Viewpoint: How to Deal with Stricter Money Transmitter Laws
By Vic Lance, Lance Surety Bond Associates
New Mexico becomes yet another state that introduces stricter rules for money transmitters. With the New Mexico Uniform Money Services Act (House Bill 250) in place, as of January 1, 2017, all transmitters will have to obtain a money transmitter license in order to comply with state regulations. (Editor’s note: It’s not just New Mexico. South Carolina earlier this year enacted a law that requires licenses for persons and entities engaged in money transmission in the state. And Minnesota also has recently addressed a money transmitter’s obligations to combat fraud.)
As money transmitting has been quite popular lately, legislators are catching up with the trends and are enacting specific legal requirements for such entities across the U.S.. In this sense, New Mexico is following the positive recent legislative changes in many other states. The tighter licensing requirements aim to raise the bar for money transmitters and prevent fraud and misuse conducted through their services, which has proven successful in other industries.
The changes introduced with the law
Until the end of 2016, the state’s Financial Institutions Division requires money transmitters in New Mexico to get a license only if they sell and issue money orders and checks. With the new rules, all money transmitters will have to get licensed as of next year. One of the most important licensing requirements will be posting a surety bond.
The money transmitter surety bond amount will vary depending on transmitters’ business volume. The bond should not exceed $2 million. The only exception would be if the transmitter’s finances are deemed inadequate. Then they may need to provide a bond that can be valued at as much as $5 million.
Like other surety bonds, violation of the bond agreement can lead to a claim against the holder of the bond, so everyone in the industry should learn more about the responsibility that money transmitter bonds carry.
For the majority of transmitters, the bond amount should be one of three options, whichever is the highest: one percent of the annual dollar volume in the state; the expected volume for the first licensing year in the state; or $300,000. Money transmitters with more than five locations in the state or who are solely online-based will have to keep a minimum net worth of $500,000.
Who is affected by the new rules?
Money transmitter companies have grown tremendously in recent years. Offering services that are not the same as banks, but do bear many similarities with theirs, transmitters sell and issue payment instruments and receive funds for storage and transfer.
The Uniform Money Services Act stipulations for providing a money transmitter license and bond apply to all companies who engage in such services. Prominent examples include PayPal, Skrill and TransferWise.
How to get a money transmitter license and bond
The licensing authority for money transmitters in New Mexico is expected to be set in the next few months. The licensing procedure should be outlined by Sept. 1. It is expected that the license applications would go through the Nationwide Mortgage Licensing System, which serves mortgage brokers and lenders, among other financial professionals.
As for the money transmitter bond requirement, companies that offer such services will have to apply with a surety agency. To get bonded, you will have to cover only a small percentage of the whole surety bond amount that is required from you.
Your surety provider will examine the solidity of your financial situation, including credit score, assets and liquidity, and business know-how. Your bond premium will depend on this examination. It’s important to keep in mind that your surety bond is not insurance for your company. Instead, it’s an extra layer of protection for the state and your customers.
The new rules for money transmitters in New Mexico aim to bring legal clarity for the newly emerged niche of financial services and to prevent fraudulent practices in the field. They follow a statewide trend to regulate money transmitters across the country, so that the industry delivers high-quality and safe services.
Although the stricter requirements mean a heavier administrative process for money transmitters, they can also be highly beneficial for the trade. With better defined standards, all members of the industry can obtain wider trust and improved reputation.
Vic Lance is the founder and president of Lance Surety Bond Associates. He is a surety bond expert who helps business owners get licensed and bonded. Vic graduated from Villanova University with a degree in Business Administration and holds a Masters in Business Administration (MBA) from the University of Michigan’s Ross School of Business.
In Viewpoints, payments professionals share their perspectives on the industry. Paybefore’s goal is to present many points of view to offer readers new insights and information. The opinions expressed in Viewpoints are not necessarily those of Paybefore. This article is intended for general information purposes only and should not be construed as legal advice. Readers are urged not to act upon the information without first consulting an attorney.
