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In the world of financial services, nonbanks issue many payment products, including money orders, prepaid cards, bill payment services and mobile payments. Despite a recent chorus of voices asserting that laws in the United States governing nonbank payments need harmonization, in my view, there is a solid base of good U.S. law already in place. These payment laws do not need an overhaul, just some fine-tuning.
This issue recently surfaced at the American Bar Association's annual meeting during a panel presentation hosted by the Cyberspace Law Committee and the Uniform Commercial Code Committee. At that meeting, participants compared payment laws in the United States with the Payment System Directive the European Union recently passed. The question put to the panelists and audience members was, "Shouldn't the U.S. have its own uniform Payment System Directive that covers all nonbank electronic payment products?"
This is an issue worthy of consideration. The EU passed the directive in March 2007 to reconcile the conflicts and variations between 27 different local laws and other national provisions that gave rise to what the directive described as "confusion and a lack of legal certainty." The directive's goal is to create a neutral system that would, as the directive stated, "ensure a level playing field for all payment systems, in order to maintain consumer choice."
That is a laudable goal. However, having reviewed the directive, I am not convinced the EU has built a better mousetrap. The directive is breathtakingly complex, with six categories of financial institutions, 43 introductory paragraphs and a list of more than 20 categories of payments it does not cover.
Even worse, the directive does not remedy the problems caused by the flawed "E-Money Directive," an earlier directive the EU seemingly designed primarily to hobble nonbanks in the prepaid industry and grant banks a competitive advantage.
It seems to me that, despite its flaws, the U.S. legal framework governing nonbank payment products has been time-tested and provides a solid legal basis on which to regulate such products. State money-transmitter licensing laws and federal money services business regulations primarily address such products.
State money transmitter licensing laws are important in that they protect the public and allow nonbanks to participate in the payment industry. Unfortunately, these laws also cause the most headaches. A national company should not have to get licensed in more than 30 states simply to offer payment products on a national basis.
The sale of bank products by retailers should not require additional licensing. And licensees should not be subjected to 10 to 20 separate state examinations each year.
But instead of scrapping these laws and replacing them with a directive-like alternative, I would propose a few steps to fix these laws.
A good first step is the Uniform Money Services Act issued by the National Conference of Commissioners on Uniform State Laws. It provides a comprehensive regulatory structure for all payment products and instruments nonbanks issue, and more states need to adopt it.
Second, while a uniform federal licensing law for money transmitters may sound appealing, simpler alternatives already are being implemented that allow a money transmitter to obtain a waiver in one state if it already is licensed in another state that has passed the Uniform Money Services Act.
Moreover, with the support of the Money Transmitter Regulators Association, some states have begun to coordinate their examinations of licensees, but more need to follow suit.
Finally, as both Florida and Hawaii recently have done, states should repeal restrictions on banks' abilities to appoint nonbanks as agents to distribute their payment products because such products already are backed by a regulated banking institution.
The U.S. system of state money transmitter licensing laws already provides the basis for a harmonized nonbank regulatory framework. Let us take what we have and make it better. CP
Judith Rinearson, a partner at the New York offices of Brian Cave LLP, specializes in payments law, particularly laws governing prepaid payment products. She can be reached at judith.rinearson@bryancave.com.
