| IS/Opinion No. | Summary |
| Payment Processor Rule and Prior Legal Opinions 03-01 and 14-01 | |
| A company providing internet escrow services to Texas residents is engaged in the business of money transmission and must be licensed under the Texas Money Services Act. | |
| A money transmission license under the Money Services Act is not necessary to provide payment processor services as agent for merchant customers. | |
| Whether an internet-based bill-paying service company that both receives and disburses customer funds only through ACH transactions would be subject to the licensing requirements of Texas Finance Code, Chapters 152 or 153. |
Payment Processor Rule and Prior Legal Opinions 03-01 and 14-01
November 18, 2020
The Texas Department of Banking (Department) administers the Money Services Act, Chapter 151, of the Texas Finance Code and related regulations at Chapter 33 of Title 7 of the Texas Administrative Code. The Money Services Act regulates, among other things, the business of money transmission.1 The Money Services Act permits the Finance Commission of Texas (Commission), which oversees the Department, to issue rules excluding certain classes of persons or transactions from regulation under the Money Services Act.2
In 2015 the Commission enacted the Payment Processor Rule, which excludes “payment processors” from regulation under the Money Services Act under various circumstances.3 As explained by the Commission in adopting the Payment Processor Rule, the Rule “expands and clarifies two exclusions that already exist under Texas law.”4 The first exclusion in question was rooted in the statutory exclusion from money transmission licensing for
a person that acts as an intermediary on behalf of and at the direction of a license holder in the process by which the license holder, after receiving money or monetary value from a purchaser, either directly or through an authorized delegate, transmits the money or monetary value to the purchaser’s designated recipient, provided that the license holder is liable for satisfying the obligation owed to the purchaser.5
The second exclusion clarified by the Payment Processor Rule applies to “a payment processor who is appointed in a written contract as a merchant’s agent to receive payments.”6 Prior to the Payment Processor Rule, this exclusion had been previously expressed by the Department in Legal Opinion 14-01.7 The Payment Processor Rule “expand[ed] the application of Legal Opinion 14-01 to some situations where there is no explicit agency appointment in a contract” as long as the requirements of the Payment Processor Rule are satisfied.8
Legal Opinion 14-01 comported with Legal Opinion 03-01, which similarly found that a third-party payment processor providing origination services for electronic fund transfer transactions as agent for its merchant customers did not need a license under the Texas statutes preceding the Money Services Act, which have now been repealed.9
Legal Opinion 14-01 has been superseded by the Payment Processor Rule, as stated by the Commission when adopting this Rule. Because the Payment Processor Rule “expands and clarifies” Legal Opinion 14-01, that Opinion is now both inapplicable and unnecessary, and has been withdrawn.
Further, since Legal Opinion 03-01 interpreted statutes that have now been repealed, and applied those former statutes to payment processors acting as agents for merchants in a manner similar to Legal Opinion 14-01 and then the Payment Processor Rule, Legal Opinion 03-01 is also now inapplicable and unnecessary, and has been withdrawn.
As stated in the Money Services Act, third-party bill-payment services presumably do constitute money transmission.10 As indicated in the Department’s Legal Opinions 99-29, 06-01, and 13-01, the following examples do constitute money transmission under the Money Services Act:
a company that “takes control of or holds [a third-party merchant’s] customer's funds for further transmission or payment”;11 or
a company that “receives funds from [a] purchaser [of real or personal property] and holds them in escrow[.]”12
Such money transmission regulation helps ensure, among other things, that “the agent [or other money transmitter] will have the funds necessary to complete its agency [or other money transmission] obligation to make payment.”13
This interpretive statement does not address the business practices of any particular person, company, or case, retroactively invalidate prior written determinations issued by the Department, or modify or affect the exclusions from money transmission licensing under the Payment Processor Rule.
A company providing internet escrow services to Texas residents is engaged in the business of money transmission and must be licensed under the Texas Money Services Act.
May 8, 2013
Everette D. Jobe, Senior Counsel
By letter to Russell Reese dated March 15, 2013, you provided an analysis of the Texas Money Services Act (Chapter 151, Texas Finance Code), and concluded that [ABC] should not be required to obtain a Texas money transmission license.
We have reviewed your analysis and arguments and conclude that [ABC] must obtain a money transmission license to continue providing the escrow services described below on behalf of Texas residents.
Services Provided by [ABC]
According to your letter, [ABC] provides escrow services for internet transactions only, limited to the purchase and sale of personal property. Pursuant to permitted instructions provided by the parties to an internet transaction, [ABC] receives funds from the purchaser and holds them in escrow, subject to the satisfaction of conditions precedent for the release of such funds to the seller or for return to the buyer.
In order to use the escrow services provided by [ABC], both parties to an internet transaction must register with [ABC] online through its website. Either the purchaser or the seller can initiate the escrow transaction by proposing the terms of the internet transaction, including: (1) the product to be purchased, (2) the purchase price, (3) the length of the purchaser's inspection period, (4) the party responsible for paying the escrow fees, (5) the shipping method, and (6) any shipping fees (the "Transaction Terms"). Upon receipt of proposed Transaction Terms from one party, [ABC] contacts the other party to the transaction by email to determine whether the other party agrees to the proposed Transaction Terms.
If the other party agrees to the proposed Transaction Terms, [ABC] will instruct the purchaser to send funds in the amount of the purchase price, the escrow fees (if applicable), and shipping fees (if applicable) to [ABC] to be held in escrow. The preferred method for submitting funds is by wire transfer, although in limited circumstances funds can be submitted by credit card or via PayPal, or by paper check or money order.
Upon verifying the payment source and available funds, [ABC] instructs the seller to deliver the product to the purchaser and submit tracking information for the delivery (if applicable). [ABC] deposits all funds received from purchasers in a non-interest bearing trust account held at a bank entitled "[ABC] Trust Account," which exclusively holds funds received from purchasers in connection with [ABC]'s internet escrow services. The trust account undergoes a monthly reconciliation and annual audit by an independent certified public accounting firm.
Upon receipt of the product, the purchaser has the right to inspect the product during the inspection period and to accept or reject the product. If the purchaser accepts the product, [ABC] will release the funds from escrow and deliver the purchase price and shipping fees (if applicable) to the seller in the manner selected by the seller (e.g., check, wire transfer, ACH transfer, etc.). An additional charge may apply depending on the disbursement manner selected by the seller. If the purchaser rejects the product, the purchaser must return the product to the seller. Upon the seller's receipt of the returned product, [ABC] will release the funds from escrow and return them (after deducting the escrow fees) to the purchaser.
Analysis under the Texas Money Services Act
Texas Finance Code § 151.302, requires a company engaging in the business of money transmission for Texas residents to obtain a license. Section 151.302(b)(1) states: "a person engages in the business of money transmission if the person conducts money transmission for persons located in this state and receives compensation or expects to receive compensation, directly or indirectly, for conducting the transmissions." Finance Code § 151.301(b)(4) defines money transmission itself as "the receipt of money or monetary value by any means in exchange for a promise to make the money or monetary value available at a later time or different location." Under these definitions, the escrow services provided by [ABC] plainly constitute conducting money transmission for persons located in Texas, other than those transactions funded through credit cards.
However, you assert several possible exemptions or exclusions from licensing that may apply to [ABC]. First, you argue that [ABC]'s escrow services do not constitute "money transmission" because of the exclusion in Finance Code § 151.301(b)(4)(B) for "the provision solely of online or telecommunication services or connection services to the internet." We disagree. This exclusion is aimed at providers of the communications medium itself, not those providing services through the medium. The services provided by [ABC] to its customers plainly do not consist "solely of online or telecommunication services or connection services to the internet."
Second, you note that Finance Code § 151.302(c) authorizes the banking commissioner to exempt a person who "incidentally engages in the money transmission business only to the extent reasonable and necessary to accomplish a primary business objective unrelated to the money transmission business," and argue that the money transmission services provided by [ABC] are incidental to its primary business of providing escrow services. This argument presumes that the escrow services are not themselves money transmission, yet the described escrow services involve nothing more than the receipt of funds in exchange for a promise to make the funds available at a later time. The fact that the promise is made to both sender and recipient is not a distinguishing factor. If escrow services are the primary business, by syllogism money transmission is the primary business, not an incidental one.
Finally, you request that the banking commissioner grant an exemption to [ABC] pursuant to Finance Code § 151.003(10), based on a finding that licensure of [ABC] is not necessary to achieve the purposes of the Texas Money Services Act. You essentially offer two justifications in support of such a finding. First, Finance Code § 151.003(8) excludes from licensure "an attorney or title company that in connection with a real property transaction receives and disburses domestic currency or issues an escrow or trust fund check only on behalf of a party to the transaction." You believe that the escrow services provided by [ABC] should also be exempt because such services are substantially similar to the exempt escrow services provided by an attorney or title company, except that they involve real property and [ABC] services are limited to personal property. We do not find this argument persuasive. The escrow services provided by title companies and attorneys are clearly distinguishable from the nature of [ABC]'s business.
Title companies are licensed and regulated in the State of Texas pursuant to Chapter 2651, Texas Insurance Code, and escrow services are plainly incidental to their primary business of title verification and title insurance. Further, title companies can only provide escrow services if conducted under the authority of employees licensed as escrow officers pursuant to Chapter 2652, Insurance Code. Attorneys are also licensed and regulated in the State of Texas for the practice of law. Escrow services provided by an attorney are typically provided incidental to a legal matter for which the attorney has been employed, and the attorney's compensation is for legal services rendered, not money transmission.
In further justification of a possible exemption under Finance Code § 151.003(10), you point out that [ABC] is already subject to regulatory oversight because it currently holds escrow licenses in [several] states.... As a licensee, [ABC] must comply with all applicable escrow laws and regulations in these states, including, without limitation, licensing, reporting, tangible net worth, and surety bond requirements. [ABC] also remains subject to oversight, audit, and examination by the relevant regulatory authorities in these states....
Texas law does not provide an exemption from licensing for a money services business licensed in another state and, to our knowledge, no state exempts a money services business from licensing simply because it is licensed and regulated by the State of Texas. With respect to a money services business licensed in multiple states, the states actively cooperate and coordinate examinations to reduce regulatory burden, but each state's licensing requirements continue to apply. We do not believe an exemption for [ABC] is appropriate solely because [ABC] is already subject to regulatory oversight in other states.
Conclusion
We conclude that [ABC] must obtain a Texas money transmission license to provide internet escrow services on behalf of Texas residents.
Based on our understanding that [ABC]'s services are already offered and provided to persons located in Texas, [ABC] must promptly submit an application for a temporary license pursuant to Finance Code § 151.306, and must submit a completed application for a permanent license within 60 days of being issued the temporary license. In the alternative, [ABC] must modify its website to prohibit transactions with Texas residents. If [ABC] chooses the alternative, please confirm in writing that the [ABC] website is no longer accepting registrations from Texas residents.
A money transmission license under the Money Services Act is not necessary to provide payment processor services as agent for merchant customers.
May 15, 2006
Sarah Shirley, Assistant General Counsel
By letter dated March 2, 2006, Russell Reese, Director of the Special Audits Division of the Texas Department of Banking (Department), asked (Company) to provide information regarding its activities so that the Department could determine whether the Company needs to be licensed under Texas Finance Code, Chapter 151 (Money Services Act or MSA). Your response to Mr. Reese's inquiry provided a thorough and clear description of the Company's services. I write to advise you of the Department's conclusion regarding the applicability of the MSA to the Company's activities.
Question Presented
The Company acts as a payment processor for its merchant customers (Merchant) and provides services that enable the Merchant's customers to pay for purchases by direct debit from the customer's bank account through automated clearing house (ACH) transactions. Must the Company hold a money transmission license under the Money Services Act to provide the described services?
Summary Conclusion
The Company does not engage in money transmission and may provide the described payment processor services as agent for the Merchants without being licensed under the Money Services Act.
Discussion
According to your letter, the Company acts as a payment processor for Merchants. As agent for the Merchant, and on the basis of information and authorization the Merchant obtains from the Merchant's customer, the Company initiates entries into the ACH network that ultimately result in the debiting and transfer of funds from the customer's account to the credit of the Merchant's account. (The Company's services also allow the Merchant to initiate credits through the ACH network to provide refunds to the Merchant's customer.) You represent that the Company acts solely on behalf of the Merchant in providing the services - the Company does not have any direct contact with the Merchant's customer, does not receive or hold the Merchant's customer's funds, and does not transfer funds or perform money transmission services on behalf of the Merchant's customer. Although the Company temporarily holds the Merchant's funds in a Company-controlled account at the end of the settlement process, it does so as the agent of the Merchant pursuant to the terms of the agreement between the Company and the Merchant.
You submit with your letter additional materials that describe the Company's payment processing services, including diagrams, the NACHA Operating Guidelines, and the Merchant Services Agreement. These materials are consistent with the letter's representations regarding the Company's activities. You also submit FinCEN Ruling 2003-8, which considers whether a company that provides third-party origination services for ACH transactions on behalf of merchants in a manner identical to the Company must register with FinCEN as a money transmitter. The Ruling concludes that payment processing or third-party origination services in which a company simply provides merchants with a portal to a financial institution that has access to the ACH system, and acts on behalf of the merchant receiving payments rather than on behalf of the customers making payments, do not constitute money transmission and that no registration is necessary.
Like FinCEN, the Department has previously addressed the question of whether a provider of third-party origination services for ACH transactions on behalf of merchants is required to be licensed under Texas' money transmission statutes. In Opinion No. 03-01, a redacted copy of which is enclosed, the Department concludes that a company's provision of third-party origination services for ACH transactions as agent for its merchant customers does not implicate Texas Finance Code, Chapter 152 (Sale of Checks Act) or Chapter 153 (Currency Exchange Act), the statutory predecessors to the Money Services Act. Although the specific language of the Money Services Act differs somewhat from the repealed Sale of Checks and Currency Exchange Acts, it substantive provisions, in terms of activities that require a license under Texas law, remain unchanged. The payment processing services the Company provides are substantively identical to the third-party origination services considered in Opinion No. 03-01. We believe that the reasoning of Opinion No. 03-01 is applicable to our analysis of the Company's payment processing activities and services under the Money Services Act and compels the same conclusion.
Based upon the submitted materials and Opinion No. 03-01, the Department has concluded that the Company is not required to hold a license under the Money Services Act to provide the described payment processing services. It appears that the Company acts solely as the agent of the Merchant and simply provides the processing by which the Merchant receives payments from its customers and makes refunds to its customers through ACH transactions - in essence, the customers pay the Merchant or receive refunds from the Merchant, and the Company, on behalf of the Merchant, facilitates settlement of the transactions through the ACH network. The Company never takes control of or holds the Merchant's customer's funds for further transmission or payment and therefore does not "receive money for transmission" in the sense contemplated by the Money Services Act. Accordingly, the Company's activities do not constitute "money transmission" within the meaning Finance Code, §151.301(b)(4).
Our conclusion is limited to the facts set forth in your March 23, 2006, letter and accompanying materials, and the facts and assumptions stated therein. Any change in those facts or assumptions may result in a different conclusion.
Whether an internet-based bill-paying service company that both receives and disburses customer funds only through ACH transactions would be subject to the licensing requirements of Texas Finance Code, Chapters 152 or 153.
July 18, 2000
Loren E. Svor, Assistant General Counsel
By letter dated July 9, 1999, you asked whether the proposed business operations of an internet-based service company (the Company), as described in your letter and summarized below, would require the Company to become licensed for currency transmission under Finance Code Chapter 153, in order to transact business with Texas customers. While the Company is presently contemplating a Texas domicile and physical presence, you further asked whether the analysis would change if the Company intends to serve Texas customers but chooses another jurisdiction for its domicile and does not maintain a physical presence in Texas.
In our opinion, the Company would not be required to obtain a currency transmission license in order to transact business with Texas customers because it is not contemplated that the Company will receive currency or an instrument payable in currency; however, because a customer is appointing the Company as an agent for the transmission of money, the Company's activities would be considered a sale of checks, and would require a license pursuant to Finance Code, Chapter 152.
Facts
Our understanding of the proposed business operations you describe is as follows:
Analysis
The Company will not be engaging in the currency transmission business within the meaning of Finance Code, Chapter 153.
A person may not engage in a "currency transmission business" in Texas unless the person holds a currency transmission license.1 A "currency transmission business" is a business engaging in "currency transmission" as a service or for profit.2 "Currency transmission" is in turn defined as the receipt of "currency" (or an instrument payable in currency) for the purpose of transmitting the currency or its equivalent by wire, computer modem, facsimile, or other electronic means, or through the use of a financial institution, financial intermediary, a federal reserve system, or other funds transfer network.3 Finally, "currency" is a medium of exchange authorized or adopted by a domestic or foreign government.4
In order to transmit currency within the meaning of Finance Code, Chapter 153, it is first necessary that the Company receive currency for the purpose of transmitting it or its equivalent. The statutory definition of "currency" as a medium of exchange authorized or adopted, for present purposes, by the United States government, for the most part means what is commonly called "cash," or more technically "legal tender,"5 the only medium of exchange authorized or adopted by the United States government.6 As you have described the transaction, the Company will receive a credit to its bank account, not currency or an instrument payable in currency. Even though the Company subsequently transmits the equivalent of currency as part of the transaction, because it does not initially receive currency for this purpose, it does not propose to engage in currency transmission within the meaning of Finance Code, Chapter 153, and no license pursuant to that chapter will be required.
The Company will be engaged in the sale of checks within the meaning of Finance Code, Chapter 152.
Although the question was not raised in your letter, the contemplated transactions have characteristics similar to the sale of checks, and it is necessary to address the possible applicability of the Finance Code, Chapter 152, the Sale of Checks Act. In contrast to Chapter 153, which was intended primarily to address money laundering concerns, with consumer protection being a secondary purpose, Chapter 152 is focused only on consumer protection. The statute is designed to assure that when a Texas citizen transfers funds to an agent for delayed payment to another party on behalf of the person, the agent will have the funds necessary to complete its agency obligation to make payment. Although most transactions of this type involve a "draft, traveler's check, or money order," as explicitly mentioned in the definition of "check" in chapter 152, the definition also includes "an instrument for the transmission or payment of money in which the purchaser or remitter of the instrument appoints or purports to appoint the seller as its agent for the receipt, transmission, or handling of money, regardless of who signs the instrument." Finance Code §152.002(1). It is apparent that the Company is appointed by its customer to be the customer's agent for the transmission of money to the customer's creditor. It is our position that the contract with the customer establishing this relationship constitutes the "instrument" which appoints the Company as the agent, and which brings the transactions within the ambit of Finance Code, Chapter 152.7 Consequently, the Company will be required to obtain a license pursuant to Finance Code, Chapter 152, to engage in the described activity in Texas.
The physical location of the Company will not affect the need for a license.
Your initial inquiry was posed under two scenarios: (1) the company was physically located in Texas; and (2) the Company existed in Texas only on the Internet, with no physical presence in the state. We believe the Company would require a license regardless of location, at least if more than a de minimis number of transactions were entered into with Texas citizens.
In general, a state may legitimately assert administrative jurisdiction over an entity not physically present in the state if the application of the state's authority, first, meets ordinary due process requirements and, second, does not impermissibly burden interstate commerce, related but conceptually distinct considerations. Quill Corporation v. North Dakota, 504 U.S. 298, 112 S.Ct. 1904 (1992). Under existing cases, the due process requirement would easily be met. In general, personal jurisdiction is dependent on the commercial interactivity of the web site. See S. Morantz, Inc. v. Hang & Shine Ultrasonics, Inc., 79 F.Supp.2d 537 (E.D. Pennsylvania 1999). The Company's internet activities would, we believe, fall into the most active of the three categories used by the courts in analyzing this issue, and the Company would therefore be subject to the personal jurisdiction of a court anywhere more than a de minimis number of transactions--or perhaps any transactions-were initiated via the internet. See Zippo Manufacturing Co. v. Zippo Dot Com, Inc., 952 F.Supp. 1119 (W.D. Pennsylvania 1997) (A Pennsylvania court has jurisdiction even though only two percent of subscribers were Pennsylvania residents.) Consequently, unless the Company expressly refused to accept business from a Texas resident, due process would permit a Texas court or an administrative agency to assert personal jurisdiction over the Company.
Whether application of Finance Code, Chapter 152 to the Company, if not located in Texas, would constitute an impermissible burden on interstate commerce is less clear. Application of Chapter 152 would prevent the Company from dealing with Texas consumers unless a Sale of Checks license was acquired. However, a similarly situated Texas company also is required to be licensed. Since the statute does not per se discriminate against an out-of-state company, we believe the analysis would proceed along the lines of cases which deal with only incidental burdens on interstate commerce. Such statutes are permissible unless the burdens imposed are "clearly excessive in relation to the putative local benefits." Maine v. Taylor, 477 U.S. 131, 138, 106 S.Ct. 2440, 2447 (1986), citing Pike v. Bruce Church, Inc., 397 U.S. 137, 142, 90 S.Ct. 844, 847 (1970). We believe the incidental burden on interstate commerce imposed by chapter 152 would be found justified in relation to the benefit of providing some assurance that Texas citizens giving money to the Company would receive the intended benefit and that the application of Finance Code, Chapter 152 to the Company even if not located in Texas is Constitutionally sound. We therefore conclude that the location of the Company is irrelevant for purposes of determining whether a Sale of Checks license would be required to engage in the proposed activities.
This opinion is limited to the specific facts of the proposed activities of the Company as you have represented them and as described above. A change in these facts could result in a different opinion.
1 Finance Code §153.101.
2 Finance Code §153.001(5).
3 Finance Code §153.001(6).
4 Finance Code §153.001(3).
5 Black's Law Dictionary defines "legal tender" as "[a]ll coins and currencies of the United States (including Federal Reserve notes and circulating notes of the Federal Reserve Banks and national banking associations) regardless of when coined or issued…."Sixth Edition, 1990, at 897. Note also that Black's Law Dictionary defines "medium of exchange," inter alia, by referencing the definition of "legal tender." Id. at 982.
6 A persuasive argument can be made that the Finance Code definition of "currency" encompasses money orders as well as cash. See Department of Banking Opinion No. 99-14 (unpublished, Oct. 7, 1999). The subsequent revision to the Finance Code explicitly including receipt of an instrument payable in currency as a sufficient predicate for currency transmission has rendered opinion 99-14 moot, but even under its analysis it is necessary to receive a physical object (paper or coins) which is used as a medium of exchange. See also Black's Law Dictionary at 382 ("Currency" is "[c]oined money and such banknotes or other paper money as are authorized by law and do in fact circulate from hand to hand as the medium of exchange.").
7 The word "instrument" is not defined in chapter 152.