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Banking Interpretations

NYSBL 640 & 641

April 24, 2007

Dear Mr. [---]

Your letter dated December 18, 2006, to the attention of Ms. Diana L. Taylor, Superintendent, has been referred to me for reply.
 
In an earlier letter dated March 27, 2006, you wrote to Ms. Taylor and requested the concurrence of the Banking Department with your opinion that neither the member banks of your organization nor the merchants participating in your organization's prepaid card program are required to be licensed as money transmitters under Article XIII-B of the New York Banking Law.
 
In a letter dated June 12, 2006, the Department responded to your March 27, 2006 letter that, as to the member banks of your organization, we agreed with your opinion because 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.)

Also, in the letter dated June 12, 2006, as to whether merchants participating in the prepaid card program described in your letter would need to be licensed, the Department disagreed with your conclusion and opined that the merchants would have to be licensed as money transmitters based upon the information you supplied.

The prepaid card program; as described in your letter dated March 27, 2006, 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.

The Department concluded, as set forth in greater detail in the letter dated June 12, 2006, that 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 that the merchants are prohibited from engaging in this activity without a license, under Section 641, unless each 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.

The Department recognized that, if the arrangement were structured so that the merchants would be 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. From footnote 1 of your letter of March 27, 2006, which seemed 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 concluded that no agency arrangement existed; however, we also stated that we were willing to reconsider this characterization if you believed the facts could support a finding that they constituted an agency agreement.

We observed that,

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.

Subsequent to sending its letter dated June 12, 2006, the Department agreed to further discuss the merchant issue and met with your organization on September 6, 2006. The key focus of that meeting and your follow-up letter dated December 18, 2006 concerns how the merchants, who will be either selling or loading prepaid cards are "agents of payees" under Banking Law, Section 641. Our prior understanding, based on footnote 1 of your letter of March 27, 2006, which indicated that receipt of funds by the merchant does not unconditionally obligate the card issuing bank on the card, is no longer in effect.

The Department concludes, based upon its changed understanding as a result of the meeting and your letter dated December 18, 2006 and the additional information supplied by your organization, that the merchants should not be required to be licensed as money transmitters pursuant to Banking Law, Section 641 in order to participate in the prepaid card program described in your two above-mentioned letters. The Department believes that it has received adequate assurances that a cardholder dealing with any such merchant and delivering funds to the merchant in connection with your organization's prepaid card program appears to encounter no greater risks than if the cardholder were dealing directly with the card issuing bank.

In particular, our conclusion that the various contracts and rules of your organization constructively constitute agency agreements under which the merchants selling or loading prepaid cards are "agents of payees" (i.e., the card­issuing banks) is based on representations about the prepaid card program that you made in the December 18, 2006 letter to the effect that:

We also note that in the December 18, 2006 letter you indicated to us that you have been in contact with regulators from California, Florida, Illinois and Texas in connection with the prepaid card program and that, in each case, the regulator confirmed that neither the banks nor the merchants participating in the program will be required to register as money transmitters or agents or subagents of money transmitters under the applicable state statutes.

While the Department concludes that the merchants should not be required to be licensed as money transmitters pursuant to Banking Law, Section 641 in order to participate in the prepaid card program, we reiterate an issue that we raised in our June 12, 2006 letter concerning the merchants being the agents of the banks. The issue, which is beyond the scope of your inquiry, is whether the banks, in receiving funds for the purchase of prepaid cards through "agents," would be receiving deposits so as to constitute the business of banking. Further information may be necessary to determine whether the funds received under the prepaid card program would constitute branching activity on the part of the issuing banks. This issue should be discussed with the banks' primary regulator and the FDIC.

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

cc: R. Stone

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