MSB: A fintech guide

Understanding MSB requirements, money transmitter licenses, and compliance obligations

If you work in fintech, you may have heard the phrase “money transmitter.” If you handle and send money for others, it’s important to know the basics of money transmission licenses (MTLs). But MTLs are actually a subset of “money services businesses” or MSBs.

If a fintech isn’t careful, it may trigger MSB (and MTL) obligations unintentionally. In this guide, we’ll walk through MSBs and cover what fintech operators should know.

Quick summary

If you’re a fintech that handles other peoples’ money, you’ll want to make sure you’re complying with MSB laws. Practically, this means you should:

• Determine if you might count as an MSB
• Consider whether any bank accounts holding customer funds are set up as “for benefit of” accounts
• Determine if you fit the state agent of payee exemptions
• If you’re an MSB or money transmitter, register with FinCEN, implement an AML program, and comply with all relevant state laws
• If you need MTLs, make sure your databases are setup in advance to support your state reporting needs
• Talk to a lawyer! Every product has its own considerations

What is a money services business (MSB)?

Money services businesses (MSBs) are non-bank businesses that let customers store, transfer, and exchange money or other stores of value.

Under federal law, a business can count as an MSB if it does one or more of the following:

• Deals or exchanges foreign currency
• Cashes checks
• Issues or sells traveler’s checks, money orders, or stored value
• Provides or sells prepaid access (e.g. prepaid cards)
• Is a money transmitter
• Is the US postal service

The most relevant categories for fintechs are money transmitters and prepaid access providers. The others are much less common for fintechs. For example, the sellers of prepaid access category generally applies to retail stores like Walmart that sell prepaid cards. However you might trip into this category if you accept funds from customers into your operating accounts before passing them onto FBO accounts at your bank partners.

This is a good reminder of why it’s important to work with an expert to help structure your funds flows and bank accounts.

MSB exceptions

There are a few types of companies that are explicitly carved out from being classified as MSBs, such as:

• Certain entities registered and regulated by the SEC or CFTC or similar foreign financial regulator
• Individuals engaged in money transmission on an infrequent and not-for-profit basis
• Banks (also exempt from having to register as MSBs)

Why do MSBs matter?

MSBs are required to register with the Financial Crimes Enforcement Network (FinCEN) and comply with the Bank Secrecy Act’s (BSA) requirements, including:

• Having an anti-money laundering (AML) program
• Performing KYC/KYB on customers
• Complying with state licensing laws (which can be onerous)

Failing to register as an MSB carries its own risk of fines and penalties. Additionally, large banks and MSBs like Ripple and Western Union have paid hundreds of millions in fines for AML failures, and AML obligations can be triggered when you count as an MSB.

What is a money transmitter?

Under federal law, a money transmitter is defined as someone who receives money from one person and transmits it to another. The definition is purposely circular to give regulators wide latitude to label something money transmission.

Money transmission can be hard to determine based on a definition alone, so let’s look at examples:

Digital wallet companies are generally money transmitters. They accept customer funds and move those funds to recipients, allowing customers the ability to hold funds in their wallets. Examples include PayPal and Block (formerly known as Square).

Cross-border remittance companies like Western Union and MoneyGram also hold money transmitter licenses. They accept funds from one party and handle sending them to another, often in a different country.

Money transmitter exceptions

There are some potential paths fintechs should be aware of if they are interested in steering away from money transmission requirements.

The definition of “money transmitter” has a few exceptions that have developed over the years, including:

• Companies that only provide technology layers that money transmitters use
• Payment processors that facilitate payments for goods and services through a clearance and settlement system
• Companies that only accept and send funds that are integral to the sale of goods or services (for example, a P2P micro-lending platform)

For the benefit of (FBO) accounts

To steer into the technology layer path, fintechs can work with bank partners to set up “for the benefit of” (FBO) accounts. These are custodial accounts that let a company manage funds on behalf of others without technically having legal ownership of the account.

To set up an FBO account, you generally need to:

1. Include who the account is on behalf of in the legal documents setting up the account
2. Have the bank’s taxpayer identification number (aka, an EIN) as the relevant tax ID when opening the account

Not every bank will offer this service, and some banks who do offer this service will still look to put limits on your product offering. So it is important to discuss FBO options and limits potential bank partners in advance.

From time to time, some regulators have tried to take the view that you have control over an FBO, even if it’s in your bank partner’s taxpayer ID number. Working with experienced outside counsel can help you navigate these issues and also respond to regulators who may take this aggressive approach.

Money transmitter licenses (MTLs) and state laws

Money transmitters are required to register for a money transmitter license (MTL) where their activity falls within the state definition of a money transmitter.

Almost all states have their own money transmitter laws, and they are far from identical. State requirements will vary on topics like:

• Posting a bond (i.e., a cash deposit or insurance covering the amount of the deposit)
• Maintaining a minimum net worth
• Applying for a license
• Undergoing regular exams
• Filing reports with the state

State exemptions

There are two carve outs that help:

1. FBO account construct - The FBO account structure discussed above can prevent you from being a money transmitter in some states
2. Agent of the payee exemption - Many states have an “agent of the payee” exemption from money transmission licenses

Agent of the payee exemption

Under the agent of the payee exemption, you generally don’t need a money transmission license if:

• You have a contract with the payee that says you can collect payments for them, or you’re appointed as their agent
• The relevant money is paid for goods and services the payee provided

Example: A platform that handles bill pay payments. Person A signs up with the platform and uses it to send a bill to Person B for work Person A did. Person B pays the platform, and the platform sends the money to Person A. The platform receives and sends money for others, which is money transmission. However, the platform is acting as an agent of Person A, the payee, and payments are made for services. Accordingly, the agent of payee exemption might apply under state laws.

This agent of payee exemption can cover use cases like:

• Payment processors
• Payroll facilitators
• Bill pay companies

The Conference of State Bank Supervisors (a trade organization representing state bank regulators) has a handy map of states with agent of payee exemptions.

State’s often have longstanding judicial precedent that establishes and protects the agent of payee model. Due to employee turnover, and sometimes aggressive posturing by staff, state regulators sometimes forget about this case law and will try to reach beyond the limits of their authority. There are a handful of law firms with deep experience in helping companies on these matters, and hiring them can help you successfully navigate these exemptions.

What is a prepaid access provider?

Prepaid access providers also qualify as MSBs, and this category includes companies that offer prepaid cards and other prepaid accounts such as digital wallets. Unless a company fits in an exemption, this means companies that provide prepaid cards or digital accounts also need to register with FinCEN as an MSB and stand up an AML program.

For those companies experimenting with product-market-fit, it may be helpful to know that certain prepaid card programs are excluded from the prepaid access category. The rationale behind these exclusions is that the structure of these programs prevents large-scale or dangerous money laundering. Companies who want to pursue these exemptions can work with experienced counsel. Some card issuing processors are also familiar with these exemptions and can help their customers structure programs.

Tips for first-time MSBs

If you and your counsel determine that you need an MSB registration and related state licenses to operate your business, you might benefit from the following best practices:

Records management

Keep digital copies of all files you submit to federal and state regulators. Google Drive, Box and other online storage services make this a lot easier than it used to be.

Organization

Get organized. MSBs need to make hundreds of reports and filings each year, across all of the U.S. states. FinCEN also requires you to update your registration on a specific cadence. You may want to use a spreadsheet or calendar invites to track when filings and reports are due, and what forms need to be filled out.

Data requirements

Check your data needs early. All those monthly, quarterly and annual reports require data and the formats and definitions often vary. Check first to see if your product and back-end databases are set up to capture all of the necessary information. Then build your SQL queries or other reporting tools to help your compliance team pull data as needed.

Product changes

Stay on top of design and copy changes. Some states will require you to submit advance notice of new products, even pilot and beta offerings. And some states like California will require you to have design changes to your receipts approved in advance.

Examinations

Prepare for onsite exams. State regulators will conduct regular examinations at your headquarters location. Make a pitch deck to help educate examiners about the history of your company. Make sure your deck walks through how your product operates, especially if you have a B2B money transmission or prepaid access product.

Escheatment compliance

Don’t cheat escheatment. Every state regulator will ask you for a copy of your last unclaimed property report, regardless of whether you have reporting obligations in that state. Some states will have negative reporting obligations—meaning you need to file a report even if you don’t have any unclaimed property to escheat.

Communication

Don’t miss your mail. Regulators will often forward complaints or routine inquiries to the contacts listed on your license. If you list a general email inbox, make sure you are checking it regularly (or better yet, forward it to a group of individuals responsible for your licenses). Regulators rightfully get upset if you don’t respond to these messages, even if the lack of response is an innocent mistake or error.

Entities already subject to certain regulators, like bank regulators or the SEC, are not required to register with FinCEN. Practically, this means banks aren’t required to register with FinCEN.

Disclaimer: This post is for information purposes only and is not legal advice. Every situation is unique, so you should consult a lawyer. Consider working with experienced fintech attorneys for guidance specific to your situation.