July 18, 2000
Your letter of July 13, 2000 to Deputy and Counsel Kelsey, which concerns the activities of your client, Confinity, Inc., has been referred to me for reply. In your letter, you indicate that your client, a California-based corporation with no physical presence in New York, offers its "PayPal" payment service to residents of the United States who have an E-Mail address, under which individuals may send money to other individuals either through the use of a credit card or through an authorized ACH debit from a bank account "with the requirement that the monies be directed to the recipients E-Mail address" (I do not understand how monies can be directed to an E-Mail address and am assuming that you are referring to the fact that all those who authorize account debits must provide the E-Mail address of the intended recipient of the monies). This service is offered exclusively through the Internet and is utilized by individuals who wish to make payments to others in connection with the purchase of goods and services. You mention in your letter that PayPal is currently available in connection with purchases made at the E-Bay auction site.
You indicate that the sender of the monies is given immediate notification as to whether the transaction is approved or declined by the credit card company and, contemporaneous with the transaction approval, the intended recipient of the monies is notified by E-Mail that the sender has sent the monies. You further indicate that the intended recipient of the monies is given the option of having PayPal (1) deposit the monies into his/her bank account, which must be located in the United States; (2) send him/her a check for the amount; or (3) keep the monies on account so that he/she may use the balance to send those monies to others. In view of the activities of your client, you ask whether those activities require that a money transmission license be obtained from the Banking Department.
The definition of "money transmission" in Article XIII-B of the New York Banking Law is very broad. The intent of the New York legislature was to, among other things, minimize the risk of loss to New York customers who utilize third parties to transmit funds and ensure that persons and entities which engage in money transmission activities do not utilize their services to facilitate the conduct of illegal activities. PayPals method of operation, as described in your letter, appears to address the concerns of the legislature. For those utilizing a credit card to effectuate a funds transfer, the Federal laws limiting the liability of credit cardholders in cases in which there is unauthorized usage or disputed charges minimize the risk of any losses arising from a transaction through PayPal. Likewise, users of the PayPal system who choose to have their bank accounts debited to effectuate payments to others would be protected by the NACH rules and it would appear, to some extent, by Regulation E of the Federal Reserve Board.
As for the potential for individuals utilizing the PayPal service for illegal activities, it appears that restricting the method of payment to credit cards and bank account debits minimizes the risk that the PayPal system will be utilized for illegal purposes given the amount of oversight existent here.
Considering the foregoing, the Banking Department will interpose no objection at this time to your client offering PayPal services to New York customers without being licensed under Article XIII-B of the Banking Law. The Department reserves the right to amend its opinion should the manner in which PayPal operates changes from what is set forth in your letter. Unfortunately, the Department believes that PayPals option under which payment money is kept on account for future use constitutes illegal banking. Although this matter is one that may be resolved by the appropriate government agency in California, this Department believes that this option should not be offered to New York residents.
I trust that this letter is of assistance to you.
Very truly yours,