Name
Global FinTech Guide
Country Name
United States
SectionTitle
Payment services
Body
FinTechs belonging to this category offer alternative payment services which are supposed to provide a faster and cheaper way for national, European, and international payments for private and business customers by using new technologies.

For example, payment service providers hereby offer solutions to easily integrate several payment services in online shops.

Some FinTechs furthermore provide real cash register systems and online-reservation solutions for restaurants and shops providing their own payment services or making use of the payment services of FinTechs described above.

Introduction

Attitude of the country towards modern payment services

The social and political climate for modern payment services has been positive, with American consumers, particularly the younger generations, eager to adopt the added conveniences of the latest payment innovations. Interest in virtual currencies continues to grow. State and federal policymakers continue to look at the modern payment industry with an eye towards the prevention of money-laundering and terrorist financing and consumer protection.  

Americans are becoming increasingly comfortable using digital payment systems. According to a study by McKinsey and Co. in 2021, 82% of Americans made a digital payment, defined as browser-based or in-app online purchases, in-store checkout using a mobile phone and/or QR code. This compares with only 72% five (5) years ago. 

Americans are still using cash with diminishing frequency, with total cash transactions dropping from about 30% in 2017 to about 19% in 2020. According to the 2021 Findings from the Diary of Consumer Payment Choice conducted by the Federal Reserve Bank of San Francisco, the COVID-19 pandemic has rapidly accelerated this trend of fewer cash transactions. 

The use of crypto currency in the United States, though primarily as an investment and not as a means of payment, has rapidly expanded in the last year. In 2021, almost 20% of respondents to the McKinsey survey reported holding or having held crypto assets up from only 6% in 2020. These statistics reflect that the ownership and use of crypto currency in the United States may continue to increase. 

Legal affairs

Obligations and requirements to provide payment services or ancillary services described above

In the United States, payment services are regulated at both the state and federal level. Under federal law, an entity providing payment services may be required to register with the Financial Crimes Enforcement Network (FinCEN), the bureau of the U.S. Treasury Department that enforces federal regulation of money service businesses in the United States. Money service businesses (MSBs) serve a large segment of the “unbanked” or “self-banked” population and provide services like check cashing, money transfer, prepaid stored value cards, money orders and travellers cheques. FinCEN regulates MSBs pursuant to the legislative framework commonly referred to as the Bank Secrecy Act (BSA), which includes elements of the Uniting and Strengthening America by Providing Appropriate Tools Required to Intercept and Obstruct Terrorism Act of 2001 (USA Patriot Act) and other pieces of legislation. The primary consequence of this regulation is that MSBs must put in place and enforce anti-money laundering (AML) and know-your-customer (KYC) policies designed to aid FinCEN’s investigation of potential criminal activity. 

As noted above, payment-related activities are regulated under federal and state laws and regulations. The primary regulators with rulemaking authority over payment services include the Consumer Financial Protection Bureau (CFPB), the Federal Reserve and state banking agencies. The primary federal agencies that supervise banks include the Federal Reserve, Federal Deposit Insurance Corporation (FDIC) and Office of the Comptroller of Currency (OCC), which impact the payment service environment by processing payments and issuing payment cards. Some forms of payments, including electronic funds transfers, are subject to specific regulations, which may include the Electronic Fund Transfer Act (EFTA) and CFPB Regulation E (establishing error resolution requirements for unauthorised transfers and requirements for payment transfers outside of the United States). The payment service-related activities are also subject to requirements imposed by industry associations, including payment card association (like Visa, MasterCard and American Express), and industry groups (like Payment Card Industry Security Standards Council). 

Under federal law, non-bank financial institutions that engage in “money transmission” are considered to be MSBs that, unless exempted, must register with FinCEN, and be licensed in those states where the non-bank financial institution operates. Money transmission is defined under FinCEN regulations (made pursuant to the BSA) as the acceptance of currency, funds, or other value that substitutes for currency from one person and the transmission of currency, funds, or other value that substitutes for currency to another location or person by any means. In addition to registration, the non-bank financial institution would be required to: (i) conduct a comprehensive risk assessment of its exposure to money laundering; (ii) implement a written anti-money laundering program based on that risk assessment; and (iii) comply with the recordkeeping, reporting and transaction monitoring, including filing Currency Transaction Reports and Suspicious Activity Reports (SARs), and recordkeeping related to the sale of negotiable instruments. Furthermore, to the extent that any of the non-bank financial institution’s transactions constitute a “transmittal of funds” under FinCEN’s regulations, then the non-bank financial institutions must also comply with the “Funds Transfer Rule” and the “Funds Travel Rule.” Additionally, money transmitters are subject to, among other requirements, net worth requirements, and disclosure requirements. Some states also require criminal background checks as part of the application process. 

At the state level, all states except Montana generally require a money transmitter licence for businesses engaging in funds transfers (including international transfers) with additional ongoing compliance requirements, whose requirements may differ from state to state. The specific regulatory restrictions applicable to money service businesses depend on the relevant statutes and the business plan the business submitted to regulators regarding its anticipated operations. Most state money transmitter laws include a broadly inclusive statutory definition, which is typically limited by a few narrowly drawn exceptions. Therefore, despite definitional differences between federal laws and state laws, money transmission potentially encompasses almost any commercial activity in which money is taken from one (1) person or place and delivered to another. This means that while a business could be exempted or excluded from regulation as a money transmitter in one (1) state, that same business could be required to obtain a license in a different state. Most states require a surety bond with amounts ranging from as little as $25,000 to over $1,000,000.  

Federal law provides for an exemption from FinCEN registration for payment processors provided that the payment processor (i) facilitates the purchase of goods or services or the payment of bills for goods or services (other than money transmission itself); (ii) operates through clearance and settlement systems that admit only BSA-regulated financial institutions; (iii) provides its services pursuant to a formal agreement; and (iv) the agreement itself is, at a minimum, with the seller or creditor that provides the goods or services and receives the funds. 

In general, the United States does not have any obligations to provide payment services and most payment service companies are self-regulated. Non-bank payment service providers have limited KYC/AML obligations, but this may be changing as regulators adapt to an increasingly cashless marketplace. 

Additional comments regarding the legal situation for payment services or what FinTech’s must be aware of in this business area

Although that there is no federal law obligation for a business to accept cash, there is some regulatory pressure to obligate businesses to accept cash since approximately 5% of American households do not have bank accounts and 30% do not have credit cards. Certain states and cities such as New York City, San Francisco and the state of New Jersey generally require businesses to accept cash.

Economic conditions

Market size for payment services and biggest payment service providers

According to a study, total transaction value in the Digital Payments segment, including credit cards, is projected to reach $1,801,000,000 in 2022. Most of these transactions are digital commerce payments transacted through credit card networks. 

Additional comments regarding the economic situation for payment services or what FinTech’s must be aware of in this business area

Although the large credit card companies, as well as PayPal and bank owned Venmo, continue to dominate the payment services market, there is increased market activity by new FinTech entrants and international juggernauts (such as Alipay) gunning for their position. 

Authors

Disclaimer

© 2022, Polsinelli PC. All rights reserved by Polsinelli PC as author and the owner of the copyright in this chapter. Polsinelli PC has granted to Multilaw non-exclusive worldwide license to use and include this chapter in this guide and to sublicense Lexis Nexis, a division of RELX Inc. and its affiliates certain rights to use and distribute this guide.

The information in this guide provides a general overview at the time of publication and is not intended to be a comprehensive review of all legal developments nor should it be taken as opinion or legal advice on the matters covered. It is for general information purposes only and readers should take legal advice from a Multilaw member firm.

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