Under the latest card brand rules, payment facilitators are being held to exacting requirements. Note that the acquirer is now able to terminate a PF contract immediately with “good cause.”

So while state and federal regulation may get the bulk of the attention, those are hardly the only areas of potential rules-enforced disasters.

Visa’s Core Rules, for example, have the PF being “liable for all acts, omissions, cardholder disputes, and other cardholder customer service related issues caused by the Payment Facilitator’s Sponsored Merchants” and “is responsible and financially liable for each transaction processed on behalf of the sponsored merchant, or for any disputed transaction or credit.” MasterCard similarly requires that “the payment facilitator must ensure that each of its submerchants complies with the standards applicable to merchants.”

Understanding the limitations and obligations that the card brands impose upon PFs is crucial to ensure the ongoing operations of business.

(Editor’s Note: Heather Mark will be moderating an all-attorney panel on this topic on April 19 at Transact16 for Payment Facilitator Day ’16.)

The PF business model is one that offers tremendous flexibility and convenience in the right circumstances.  It provides companies that may not have payments experience with the ability to offer their clients all the conveniences of electronic payments.  For many, it may appear that the PF model is a convenient middle ground between offering no payment services and becoming a full-fledged payments company, with all of the attendant liabilities and requirements.  However, the road to becoming a PF may contain some unforeseen obstacles that may require the services of a knowledgeable payments attorney.

Assuming for the sake of discussion that a PF has already vetted the knowledge and experience of its payments attorney (the process of which would be fertile grounds for further discussion), there are several questions that a prospective PF is advised to have answered prior to taking the first step down that path.

  • What are the implications of state money transmitter laws on a potential PF?

There is a groundswell of change at the state level that could have a tremendous impact on the PF space.  It is vitally important for PFs to research their prospective business models and flow of funds to determine how and if money transmitter laws will come into play.  Further, working with a qualified attorney, the PF may want to determine if there is a way to structure the business to preclude the imposition of money transmitter regulation.  For example, what does it mean to “receive” funds?  What does it mean to be an “agent?”  These definitions can change dramatically from state to state, so the importance of having an attorney that can understand and speak to these questions is vitally important.

Following in this vein, one should know what the impact of a state designation as a money transmitter may have on registering with the Financial Crimes Enforcement Network, or FINCEN.  Among those businesses FINCEN categorizes as a money services business (MSB) are money transmitters.  Registering as an MSB with FINCEN brings with it specific regulatory requirements, such as the implementation of a compliance program and the designation of a BSA/AML compliance officer, with which MSBs must comply.  MSB registration also brings with it additional government oversight.

Perhaps one of the most compelling consequences of being designated a money transmitter, however, is that it may become exceedingly difficult to find an acquirer.  The current regulatory environment has led many acquiring banks to de-risk their portfolios, terminating relationships with businesses seen as too dangerous.  As a result, MSBs may find it more difficult to successfully undergo due diligence with a potential acquiring bank.

  • Is there a way to avoid designation as a money transmitter?

One of the primary challenges associated with the money transmitter laws is the rate of change that currently characterizes the landscape.  There are 47 states with money transmitter laws in place, and at any given time, more than half a dozen may be considering changes to those regimes.  The evolving definition of money transmission poses a significant challenge to PFs.

PFs must be vigilant about the way in which they describe their services.  It is possible to attract the attention of state regulators unknowingly, by the use of specific phrases or description in marketing materials.  If a regulator perceives that a PF is portraying itself as a money transmitter, or soliciting money transmitter services, an audit may ensue.  Even co-branding may invite state scrutiny.

  • What agencies or regulations at the federal level should a prospective PF monitor?

While money transmission laws are certainly the most prominent concern for PFs, they are not the extent of the regulatory requirements to which they may be obligated.   There are a number of oversight mechanisms at the federal level to which PFs may be subjected. Each of these agencies and mandates may have distinctly different objectives.

As mentioned previously, if a PF is designated as a money transmitter, registration with FINCEN is required.  The goal of FINCEN is the prevention of money laundering and terrorist financing.  Given the current environment, there is growing urgency around this mission and the new models and technologies of the payments ecosystem are of particular interest to the federal regulators.  Compliance with anti-money laundering regimes is often audited by sponsor banks and processors, as well as external auditors.  FINCEN requires an annual independent audit of an MSB’s anti-money laundering program.  The IRS also takes an interest in the anti-money laundering activities of MSBs.

FINCEN is simply one example at the federal level.  In addition, PFs should be carefully watching the Consumer Financial Protection Bureau, the Internal Revenue Service, the Federal Trade Commission, and the Office of Foreign Assets and Control.  Each of these agencies can have purview into the operations of PFs.  Understanding their missions and their enforcement powers is crucial to staying on the right side of regulatory compliance as a PF.

  • As a PF, what are the organizations mandates requiring verification of sub-merchants?

As mentioned above, the PF is liable for all of its sponsored merchants (sometimes called submerchants) and their activity.  For this reason alone, PFs should be investing in processes to ensure that their sponsored merchants are truthfully representing their identity and their business.  However, the onus for verifying the submerchant’s identity extends beyond card brand rules.

Federal regulation precludes U.S.-based companies from enabling certain sanctioned individuals and businesses.  Failure to abide by these rules can result in significant penalties.  Further, federal regulators have taken an enhanced interest in consumer protection, often taking action against companies that regulators feel have enabled another business in the defrauding or deception of consumers.  Conducting appropriate due diligence on sponsored merchants and monitoring their business activities can help assuage concerns on the part of regulators.

Although the PF model provides significant advantages, particularly to those companies dealing with smaller merchants, there are also some obstacles on the path.  Having a knowledgeable, experienced payments attorney can help avoid some of the potential dangers.

Those organizations that rush headlong into the PF space may be surprised by some of the regulatory obligations that are incurred.  By researching and addressing these questions early in the process, prospective PFs can map out a plan to address these concerns.  While they may not be able to avoid regulatory entanglements outright, well-prepared PFs will be able to prepare proactively for what may come.