United States: Washington State Amends Money Transmitter Law to Exclude Payment Processors

Last Updated: May 3 2017
Article by Keith J. Barnett, Reade Jacob and Ashley L. Taylor

On April 17, 2017, Washington Governor Jay Inslee signed into law an amendment to section 19.230.020 of Washington's Uniform Money Services Act (the "Act"). The amendment exempts most third party payment processors from the state's money transmitter licensing requirements. This amendment is the legislators' response to an interpretation from the Washington Department of Financial Institutions ("DFI") determining that payment processors must be licensed as money transmitters or receive a waiver from the license requirement.

The Washington House and Senate overwhelmingly approved the amendment earlier this year after the DFI issued an interpretive statement in December 2015 concluding that "[p]ayment processing is money transmission as defined in the Act" and payment processors must be licensed as money transmitters under the Act or apply for a license waiver if the payment processor met certain conditions. In the December 2015 interpretive statement, the DFI acknowledged that the existing law already had a payment processor exclusion stating that the money transmitter licensing requirement did not apply to "[a]n operator of a payment system only to the extent that it provides processing, clearing, or settlement services, between or among persons who are all excluded by this section... ." The DFI, however, stated that the foregoing exclusion did "not apply [to payment processors] because merchants/creditors and consumers/debtors are not typically persons all excluded from the Act." The interpretive statement stated that companies could apply for a license waiver if they submitted evidence to the DFI revealing that they met all of the following conditions:

  1. Facilitated payments for goods or services (not including money transmission) or bill payment (receiving money from the payor and delivering it to the payee);
  2. Operated through a settlement system that admits only BSA-regulated financial institutions; and
  3. Operated pursuant to a formal agreement with the merchant that created an agency relationship between the processor and merchant.

The amendment to the Act directly addresses the issue that led the DFI to conclude that the exclusion above did not apply. The amendment states, among other things, that the following companies are not required to be licensed as money transmitters in Washington:

"That facilitates payment for goods or services (not including money transmission itself) or bill payment through a clearance and settlement process using bank secrecy act regulated institutions pursuant to a written contract with the payee and either payment to the person facilitating the payment processing satisfies the payor's obligation to the payee or that obligation is otherwise extinguished."

The foregoing portion of the amendment is substantially similar to the interpretive statement waiver requirement. The key difference is that the amendment does not require a payment processor to apply for a waiver in order to process payments in Washington. The waiver application is now optional. The payment processor must simply meet all of the requirements and submit proof that the requirements are met if the payment processor is ever investigated.

The amendment also excludes from the licensing requirement payment processors who process payroll for employers as long as the wage, salary, or employee benefits "is an ancillary service in a suite of services." The "suite of services" includes facilitating the payment of payroll taxes, payments related to employee benefit plans, distributions and deductions from employee wages and transmitting other funds for an employer related to employees.

Payment processors who only engage in acts that are excluded by the license requirement should maintain proof that they fall within the exclusion if Washington investigates the veracity of a payment processor's belief or representation that it falls within the exclusions. It is important to emphasize that payment processors may engage in other activities, like traditional money transmission as defined by the Act, that will require a money transmitter license if an exclusion is not available for that other activity.

While other state enforcement agencies have interpreted their statutes to require payment processors to obtain money transmitter licenses, the Washington state legislature and the Governor worked together to amend the existing laws to allow payment processors to distance themselves from money transmitters in spite of what the enforcement agencies have concluded. The full text of the legislation can be found here.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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Authors
Keith J. Barnett
Reade Jacob
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