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Agent of Payee Exemption

Also See: Agent of Payee Exemption (Table)

In the United States, money transmitters are required to obtain a license in order to legally transmit money or monetary value. The agent of payee exemption is a provision that may allow a money transmitter to be exempt from certain requirements of the money transmitter license. This exemption may apply when the money transmitter is acting as an agent for the payee, rather than as a direct recipient of the funds.

For example, if a money transmitter is acting as an agent for a payee in transmitting funds from one location to another, the money transmitter may be able to claim the agent of payee exemption and be exempt from certain requirements of the money transmitter license. However, the specifics of the exemption and how it applies to money transmitters can vary from state to state, so it is important for money transmitters to understand the requirements and limitations of the exemption in the states in which they operate.

Industries Included

  1. Marketplaces [2]
  2. Charitable organizations [6]
  3. Online Gaming/Sports Betting – only ‘pay-in’ transactions qualify for the exemption. Pay-out transactions, “constitute ‘receiving money for transmission’ because the [company] receives money from the [m]erchants for transfer to the [c]ustomers” and the customer does not provide goods or services to the merchant for which payment is owed, thus the exemption does not apply to pay-out transactions. [1]
  4. Sale & Purchase of Cryptocurrency – a company’s activities, which are limited to buying and selling virtual currency directly from and to consumers via ACH or wire transfer, do not trigger the licensing requirements of the MTA because the activities do “not involve the sale or issuance of a payment instrument, the sale or issuance of stored value, or receiving money for transmission.” [1]
  5. Paying Recipients Before a Company is Reimbursed – The company offers transactions that result in beneficiaries being paid before the company receives money from the sender. The company “obtains a payment authorization on the customer’s debit card for the transaction,” and the debit card authorization then “puts a hold on the cardholder’s funds for the purchase and guarantees that [the company] will be paid.” Once the customer authorizes the transaction, the funds are instantly moved to the recipient’s wallet or bank account for immediate use. To be reimbursed, however, the company must initiate a second step, which actually processes the payment and converts the hold status to payment/post status. According to DFPI, the company’s payment reimbursement model does not involve transactions that constitute money transmission because the company “never ‘receives money for transmission. . ., does not actually or constructively receive, take possession of, or hold money or monetary value for transmission. . ., incurs no transmission liability,” or puts consumer funds at risk. [1]
  6. Bill payments [[8](https://www.electran.org/publication/transactiontrends/guest-analysis-the-intersection-of-payments-and-money-transmission-a-look-at-the-agent-of-the-payee-exemption/#:~:text=What is the Agent-of,state’s money transmission licensure requirement.)]
  7. Payfacs – Because payment facilitators provide services to the sub-merchant payee, they can potentially take advantage of these exemptions. [7]
  8. Payment processors (fiat only) – FinCEN stipulates four conditions for the payment processor exemption to apply to a particular business pattern [3]:
    1. the entity providing the service must facilitate the purchase of goods or services, or the payment of bills for goods or services (other than money transmission itself);
    2. the entity must operate through clearance and settlement systems that admit only BSA-regulated financial institutions;
    3. the entity must provide the service pursuant to a formal agreement; and
    4. the entity’s agreement must be at a minimum with the seller or creditor that provided the goods or services and receives the funds.
  9. Payment processing (digital assets) – The DFPI stated that, because it has “not yet determined that payment processing transactions involving digital assets constitute receiving money for transmission, [it] decline[s] to address whether the transactions would qualify for the agent of payee exemption. However, at this time, the [DFPI] does not require licensure under the MTA for the Company to receive fiat currency from the customer for the transfer in the form of digital assets to the merchant.” [4]
  10. ISO – the Company neither accepts nor transmits funds on behalf of the merchants the Company solicited, nor on behalf of the Company’s counter-parties, and therefore we find that such marketing activities do not make the Company a money transmitter under FinCEN regulations. [3]

Industries/Services Excluded

  1. Sale or issuance of stored value – because when stored value is issued, no payee is identified, and therefore, there is no immediate obligation to deliver funds to a specific person [5].
  2. If a transaction does not involve goods or services, it would not come within the scope of the Exemption [2]
  3. Money transmission [6]

Sources:

  1. https://buckleyfirm.com/blog/2021-02-26/dfpi-addresses-several-mta-licensing-exemptions
  2. https://www.mofo.com/resources/insights/200305-agent-payee-exemption.html
  3. https://www.fincen.gov/resources/statutes-regulations/administrative-rulings/application-money-services-business
  4. https://www.dlapiper.com/en/us/insights/publications/2022/03/california-dfpi-issues-interpretive-opinions-regarding-money-transmission/
  5. https://www.jdsupra.com/legalnews/alert-california-finalizes-rulemaking-7751931/
  6. https://www.cooley.com/news/insight/2021/2021-06-28-california-rulemaking-agent-of-a-payee-exemption-money-transmission-licensing
  7. https://infinicept.com/payment-facilitator/expert-perspectives/compliance/money-transmission-in-the-payment-facilitator-model/
  8. https://www.electran.org/publication/transactiontrends/guest-analysis-the-intersection-of-payments-and-money-transmission-a-look-at-the-agent-of-the-payee-exemption.

Opinion references

  1. https://s22127.pcdn.co/wp-content/uploads/2019/04/fin-comment-letter-on-ca-payee-agency-1061371-final.pdf
  2. https://www.dfs.ny.gov/legal/interpret/lo070720b.htm
  3. https://dfpi.ca.gov/2019/06/27/opinions-letter-payment-processing-service-not-exempt-as-agent-of-payee-2/

Various definitions of what this means: Agent of the Payee Exemption

III. Exemptions from Licensure – Agent of Payee

Financial Code section 2010, subdivision (l), exempts from the MTA transactions in which the recipient of the money is an agent of the payee (“Agent of Payee”), pursuant to a preexisting written contract, and delivery of the money to the agent satisfies the payor’s obligation to the payee. “Agent” is defined as one who represents another, called the principal, in dealings with third persons. “Payee” means the provider of goods or services, who is owed payment of money from the payor for the goods or services. “Payor” means the recipient of the goods or services, who owes payment of money to the payee for the goods or services.

Source: https://dfpi.ca.gov/2021/10/05/agent-of-payee-exemption-9-24-21/

What is the Exemption?

The basic concept of an exempt agent-of-a-payee transaction is that the intermediary facilitates the receipt of payment by merchants or other payees, rather than facilitating the transmission of funds on behalf of a sender. An entity providing this type of service often has a contractual relationship with the recipient under which the entity is appointed as an agent to receive funds on behalf of that recipient (i.e., the payee). The common law principle of agency suggests (although not always applied in the same manner by state regulatory agencies) that the receipt of funds by the agent should be treated as tantamount to the receipt of funds by the principle, and, therefore, the agent does not receive the payor’s funds for transmission.

Source: https://www.mofo.com/resources/insights/200305-agent-payee-exemption.html

From the CSBS Money Transmission Modernization Act

Agents of a payee are persons who collect and process payments from a payor to a payee on behalf of the payee. Currently, only a little more than half of the states recognize the “agent of a payee” exemption. The Model Law also exempts payment processors from licensure. Payment processors are “person[s] that act as an intermediary by processing payments between an entity that has directly incurred an outstanding money transmission obligation to a sender, and the sender’s designated recipient.”

Source: https://www.wsgr.com/en/insights/money-transmitter-model-law-poised-to-change-regulatory-landscape.html

Agent of the Payee Exemption

The agent of the payee exemption applies to companies handling payments on behalf of a provider of goods or services. They generally fall into the incidental transmission category. It also requires these companies have a formal agreement with the payee to handle payments. Marketplaces like Uber and Airbnb are prime examples of such businesses. Airbnb collects payments from guests with the sole purpose of sending them to hosts over regulated payment networks like ACH.

Source: https://www.moderntreasury.com/journal/how-do-money-transmission-laws-work#toc-fincen-exemptions-from-money-transmission

Regulatory Exemption

The most common exemption that may be applicable to payment facilitators is known as the agent-of-the-payee exemption. The qualification requirements vary among states but this exemption typically applies to entities that accept payments from payors (i.e., cardholders, customers, or debtors) on behalf of (as an agent of) a payee (i.e., merchant, creditor, or biller). Certain contractual language must be in place between the payee and the payment facilitator which authorizes the payment facilitator to act as the payee’s agent, among other things, in connection with the receipt of the payors’ funds.

While this exemption can be effective for payment facilitators that qualify, only about half the states currently recognize it. Other states have expressly rejected it or have remained silent on the issue. For companies operating nationwide, qualification for this exemption can only get them so far because it will only afford them protection in the states in which they qualify. Therefore, there may be a need to consider the application of other exemptions recognized in a particular state.

Source: https://www.electran.org/publication/transactiontrends/eta-expert-insights-money-transmission-and-payment-facilitation-risks-and-mitigation-strategies-part-2/

Articles on “Agent of Payee Exemption.”

From a money transmitter license point of view.

  1. https://www.regulatoryoversight.com/2021/09/csbs-releases-money-transmission-model-law/
  2. https://www.cooley.com/news/insight/2021/2021-06-28-california-rulemaking-agent-of-a-payee-exemption-money-transmission-licensing
  3. https://www.csbs.org/sites/default/files/2021-09/CSBS Model Money Transmission Modernization Act_09.13.21.pdf (Section 3.01 Exemptions)
  4. https://www.csbs.org/soundbite4
  5. Is this relevant? https://www.gtlaw.com/en/insights/2019/6/fincen-issues-guidance-on-application-of-fincens-regulations-to-certain-business-models
  6. https://www.lexology.com/library/detail.aspx?g=afbb79ed-31f0-493c-be89-0a5baaff51e5
  7. https://www.mayerbrown.com/-/media/files/perspectives-events/publications/2019/03/californiaclarifymoneytransmissionactexemptionthroughrulemaking.pdf
  8. https://dfpi.ca.gov/wp-content/uploads/sites/337/2021/06/L1.-Final-Statement-of-Reasons.pdf

Also see: https://www.csbs.org/agent-payee-exemption-map

This page was last updated on January 2, 2023.