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Intro to emerging payments regulation

Judith E. Rinearson and Linda C. Odom

Emerging Payments is a broad, diverse, and growing area of financial services technology. From phone apps, watches, connected cars, and home digital assistants, the payments industry keeps finding ways to make payments easier, faster, and cheaper.

A practitioner in this space is often reviewing business models that do not fit clearly into any regulated financial services model. But that does not mean that a product or service is “unregulated.” In fact, by helping position a product in an existing regulatory scheme, a practitioner can provide a clearer and more reliable path to compliance. To begin narrowing the applicable regulatory environment, one must first determine the overall product type.

Much of the emerging payments industry is focused on stored value products or products that rely on funding from credit or debit cards on an “as needed” or “on demand” basis. With respect to prepaid cards and other stored value products, there are a panoply of laws that might apply, including FinCEN’s “prepaid access” rule under the Bank Secrecy Act and the Electronic Fund Transfers Act, the new CFPB prepaid account regulations under the EFTA, as well as many state laws, including abandoned property laws and money transmitter licensing laws. If bank-issued, these products may constitute “debit cards” and they may or may not have credit features.

For traditional debit card products, the Truth in Savings Act (primarily a disclosure law) and Electronic Funds Transfer Act (a disclosure law, but one that also provides consumer protections from unauthorized transactions) will apply, as would the Fair Credit Reporting Act if consumer credit reports or other background checks will be obtained, and the Automated Clearing House (or ACH) rules will usually apply as well.

For credit products, many of the rules depend on what “interest” or “finance charges” are imposed. In all states, the interest rates to be charged must be consistent with local usury limitations or any exceptions to those limits stated in specific lending laws. In many cases, a lender can charge interest in excess of that stated in the local usury law only after obtaining a lender’s license, although in some states, a lender’s license can be required regardless of the interest rates charged. In addition, in many states, only expressly permitted fees are allowed, and any extra fees will be included in the calculation of the total interest being charged.

When a product or service has credit features, another issue to consider is whether credit is being extended for consumer or commercial purposes. While fewer states require commercial lenders to obtain a license, many states, such as California, do require a license. Some non-bank clients might elect to partner with a regulated banking entity so as to avoid state licensing requirements, but this will mean oversight and control by the bank, as well as a sharing of program revenues with the bank. (Of course, should your client choose to partner with a bank, care must be taken in preparing and implementing the contractual relationship between the non-bank company and its regulated banking partner to meet all necessary business and regulatory compliance needs.)

Continue reading the full article here (Westlaw log-in required). Find more articles on emerging payments and prepaid cards in our Payment Systems and Electronic Fund Transfers Guide including:

  • Money Transmitter Licensing, Generally
  • Licensing and Registration Federal Money Services: Business Registration and State money Transmitter Licensing
  • Federal and State Law Limits on Card Fees and Expiration Dates: Special Rules for Gift Certificate, Store Gift Card and General- Use Prepaid Cards
  • Emerging Payments: BSA/AML Compliance Issues Prepaid Access Rule

This publication is part of Thomson Reuter’s new publishing initiative to provide customers with secondary source material as the law emerges. New documents are loaded to Westlaw on a rolling basis as received and content is updated quarterly.


About the authors

Judith Rinearson concentrates her practice in prepaid and emerging payment systems, electronic payments, crypto/virtual currencies, reward programs, ACH and check processing. She has more than 25 years of experience in the financial services industry, including 18 years at American Express’s General Counsel’s Office. Her expertise focuses particularly in the areas of emerging payments and compliance with state and federal consumer protection laws, anti-money laundering laws, state money transmitter licensing laws and abandoned property laws.

Linda C. Odom concentrates her practice on representing technology companies and technology users in licensing, software development, data processing outsourcing, intellectual property and e-commerce matters and related litigation. She has over twenty years’ experience with financial services technology (Fintech) agreements and related consumer regulatory issues. She regularly conducts boot camps on Fintech and emerging payments technology and related regulatory issues.