The Law Can Help – Or Hurt – Payments Innovation

The laws make it hard for payments players to innovate – but it doesn’t have to be that way.

The rise of technological innovation in payments has been reciprocated with equally technologically-advanced crime in the sector, shown by the recent hacks and security breaches that have hit the likes of Target, Home Depot, and Bitcoin wallet provider Blockchain.

Federal authorities have acted to catch up with high-tech crimes in the payments industry, and while the regulations allow non-banks to handle money for their consumers, they force new market players to jump through some serious legal hoops to be allowed to handle their customers’ dollars. For example, any new payment business must obtain a license in every state in which it operates. The process, experts say, costs big bucks – between $1 million and $2 million – and could take up to two years.

But one tactic for startups to more easily enter the payments industry is catching on. Young companies can partner with another firm that is already fully licensed to operate as a money transmitter. The startup can become an “authorized delegate,” meaning it is allowed to act as a third-party to operate under the money transmitter’s licenses.

Experts, like Bryan Cave LLP partner Judith Rinearson, say this method is preserving the spirit of payments innovation. While the delegate can launch its operations more quickly and for less money than going through the traditional route of obtaining dozens of licenses, the already-established money transmitter gets the benefit of a transaction fee paid by the delegate as compensation for taking on risks associated with partnering with a young company, and reaches more customers. Meanwhile, those customers’ funds remain protected.

Still, it’s no picnic for startups to find themselves an authorized delegate – the licensed company must be willing to oversee and monitor all of the startups activities and is likely to launch intense scrutiny of the potential delegate’s compliance, anti-money laundering and anti-fraud procedures, as well as of the company’s management and banking relationship history.

And some states have taken to challenging these business partnerships, labeling them as “rent-a-license” agreements. Washington, for example, requires the delegate to have a physical presence in-state. Texas recently issued a Supervisory Memorandum that scrutinizes the partnerships and bans licensed company from appointing a delegate that is not in the same business as itself.

Rinearson, however, is pushing back against the states’ suspicion over these licensing agreements, instead calling for state officials to encourage the deals so as to not hamper competition or innovation in the payments industry.



Banks, corporates and even regulators now recognize the imperative to modernize — not just digitize —the infrastructures and workflows that move money and data between businesses domestically and cross-border.

Together with Visa, PYMNTS invites you to a month-long series of livestreamed programs on these issues as they reshape B2B payments. Masters of modernization share insights and answer questions during a mix of intimate fireside chats and vibrant virtual roundtables.

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