Guest Post: Money Transmitter Laws May Impact Your Deal: Costs, Considerations and Consequences

By Nicole Meisner, Partner and Attorney, Jaffe, Raitt, Heuer & Weiss

The impact of money transmission regulations on the payments industry has become significant. Gone are the days that payment companies could be unconcerned with whether their conduct conflicts with these broadly applied laws and regulations. Money transmitter laws are now more relevant—and more impactful—than ever. And it’s not just regulators that these companies may find themselves answering to.

Increasingly, purchasers and investors involved in payment related corporate transactions ranging from strategic acquisitions to capital investments are inquiring about money transmission regulatory risks associated with the target company. If there’s a risk that the company is engaged in money transmission activity without being duly licensed, that exposure could have a substantial adverse effect on the value of the business—and could even tank a potentially lucrative business deal.

Money Transmission Laws: Do they Apply?
Payment companies are continually grappling with the application of money transmission laws in the United States.  Do they, or don’t they, apply?  The answer requires a detailed analysis of the facts and circumstances related to the payment company’s conduct, not its classification or title within the payments industry.  This is why, for instance, some payment facilitators are required to be registered and licensed as a money transmitter while others are not. But to be clear, these concerns effect not only entities that provide payment processing or acceptance as their core offering, they can also impact non-payment companies that have payment acceptance as a feature of their core offering (for instance, a software platform that provides back-office functionalities to a vertical of merchants which also includes payment acceptance).

Because money transmission is regulated on both the federal level and state level, it makes compliance (or the determination of whether the laws apply) challenging. But it is precisely because the regulatory specifics can vary so greatly that obtaining a detailed understanding of M&A-targeted companies—and their operational specifics—is so critically important.

Investing In or Purchasing a Payments Company?
Potential investors or purchasers of payments companies should analyze whether the target company operates in a way that presents elevated money transmission regulatory risk. This involves carefully analyzing the flow of funds in payment transactions while paying particularly close attention to the target company’s role in those transactions.

To start, some preliminary questions to ask and analyze include:

• What is the target company’s involvement, if any, in the flow of funds? For instance, does the company take physical possession or control of the funds? Does the company take constructive control of the funds?
• How is the settlement account owned and titled?
• What are the contractual obligations between the company and its customers?
• What are the contractual obligations between the company and its payment processing sponsor?
• Does the company qualify for an applicable exemption?

If the target company is involved in the funds settlement between two other parties (i.e., cardholders and merchants, merchants and vendors/suppliers, buyers and sellers, debtors and creditors) there is a significantly elevated risk that the conduct could be construed as a money transmission. That could be true even if the money is only held by the target company momentarily. Having a full understanding of the target company’s operational mechanics and contractual obligations is key for making a determination about money transmission regulatory risk—and what the nature and extent of that risk might be and whether any exemption applies to such conduct.

Tips for Target Companies
Keep in mind that it’s not just the purchasers or investors of payment companies that should be attuned to these issues. Companies that are seeking capital investment or looking to sell should understand the regulatory impacts on their business.  The risk of increased regulatory exposure stemming from the company’s operations could negatively affect the value of the company—or completely deter a potential investor or purchaser all together. Companies with such regulatory exposures may find themselves making concessions in value or having to extend extensive indemnity protections in order to close the deal if their regulatory affairs are not in order.

Payment companies should not take solace in past non-regulatory enforcement.  Instead, a proactive approach is recommended.  Because many regulators have been taking a more expansive and aggressive approach in interpreting and applying money transmission laws—identifying and addressing these issues proactively is essential. Doing so will not only allow the company to truly understand its regulatory exposure (and take the necessary steps to mitigate such exposure, if needed) but it may bolster the company’s value in connection with an M&A deal because the company will be on stronger regulatory footing.

Final Thought
Despite the global pandemic, the payments industry is experiencing a strong showing of merger and acquisition transactions and it is expected that such activity will continue to increase. While it’s hardly possible to eliminate all risk, there is a lot at stake in these transactions. Having a thorough understanding of a company’s money transmission regulatory risk profile will benefit sellers by increasing valuation, and will benefit purchasers and investors by mitigating deal risk.  It’s an issue no longer being ignored.

Nicole Meisner is an attorney and partner in Jaffe’s Electronic Payments practice group.  She concentrates her practice exclusively on the payments industry and is experienced in legal issues affecting payment facilitators, marketplaces, fintech companies, money transmitters, and merchant acquirers. You may reach her at: [email protected]. 

The above is intended as general information only and should not be construed as legal advice or as creating or soliciting an attorney-client relationship. You should consult your attorney for guidance with respect to any particular issue or legal inquiry.