Building a Payment Rail: Key Legal Considerations for Technology Platforms and Online Marketplaces | Wilson Sonsini Goodrich & Rosati

Building a Payment Rail: Key Legal Considerations for Technology Platforms and Online Marketplaces | Wilson Sonsini Goodrich & Rosati

As marketplaces have turn into digital and additional technological innovation platforms are integrating payment solutions into the client expertise, there has been elevated interest among technology organizations in probably starting to be income transmitters or partnering with regulated monetary establishments1 (straight or indirectly) to embed payment solutions in just their platforms or applications.

A business could embed payments into its software program and user interface to blend transaction processing in a seamless, cohesive encounter for its shoppers. For case in point, an online marketplace connecting lessors and renters could insert new payments operation. Embedding payment operation in this way could provide as an further profits stream by presenting payment companies as an “add-on” or “value-add” support. This design stands in contrast to a single wherever a corporation principally engages in the business of payments, with payments companies as a primary source of profits, these kinds of as presenting a peer-to-peer income transfer application.

Corporations that want to incorporate payments performance into their choices need to stay away from adding the payment rail initially and imagining about regulatory compliance later. Platforms and marketplaces that hurry to supply payment rails without the need of to start with assessing the lawful ramifications may well find by themselves issue to an enforcement action by a federal or state regulator, dropped by a strategic companion, or know too late that the resources desired to include payment operation considerably exceeded their anticipations or prospective returns. Thinking about regulatory compliance too late, or not at all, could prevent future traders, or derail a promising IPO, merger, or acquisition.

Under are critical issues for corporations to strategically method the threshold legal and business thoughts close to giving embedded payments solutions, with a focus on the impression to the product’s layout, essential compliance assets, and potential income.

Regulatory Compliant Procedures to Embedding Payments

There are various ways to offer you payment providers and many authorized and organization factors providers must feel about when contemplating embedding payments functionality, dependable with regulatory compliance.

Top of brain, at the federal and point out amount, are revenue transmitter legal guidelines. Typically, a “money transmitter” is a person that accepts worth from 1 particular person and transmits that value to a further particular person or to one more spot by any means. In other phrases, money transmitters are folks who aid the transfer of benefit (fiat or crypto belongings) amongst two individuals, a buyer and a company (or vice versa), or involving corporations. Organizations that are accredited as a funds transmitter with all related states and registered as a income companies small business (MSB) (“money transmitter” is a sort of MSB) with the U.S. Department of the Treasury’s Fiscal Crimes Enforcement Community (FinCEN) are ready to sit straight in the “flow of funds” or get price in an account that they possess or control from a single human being, and transmit that worth to another man or woman or to one more locale on behalf of the sender. 

There are distinctive strategies to embedding payments in compliance with relevant laws and polices, like the adhering to: 

  1. the money transmission licensure design, in which the small business obtains suitable condition licenses and registers as an MSB2
  2. the partnership model, whereby a corporation contracts immediately with a controlled money institution to deliver payment services (a variation, the banking-as-a-provider API design, is where a firm specifically contracts with a technological know-how enterprise that presently has a direct relationship with a controlled fiscal institution, these types of as a lender, to deliver payment companies) and
  3. the hazard-based mostly design, whereby a company depends on an exemption from income transmission licensure and MSB registration to give payment providers on its possess.

The exceptional method differs by company, depending on their organization ambitions, possibility urge for food, and sources for regulatory compliance, between other significant criteria. The next chart is an instance of how these distinct criteria may perhaps stage in favor of a single method over an additional. 

The Licensure Route

Starting to be a controlled income transmitter—registering as an MSB and acquiring point out revenue transmitter licenses—is no compact make a difference. While registering with FinCEN as an MSB is a quite simple and simple course of action, condition licensure is very time consuming and cumbersome, and can be really expensive.

The normal intent of the point out dollars transmission application course of action is to make certain the applicant has the monetary ability, administration, and business product in put to productively function a funds transmission business enterprise. Among the other specifications, state-stage cash transmitter applicants are demanded to submit a company plan, have a surety bond, undergo legal background checks and fingerprinting, present financial statements, and meet minimum internet value specifications.

If a corporation desires to offer you revenue transmission expert services nationwide, the corporation should acquire a license in each individual point out and coordinate the licensure approach with state regulators. Just about every state has its own income transmission application, but lots of states have joined the Multistate MSB Licensing Agreement Application (MMLAP), wherever a multi-condition funds transmission software process is far more streamlined and coordinated by a solitary condition. The MMLAP software process consists of two phases: (1) evaluation of the basic license application requirements relevant to MMLAP taking part states by a single state regulator and (2) evaluate of point out-particular license software information by other states in which the applicant is in search of funds transmission licensure. Usually, the licensure course of action for a single point out may well get between six months and just one year. If a corporation programs to go-to-market in the relative close to phrase, the application processing time may perhaps in the end be the selecting element from licensure. 

Outside of obtaining first state licenses and registering with FinCEN, accredited and registered funds transmitters have significant on-heading federal and point out regulatory obligations. At the federal level, the reason of income transmission regulations is to combat income laundering and terrorist financing. Income transmitters registered with FinCEN are essential to carry out and retain an anti-money laundering (AML) system, report suspicious and substantial transactions to FinCEN, and comply with recordkeeping and other AML demands.

In contrast to the objective of federal cash transmission laws, in a large the vast majority of states, the function of income transmission rules is usually consumer protection. State accredited dollars transmitters are subject matter to ongoing supervision, these kinds of as examination by the point out regulator, and quarterly and yearly reporting. In many cases this demands at least a single unique or, in several situations, numerous men and women to be responsible for developing and overseeing the company’s regulatory obligations. 

As with other regulatory licensure regimes, there are exemptions from MSB registration and cash transmission licensure. However, the exemptions are not uniform and differ from federal to state, and state to condition. For illustration, a corporation may well be exempt from federal MSB registration, but not state licensure. Or, a company could be exempt from licensure in one state, but not in a different. If a business in the end decides to depend on an exemption, the firm should really consult with with outdoors counsel to recognize the authorized possibility of relying on an exemption.

The Partnership Path

While the income transmission licensure approach may well be extensive and cumbersome, that does not always indicate that the partnership route is less resource intensive. First, the corporation have to uncover a partner that is ready to supply its providers based mostly on the company’s enterprise design. Each and every controlled financial institution has its very own threat urge for food, and a company’s organization design may perhaps only be as well risky for the controlled money establishment. Further more, the business partnership agreement negotiating procedure requires time and, relying on the lover, there is no warranty that it will be a lot quicker than getting a point out revenue transmission license.

In addition, frequently talking, a enterprise that pursues the partnership path will lose some autonomy. While a firm that partners with a controlled economic establishment may perhaps stay clear of some direct regulatory scrutiny, the regulated monetary establishment is subject matter to federal and/or point out oversight and may perhaps be liable for the pursuits of its spouse. This means that the organization will deal with constraints and scrutiny from its regulated fiscal institution partner in excess of its system and solutions supplied, these types of as buyer on-boarding. Similarly, if the regulated financial establishment is not ready to supply a payment support to a sure purchaser or course of customers, then the business likely are unable to offer you the service to those customers through its partnership.

The partnership model could also impose extra onboarding or marketing constraints on a business. Some of these constraints may crop up from the controlled financial institution partner’s have regulatory and risk-administration obligations. For example, if the controlled economical institution husband or wife needs specific details to be gathered from all prospects for the duration of on-boarding, it might contractually involve the business to collect that details. Likewise, the regulated fiscal establishment may contractually require the business to seek out its approval for all advertising and marketing supplies right before they are disseminated, or that certain information and facts or other terms are included in the company’s conditions of services or user settlement.

For these and other motives, partnering with a regulated economical establishment does not automatically guarantee a lighter regulatory burden. Quite often, in fact, the regulated fiscal institution will go down some of its regulatory compliance obligations to the organization. For example, the controlled fiscal institution may well call for the organization to acquire compliance procedures that are topic to approval by the regulated monetary institution, and employ all those compliance insurance policies. Alternatively, the regulated economic institution might give the organization with its compliance procedures and call for the company to adopt and put into practice them. Relying on the company’s small business design, this might end result in many compliance guidelines that will have to be made or adopted, and followed and managed. Related to the licensure product, this may well call for a person personal, or multiple individuals, to oversee the company’s contractually demanded compliance burden. As it relates to compliance risk, the most important difference in between the licensure path and the partnership route is the shifting from regulatory chance to contractual threat.

There are also probable economical downsides to the partnership product. In the partnership model, the regulated money institution will normally take a share of each transaction it processes. Even more, there may perhaps be necessary minimum amount use requirements. While these are each enterprise details topic to contractual negotiation, bargaining electricity is a big restricting component on a company’s ability to negotiate these phrases. If a corporation is a little get started-up, a larger sized regulated monetary institution partner could not be inclined to budge on the utilization commitments or the proportion of every single transaction that the controlled economical institution spouse retains, i.e., its charges for delivering the provider.


Regulatory compliance should be a principal thing to consider in the improvement of embedded payments features. Whether or not regulatory compliance sits with the enterprise as a regulated fiscal establishment (the licensure model), or by way of its contractual relationship with a regulated monetary institution (the partnership design), comprehending payments regulatory compliance and the accompanying legal framework on the entrance-finish may in the end strengthen business functionality, time to sector, and strategic associations.

This report discusses only a couple of organization and legal issues and dangers linked with embedded payments. Corporations that plan to enter the payments space should really look at all of the authorized and company concerns before making use of for licensure or partnering with a payment company company.

[1] As applied in this post, the expression “regulated economic institution” usually means a economic institution that is registered, certified, and/or authorized by the proper federal and/or point out regulator to accomplish payments services.

[2] As earlier outlined, a “money transmitter” is a type of MSB.