Is a money transmitter license required for the operation of closed-loop cards in the United States?

In the United States, the need for a money transmitter license for closed-loop cards depends on various factors, including the specific features of the card, the way it’s used, and state laws. Here’s a general overview:

  1. Definition of Money Transmission: Money transmission typically involves the transfer of funds between people or locations, often through a third party. Money transmitter licenses are required for businesses that engage in the activity of transmitting money for customers, which is regulated at both the federal and state level.
  2. Closed-Loop Cards: These cards are generally limited to purchases of goods and services from a specific retailer or a limited network of retailers. They do not usually enable users to transmit funds to another individual or entity outside of that closed system.
  3. Regulatory Exemptions: Closed-loop cards often fall under certain exemptions from money transmitter regulations. For example, they might be classified under gift card or stored value card exemptions, as they typically do not involve transferring money outside of the issuing retailer’s network.
  4. State Laws: The requirement for a money transmitter license varies by state. Each state has its own regulations regarding money transmission and the exemptions that apply. Some states may require a license or have specific regulations for certain types of closed-loop cards, especially if they have features that resemble traditional money transmission services.
  5. Federal Regulations: At the federal level, closed-loop cards might not be classified as money transmission, especially if they do not enable the transfer of funds to third parties. However, issuers still need to comply with other relevant federal regulations, such as those related to anti-money laundering (AML).
  6. Changes in Usage or Features: If a closed-loop card system evolves to include features such as allowing users to transfer funds to others or withdraw cash, it may then fall into the category of money transmission, necessitating a license.

It’s important for businesses dealing with closed-loop cards to consult with legal experts and review both federal and state regulations to determine if their specific card program requires a money transmitter license. The regulatory landscape can be complex and varies based on the exact nature and features of the card program.

This page was last updated on January 29, 2024.

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