US Money Transmitter License Options

US Money Transmitter License Options

Looking for US Money Transmitter License Options? This articles explains the various avenues you can travel upon to get money transmitter license coverage!

A question asked often is what are the various options for fulfilling the requirement of having money transmitter licenses to do business in the US.

The diagram below depicts the various options one has as far as doing business with is licensed / governed by Money Transmitter Licenses.

US Money Transmitter License Options

In order of difficult (from lowest to highest):

  • Affiliate
  • Correspondent
  • Correspondent / ISO
  • Authorized Delegate
  • Licensed
  • Banking Agent

Affiliate

As an affiliate, you don’t have any licensing per se, what you are doing is selling the products/services of an existing license holder and earning commission for every sale you bring in. As an affiliate, you don’t have any claim on the new business that you bring in. The client will legally belong to the principal license holder. Also as an affiliate, you cannot touch the funds. The client onboarding process and funds handling has to be done directly by the principal license holder.

Correspondent

Correspondents can be of two types (in the domain of money transfer services). Essentially there is a foreign correspondent, and a Local (domestic) correspondent.

Foreign Correspondent

As the name implies, a foreign correspondent is someone who wishes to do business with the principal license holder in the US. This correspondent can be a Bank or a Licensed Money Transfer Operator. What a foreign correspondent essentially does, is that it legally becomes the trading partner with the principal license holder, thus allowing transactions to be settled.

In other words, it is a contractual understanding of how the principal license holder can send transactions to the correspondent and how they will further settle it. A correspondent agreement is usually required by the State Regulators when they audit an MSB, they would like to see a contract with the counter-party where transactions are being terminated/settled. This is essentially what a Correspondent is.

As an example, if an MSB in the US is dealing with a Bank/MTO in Philippines to settle a transaction, then the US MSB will have a Correspondent Agreement with the Bank/MTO in Philippines to give legal structure to the transaction and its settlement.

Likewise, for the Bank/MTO in Philippines, they now have a legal contract with the US MSB to show to their local regulator.

A Correspondent contract does not allow them (the correspondent) to onboard transactions on their own from the US, i.e. a correspondent cannot solicit business from the US directly. Business must be handed to it by the US MSB.

It is simply a contractual obligation to handle a cross-border transaction (or a counter-party transaction).

Local Correspondent

As the name implies, the localized version of a correspondent contract, allows for an MSB in the US to send forth a transaction to locally licensed entity for the same. It does not provide the local party any licensure rights on the transaction, but simply is a legal contract allowing the transaction to be settled.

In both cases (Local or Foreign), the following restrictions would apply to the correspondent:

  • Legally speaking the transaction owner is the MSB in the US (if the transaction is being originated there)
  • If the transaction is being originated by the Correspondent, then the legal owner of the transaction is the correspondent.
  • In either case, neither party can market or solicit business in other party’s territory
  • Because the agreement is for two or more parties to settle the transaction, the flow of funds is such that it will touch both the parties.
  • Neither party can assign agents or further sublet this work to a 3rd party without it being explicitly being mentioned in the Correspondent Agreement.

Correspondent / ISO

A Correspondent Agreement coupled with an ISO (Independent Sales Organization) Agreement is a methodology for a party to further sell/promote the products/services being offered by the Principal License Holder.

To further explain this, consider the two examples:

Example A

Bank/MTO in India wants to tie-up with an US MSB and also promote the services being offered by the US MSB so that more transactions can be generated.

In this case, the Correspondent Agreement provides legal cover to the transaction, whilst the ISO Agreement would allow the bank to promote the website/app of the US MSB to drive more customers. The ISO Agreement takes a proactive approach to the marketing and sales efforts of the US MSB, rather than passively waiting for transactions to come in.

Example B

A US entity decides it can drive more traffic (read: sales) to a US MSB’s website. For example, an illustrious business in the US decides that they want to get into the business of money transfer services to India.

They approach a licensed MSB in the US and offer their marketing services to them. Along with the marketing services, they highlight a Bank/MTO in India to which they would like to pass on the transactions to.

The MSB in the US will sign a Correspondent Agreement with the Bank/MTO in India. The pricing offered to the Bank/MTO in India is dictated by the pricing that the ISO Agreement will state. Thus essentially earning the ISO affiliate income.

The ISO will continue to earn the affiliate (differential) income for the life of the customer.

In both cases, the ISO entity (which could be a separate entity from the Correspondent or the same) essentially extends its Sales & Marketing resources towards driving more traffic to the US MSB’s website.

The following conditions will still apply:

  • The transaction owner will always be the US MSB.
  • The flow of funds will always be such that they flow through the US MSB’s banks and the ISO cannot touch the funds or collect them.
  • The website/app that the ISO will promote will always be that of the US MSB.
  • So direct solicitation via any 3rd party website or app is allowed.
  • Sign-ups, etc. must all be on the principal licensee’s website

Authorized Delegate

The Authorized Delegate (or Agent program for short) is where an entity, essentially gets money transmitter license coverage, as provided by a Principal Licensee.

The Authorized Delegate program allows a company to have their own brand and onboard clients directly on behalf of the Principal License Holder.

There are three axioms that govern the Authorized Delegate Program:

  1. The Agent on-boards the client on behalf of the principal licensee, i.e. Principal License Holder.
  2. The monetary transaction flow has to be as such, so that all flow of funds (and bitcoins, if utilized) have to be through the principal licensee’s bank account and the Bitcoin Exchange (if applicable)
  3. The product &/or service that the Agent is marketing or extending out, has to tie-in to the core product &/or service of the principal licensee.

It is point # 3 that is of most importance to the Principal License Holder, as this is what the regulators would be looking for, to establish that if your company (if and when it becomes an agent) is extending the core product/services of Principal License Holder.

Many existing license holders are being scrutinized on their Agent relationships, in light of PreCash (a money transmitter holder company) that was essentially accused by the Texas Regulator of essentially renting their licenses.

The Department of Banking (for Texas) released a supervisory memorandum (1038) on this particular issue:

Texas Department of Banking - SUPERVISORY MEMORANDUM 1038

Source.

As a result of this memorandum, all money transmitters in the US had their agent contracts reassessed and where the regulator saw strong possibility of license rental, the agent relationship was terminated.

In the payments industry, PreCash was the go to company if one wanted money transmission coverage. As of early 2015, PreCash has exited all agent relationships which they deem would be ruled upon as being license rental and the very last contracts that they have on file, would cease Agent relationship by October 2015.

I’ve written a lot more about the Authorized Delegate Program which can be read here:

Licensed

A licensed approach needless to say is all about applying for your own money transmitter licenses. A complete list of all US State Regulators can be seen here. In addition to this, you can also read more about obtaining your own license here:

Banking Agent

US Banks (be it nationwide/national) or State Chartered, are exempt from Money Transmitter License requirements because of their Banking Charter. In plain English, a bank does not need a Money Transmitter License in each State.

Likewise, Banks can too assign Authorized Delegates, or Agents. As a Bank Agent, you too would be exempted from obtaining Money Transmitter Licenses in each of the 50 States to do business. You can ride as an Agent, under the banking charter of the Bank and be exempt from amassing licenses.

You can read in detail about this process (Banking Agent), which some casually refer to as the FBO (For Benefit Of) Account Relationship: Money Transmitter License: US Remittance & Payments Solution