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Banking Interpretations

NYSBL Sections 131(1), 641, and 648

June 12, 2006

[ ]

Dear [ ]:

Your letter dated March 27, 2006, to the attention of Ms. Diana L. Taylor,
Superintendent, has been referred to me for reply. In the letter, you requested
the concurrence of the Banking Department with your opinion that neither the
member banks of your organization nor the merchants participating in the
prepaid card program (described in the letter) are required to be licensed as
money transmitters under Article XIII-B of the New York Banking Law.

As to the member banks of your organization, we agree with your opinion.
Section 641 of the Banking Law is clear that banks, savings and loan associations
and state and federal credit unions, inter alia, do not have to apply for a license
to engage in the money transmission business. Section 641.1 provides that:

No person shall engage in the business of selling or issuing checks, or
engage in the business of receiving money for transmission or
transmitting the same, without a license therefor obtained from the
superintendent as provided in this article, nor shall any person engage in
such business as an agent, except as an agent of a licensee or as agent
of a payee; provided, however, that nothing in this article shall apply to a
bank, trust company, private banker, foreign banking corporation
licensed pursuant to article two of this chapter or foreign banking
company authorized to operate pursuant to the International
Banking Act of 1978 (12 USC 3101 et seq.), as amended, savings
bank, savings and loan association, an investment company, a national
banking association, federal reserve bank, corporation organized
under the provisions of section twenty-five-a of an act of congress
entitled the "Federal Reserve Act", federal savings bank, federal
savings and loan association or state or federal credit union. (Emphasis
Added.)

As to whether merchants participating in the prepaid card program described in
your letter would need to be licensed, we disagree with your conclusion and we are
of the opinion that the merchants would have to be licensed as money
transmitters based upon the information you supplied.

The prepaid card program, which is described at length in your letter, works
essentially as follows: the merchant receives funds and information from
individuals, transmits same through its acquiring bank (i.e., the bank that settles
its credit, debit and prepaid card transactions) to the card issuing bank through
your organization and, upon receipt of the required authorization, delivers the
loaded prepaid cards and receipts evidencing the transactions to the
cardholders. The acquiring bank is responsible for delivering the funds to the
card issuing bank and the card issuing bank is responsible for satisfying the
payment obligations associated with proper use of the cards. The various
responsibilities of the merchant, acquiring bank and card issuing bank are set
forth in various contracts and rules of your organization. We have not examined
these contracts and rules, but we understand from your letter that receipt of
funds by the merchant does not unconditionally obligate the card issuing bank if,
for example, the card issuing bank has not authorized the transaction.

The crucial issues here are whether the receipt of funds by the merchants is
within the meaning of the term "in the business of receiving money for
transmission" as used in Section 641, quoted and highlighted above, and, if so,
whether the prohibition on engaging in this activity without a license under
Section 641 is somehow inapplicable to the merchants.

The scope and meaning of the term "the business of receiving money for
transmission" is not clear on the face of the statute and one must therefore look,
among other places, to the legislative history.

The legislative history of L. 1963 C. 1000, adding Article Xlll-B to the Banking
Law, provides in part as follows:

"The business sought to be supervised consists, essentially, of the sale of
traveler's checks and money orders, and the transmission of funds
overseas. It involves, therefore, the receipt of funds from the public for
transmission or for payment upon demand at a later date. The inherent
possibilities of abuse through fraud, defalcation or insolvency are
obvious."

The elements of the business sought to be supervised by the statute, however,
do not appear to differ materially from those involved in the prepaid card
program. As far as we can determine from your letter, a cardholder is not
unconditionally granted a usable prepaid card upon the merchant's receipt of
cash or other funds. As with traditional money transmitters, the customer
encounters some degree of risk. Additionally, even when the customer provides
cash to the merchant, there is no indication that a non-conditional receipt
effectively binding the bank with respect to the prepaid card is issued by the
merchant at the time of transaction. Since the arrangement appears to place the
cardholder in a position as a party upon which the risk of the merchant's default
or defalcation may fall, the activity appears to be one at which the statute is
directed.

A merchant is not a bank or other entity enumerated by the statute as one to
which licensing does not apply. The merchant, therefore, in our opinion, would
need to obtain a license, unless the merchant were considered an "agent of a
licensee or an agent of a payee" within the meaning of the language of the
statute, also highlighted above. In this regard, we disagree with your reading of
the statute, which is that since banks are not licensees, merchants in the prepaid
card program cannot fall within the definition of "agents." In our view, when the
statute uses the phrase "agent of a licensee or an agent of a payee," the word
"agent" is not limited to an agent of a licensee because otherwise the words "of
the licensee" and "agent of a payee" in the phrase would be superfluous. Based
upon the language of the statute, a payee other than a licensee may have an
agent, too. As applied to the case at hand, a merchant can be the agent of a
payee bank and, if the arrangement is so structured, the merchant would not be
required to obtain a license.

Also, you suggest that requiring merchants to be licensed is inconsistent with the
statutory exemption for banks. We disagree. Nothing in the statute indicates
that the exemption for banks extends beyond them to merchants. We construe
Banking Law Section 648, however, to allow banking organizations, which are
exempt from the licensing requirements because they are highly regulated and
supervised, to be able to use agents in essentially the same way as licensed
money transmitters, whose agents are exempt from licensing except as provided
in section 648. The Banking Department's opinion is that agents of a bank would
be subject to, or exempt from, any requirement that they be licensed as money
transmitters to the same extent as are agents of licensed money transmitters.

Section 641(1) states that an entity which acts as an agent of a payee is not
engaged in money transmission and need not obtain a money transmission
license. Consequently, if the merchants would be, in this case, agents of payees
(i.e., the card issuing banks), there would be no legal objection to their assisting
the banks in collecting payments for the prepaid cards.

As mentioned above, however, although the various responsibilities of the
merchant, acquiring bank and card issuing bank are set forth in various contracts
and rules of your organization, which we have not examined, it seems to us from
your letter that the documents do not constitute an agency agreement. Footnote
1 of your letter seems to state that receipt of funds by the merchant does not
unconditionally obligate the card issuing where the card issuing bank has not
authorized the transaction. We are willing to reconsider this characterization of
the documents if you believe that they constitute an agency agreement.

As part of an agency agreement, agents of payees must give customers a receipt
which indicates that payment to the agent is deemed payment to the payee.
There can be no risk of loss to the cardholders if any of the merchants fails to
remit the proceeds from the sale of the cards. Whether or not the card issuing
banks receive the cardholders' funds, the banks must treat the purchasers of the
cards as if, in effect, the banks received payment for the cards. If that does not
occur and if the agency agreements do not clearly make the merchants agents of
the payees, the activity would not be legally acceptable for the merchants as they
would be engaged in illegal money transmission.

There is another issue to be considered concerning the prepaid card program,
assuming it were to operate with the merchants being the agents of the banks.
The issue is whether the banks' agents, in receiving funds for the purchase of
prepaid cards, would be receiving deposits so as to constitute the business of
banking. Section 131 of the Banking Law states that only duly authorized
banking institutions may accept deposits. Some of the indicia of deposit-taking
would appear to be present. For example, customers would be able to provide
and withdraw monies from time to time and there will often be a balance in the
cardholders' accounts. Further information may be necessary to determine
whether the funds received under the prepaid card program would constitute a
credit balance rather than a deposit.

The opinion rendered herein is based on the facts set forth in your letter and may
not be applicable to any other situation.

I trust that this letter is responsive to your inquiry.

Very truly yours,

 

Alan Weinberg
Assistant Counsel