MTLs and Money Transmission Primer with Evan Minsberg

In this episode of FinTech Layer Cake, host Reggie Young speaks with Evan Minsberg, Partner at Morrison Foerster, about the nuanced world of money transmission licenses (MTLs). Evan explains what MTLs are, why fintechs need them, and the trade-offs between pursuing a license, partnering with a bank, or using alternative models. He also unpacks the hidden costs, both in dollars and time, behind getting licensed, and how fintechs can think strategically about when it makes sense to pursue one.

From agent-of-payee exemptions to the risks of operating without proper licenses, Evan offers a practical primer for founders navigating regulatory quicksand. He also shares trends in state-level adoption of the Money Transmission Modernization Act (MTMA), rising anti-money laundering scrutiny, and myths about “FBO” and “BOBA” accounts. Whether you’re building a payments product, exploring embedded finance, or just trying to future-proof your business, this conversation is packed with insights you won’t want to miss.

Transcript

Reggie Young:

Welcome back to Fintech Layer Cake, where we uncover secret recipes and practical insights from fintech leaders and experts. I'm your host, Reggie Young, the Chief of Staff at Lithic. On today's episode, I chat with Evan Minsberg, a fintech payments partner at the law firm Morrison Foerster.

Evan's an expert on payment processing, money transmission, bank, fintech partnerships, and much more. Given how often I field questions on money transmission licenses, or MTLs as they're known, I'm excited to have Evan on the podcast to demystify and break down what MTLs are, when they make sense, and other payment trends he's seen in the market.

Fintech Layer Cake is powered by the card-issuing platform, Lithic. We provide financial infrastructure that enables teams to build better payments products for consumers and businesses. Payments, especially money transmission, is a very nuanced regulatory space, and you should always work with a lawyer when you're doing anything money transmission related. Nothing in this podcast should be construed as legal or financial advice.

Evan, welcome to Fintech Layer Cake. Excited to get you on the podcast. I know you and I historically have run into each other only at Money 20/20, where we catch up on money transmission and payment trends. Now we can talk outside of the Venetian for once, which is great.

I was excited to get you on the podcast because you are a deep expert in the fun, nebulous world of money transmission, in addition to payments and a bunch of other stuff. Money transmission is always one of those fun topics that whenever you get a creative problem solver, which is usually the sales team, or a founder who wants to push boundaries, you usually end up being like, actually, guys, we can't do that because it's probably money transmission.

I thought this would be a great episode. I know you're great at distilling legalese and making it fun. Maybe a good place to start is what is money transmission, and why might a fintech be interested in getting money transmission licenses?

Evan Minsberg:

Awesome. Thanks, Reggie. Money transmission is a regulatory regime under both federal law and the laws of 49 states, District of Columbia. I was at a conference the other day, and the only state that doesn't have money transmission is Montana. But I said South Dakota, and the person next to me was like, it's Montana. It was awesome because either I don't know the thing I'd come to speak on or I don't know basic geography. So that was lovely.

The definition varies a little bit between states and federal law. I think we generally boil it down to money transmission is the receipt of funds into an account you own or control for the purpose of transmitting it to another person or location. There's variations. Federal law uses the term accept funds. States may say funds, money, monetary value, different sort of scope. But big picture, you're receiving funds for the purpose of transmitting them somewhere else.

If you think that is a broad definition, it's going to put my kids through college, so it is, and it encompasses a wide range of potential business models like bill payment, payroll processing, remittance transfers, stored value, certain types of merchant acquiring and processing, and these days, certain types of digital assets transactions also. So there are a wide variety of different business models that can potentially fall under money transmission regimes where you say, oh, maybe I'd like to be in the funds flow. The term embedded payments is everywhere these days. And so everybody is trying to embed payments. Well, maybe you want to think carefully about how you go about doing that so you don't accidentally walk into this world of regulation.

Reggie Young:

Yeah, it's a hairy set of requirements to trip. I usually end up distilling it down to, you're taking person A money, putting it in your bank account and sending it to person B money. It's like you're taking possession or ownership. But again, there's so much variation.

I think even for folks, just the practical effects, at least the way I think about it is if you're a money transmitter, you’ve got to register with all the states. You’ve got to go through state exams, which are not fun, require resourcing. The whole process to actually get the license is two years, usually cost several millions of dollars. And you have to have a whole AML program. You've got to file SAR filings. It's a whole set of nasty things.

If you want to do it intentionally, there are strategic reasons. Maybe that's what we can get into next, is what does it unlock for a fintech? Why might they want it? Where does it make sense to get a license or not? But yeah, it's something like, if you do it, you want to do it intentionally rather than, whoopsies, now I've got all this mess to clean up.

Evan Minsberg:

Yeah. We have a range of clients from sophisticated payments companies who, for whatever reason, their model has never involved actually being in the funds flow, might involve just sending instructions to move money between banks to retailers, to software companies, to others who, today, don't think of themselves as being a payments company. But we have to have this conversation that's like, today, you're a software company. But if you want to do this, you're going to become a financial services company. All that stuff that you just described is what comes with it. Are we going to get the bang for our buck? What we're planning, is that going to become a core part of the business model, or is this something ancillary that we were hoping to do on the cheap, and that's not going to be accurate?

Reggie Young:

When does it make sense for a fintech? I guess a fundamental question you're just getting at is like, is there a bang for our buck to invest in- do you see certain themes or rules of thumb where like, oh, yeah, for this client, it actually does make sense?

Evan Minsberg:

Sure. I'd say it starts to make sense where either your business model doesn't work without doing it, where you're outgrowing a different approach to the same service, whether from a volume perspective or a flexibility perspective. We can get into different models where you might work with a licensed money transmitter, or you might work with a bank partner, and that's worked out for you, but now your team can't iterate. Your team doesn't have flexibility because they are stuck into a particular way of getting this done that's been authorized by a partner, and they want greater flexibility to be able to offer things.

I'll say the full process is often not maybe the right step for a fintech starting out. Often there may be an easier go-to-market solution. It may come with different restrictions or other types of requirements being put on you by contract instead of by law. But what I have found is oftentimes it's not necessarily- the money, it is an expensive process, right? Like you said, it could be in the millions. There are lots of different service providers out there now that I think can be helpful in cutting down that cost. It's the time. I think as long as 24 months is probably accurate.

There are states where, with a full complete application package, you could probably be approved in, let's say, three to six months. But it's the long tail of certain states, and they're the biggest markets. They're the Californias, the New Yorks, the Floridas, the Texas. I'm not picking on them, but they tend to have a more rigorous process. So in order to really be nationwide serving all the markets that you'd want, that timeline could be 24 months.

And so even if you are a fintech that's got investment money, to be able to accomplish this- I'm sure some of my clients, if I said, you spend $3 million, but you'll have them all tomorrow, they'd be like, boom, I will hit that button, where do I sign? And it's a longer timeline to actually get that done. And what do you do in the meantime, you're hoping to get to that point.

Reggie Young:

And so occasionally, for listeners, if you scroll down to the bottom of fintech’s website, it'll be like, this is only available in these eight states and half the time it's because that's where it's like Montana plus the other states where they have the license.

Evan Minsberg:

We were just talking about that, about the UDAAP concept of clear and conspicuous disclosures, and that theoretically putting it in the footer of your website might not always be considered clear and conspicuous. But me, whenever I go to the website, I do CTRL+End, just immediately go down there because I'm like, that's where all the good stuff is. I'm just going to go straight there. Maybe there's an evolving standard.

Reggie Young:

Yeah, no, there's a lot of good intel you can gather from those footer websites. It's fun to poke around.

What are some of the most common misconceptions you get from clients about money transmission licenses and all the MSB regime?

Evan Minsberg:

I don't get a ton of misconceptions as much. I think these days, a lot of people, even companies just starting out, are aware of money transmission. From when I started practicing, awareness of money transmission in the ecosystem has just skyrocketed. I mean that both from the client perspective, the banks that they might want to work with perspective, even the regulatory perspective, that at some point, at least some regulators woke up and realized that they had this thing in their toolkit that actually encompassed quite a number of different business models.

But I get misconceptions like, the biggest one, and we'll probably touch on this multiple times because it comes up for me all the time, is around what people will refer to as an FBO account. And that is for benefit of, and this comes in lots of different flavors within the industry. I'm sure a lot of your listeners are aware of this concept. The first misconception is that if you do activity that meets the definition of a money transmitter, that if the funds are moving through an account that has been labeled for benefit of, that in itself confers an exemption. Were that true, I wouldn't have a job because everybody would just slap the letters FBO on the bank account and move on, and that's not true.

So when people use that term, at least these days, generally, what they're referring to is a particular arrangement with a partner bank, the important part of which is the bank's name in tin is on the account that the funds move through. I've been unsuccessful in trying to convince the industry to call this a BOBA, or bank-owned bank account.

Reggie Young:

You've successfully convinced the lawyers at Lithic. We actually call it a BOBA internally. Legitimately we do.

Evan Minsberg:

I could quit now, because the important part of this is not the FBO part. It is for the purpose of the fintech to be able to have the argument that it has not received the funds, that there's a chartered bank that is in possession of the funds, and they're just submitting payment instructions to move the money back and forth. So that's very different than just calling an account that you own FBO, which, to me, doesn't particularly do anything. Sprinkling that on there doesn't solve the problem. So I think that's a big misconception I've gotten.

Reggie Young:

The awareness point is a great one. One of my favorite fintech nerdy stories, PayPal. This is in a book that came out, I want to say two or three years ago, about PayPal's rise when they were getting ready to go public. I think it was Louisiana realized they had money transmission statutes that have not been enforced at all. And now you look at all these B2B platforms, and they absolutely all have money transmission licenses. It's one of the canonical examples of modern fintech business models that need money transmission. PayPal didn't have any. And so they were getting ready to go public. I think it was Louisiana that realized they had this statute. It more or less made PayPal pay up a little bit. Otherwise, it would totally have derailed and delayed their IPO. Pretty interesting.

Evan Minsberg:

Oh, wow.

Reggie Young:

It's just a good example of this is now very much expected for that business model. But yeah, hasn't always been the case. I feel like crypto contributed to that because crypto gets into the money transmission space a lot. And so they brought MTLs much more to the forefront of conversation.

Evan Minsberg:

Up until recently with MTMA adoption, a lot of those statutes were still labeled check seller statutes. And if you're just hooking around, you're like, I don't sell checks. The actual definition of activity could be a good deal broader even under some of those old statutes.

Reggie Young:

And just quick hit for listeners in case you're not familiar with the MTMA.

Evan Minsberg:

Now that I've said it, Money Transmission Modernization Act.

Reggie Young:

I was going to guess. I was like, I know one of the words is model or modern.

Evan Minsberg:

I'm like, oh, man, I wrote down an acronym, and now I should have wrote it out. I'm on the spot.

Reggie Young:

For a hot second, I thought you said MDMA. And I was like, this is a different conversation.

Evan Minsberg:

This is going to solve all your money transmission problems.

Reggie Young:

As Evan was alluding to, the states have such variable definitions of this stuff and what it encompassed. It's this attempt, basically, I don't know what I would call the- it's like a trade group of sorts.

Evan Minsberg:

It's a conference of state bank supervisors, CSBS, attempt to make a model statute that would result in states having a more uniform approach to money transmission. Prior to that, I think many of the definitions and approaches were still similar, but there were a lot of different approaches. The scope of different state statutes weren't always clear. So this was an attempt at uniformity. And I want to say something like 30+ states have partially or fully adopted the Model Act.

The funny thing is there is greater uniformity because states are not always adopting all of it. You're still ending up with states that, let's say, the exemptions are not uniform. The definition of money transmission is often fairly similar. But I think the biggest differences among state statutes are the exemptions. Different states exempt different things so that you can still potentially end up with, I'm regulated here but not here. I'm exempt here, but not there.

Reggie Young:

Yeah, it gets us closer to a more efficient system, but also it's states, it's going to take forever. And then you still have to wait for the regulator approval in different regions. And so it's not necessarily a panacea.

What are some of the top most common questions you get from clients when they're coming to you asking about money transmission licenses?

Evan Minsberg:

I get a lot of, what's the risk if we don't do this? I get that a lot. My particular favorite variation on that is, can you quantify the risk, to which I always say 72%. That's a joke. But it is a good solid number to convey confidence with risk if you needed one.

But in terms of what is the risk, I always tell everyone, get all the authorizations that you need by law. Let's get that out of the way first. But in terms of trying to put my practical hat on, help clients out and help them think about things, I think the reality of state resources is that they're not necessarily scanning the airwaves and able to detect every time somebody starts moving money into and out of accounts that might be money transmission. But the risks are things like you get going, and now you want to get the license, and you go to apply, you're going to be asked, have you already done this activity without a license? And if you have, you're likely then going to engage in a sort of consent order process before you're allowed to get the license.

Other risks are things like what you mentioned with the IPO. You want to have some kind of strategic transaction, investment, merger, acquisition. Now you are going to be diligenced by folks that are paying very close attention to this type of issue, and that can become a problem for you in certain situations. I say at the beginning, risk of identification can be lower. But once identified, you either do or don't have a good reason for not having the licenses. And if you don't have any good reason, then it can become a problem.

Reggie Young:

It's a great segue into exemptions and alternative structures, which is that kind of first line of defense to be like, no, no, we have a good reason. Because your point, if you can say something with a reasonable argument, you're going to be treated- you may get off with nothing, you may be totally fine, or they just may say, hey, you still need these licenses, but also we're not worried about the activity you did. You can get treated more lightly there. So I'd be curious to dig into what are some of those common exemptions and alternative structures that you see folks use besides the BOBA, the bank-owned bank account. We're going to make this happen.

Evan Minsberg:

We'll set BOBA aside for a minute. I don't think there is any exemption that is available on a 50-state basis. The closest thing is the agent-to-payee exemption. Essentially, what that means is you are in the funds flow, you are receiving funds and transmitting them, but you are doing that on behalf of the payee. For the non-lawyers out there, the payee is the recipient. We just make words up all the time. That's what keeps us in business. The recipient of the funds, and you're specifically doing that to facilitate their sale of goods and services. And you have to do that under a contract with them that appoints you as their agent. And your receipt of funds has to constitute their receipt of funds so that paying you gets the sender off the hook.

And the reason for that is state statutes, although they are now increasingly concerned with anti-money laundering, are initially and primarily concerned with consumer or sender protection. So that if you send funds to some intermediary, they don't lose them, spend them, disappear with them. If your payment to the intermediary equals payment to the end recipient, then your transaction has been accomplished, and the person in the middle doesn't have to be regulated as a money transmitter. So that exemption exists by statute, regulation or guidance, let's say, in 30+ states now.

I'll say there are many participants in the ecosystem who take the position that the common law of agency gives them an agent of payee exemption everywhere. I've not had an opportunity to see that tested on a multi-state basis. But I will say, I think the only state I'm aware of that has publicly disagreed with agent of payee is Florida. That's probably the number one exemption I see leveraged. It's the one that's most commonly available. It covers a wide variety of merchant acquiring and other processing business models. There are others, but they're not quite as widely available, I'll say.

Reggie Young:

Yeah. Matt Janiga and I used to talk a bunch about the layer cake of fintech. Part of why this podcast is named Layer Cake, because it's like the answer is in the regulatory financial services. The answer to any product question, can we do this, is usually, well, here's four arguments for why you can. And there are these layers of protection, and agent of payee is a great example where it's like, well, in two-thirds of the states, there's this thing you can rely- but not all states. And do the other states care? Are they going to enforce? Yeah. The money transmission is like just this quicksand of a nebulous complexity. It's a good example of that.

Evan Minsberg:

Absolutely.

Reggie Young:

How does money transmission apply across different payment systems like cards or ACH? Is it more relevant in one versus the other?

Evan Minsberg:

I wouldn't say it's based on the network. Again, it's like a funds flow question. Depending on the network and the way settlement works, generally, for Visa, Mastercard purposes, if you are what they would consider a processor, you're typically not in the funds flow. You don't actually receive settlement funds. You are directing traffic, essentially. And I wouldn't expect you to be considered a money transmitter.

Now, a payment facilitator is a different model within the ecosystem. A payment facilitator, unless a different setup occurs, will receive settlement for distribution to underlying sub-merchants. So without an agent of payee payment processor exemption, a payment facilitator could potentially be considered a money transmitter as a result of that flow. Because that exemption exists, I think oftentimes payment facilitators would take the position that they're not engaged in money transmission. But I think there's enough of a concern out there that there also exist products where settlement will basically go around the payment facilitator to sub-merchants directly from the acquiring bank in order to, let's say, fully resolve any money transmission concern. That's card network universe.

We also run into a lot of questions around merchant of record that we were talking about. Merchant of record is like, I'm a platform, I'm a marketplace, I'm something else. There are sellers visible or featured on the platform, but I am processing as the merchant. Taking that position means I'm presenting myself as the seller, or at least I should be. If that's all true and payment to me finishes the transaction, that would be a two-party transaction between me and the cardholder and a separate two-party transaction between me and the folks on my platform, which you could potentially make an argument is not money transmission. The difficult part is propping up your argument that you're properly processing as the merchant. And if not, are you actually processing payments? And that's when things get more complicated.

Reggie Young:

Yeah, I've definitely encountered this sort of, oh, but they’re buying and selling for us. I think the canonical example to me is Amazon. My experience is ordering things on Amazon. There's like a tiny seller name on the product page. All my emails, all my transactions, I experienced it as Amazon, but it can get murky very fast in other models where it's a little less clear that there's a holistic platform there.

Evan Minsberg:

Yeah. There's a lot of different approaches to platform marketplace payments. Like on a Spectrum, I think some probably have a better argument that they should be considered the merchant, and it buck stops with them. And then there are other versions of that model in which I don't know if merchant is the appropriate processing category.

Reggie Young:

Yeah. Are you seeing any recent trends in state MTL activity, or enforcement, or scrutiny or anything, or some states letting up, others cranking down, or are they changing views on the BOBA model? Are you seeing any interesting MTL trends?

Evan Minsberg:

I guess the big trend is towards adoption of the Model Act. If that continues, I think that's helpful because at least some of those exemptions are consistent. And I think there are some business models that were in a gray area before that, let's say, are becoming more clear, not necessarily more consistent, but perhaps more clear. Payroll processing is an example of an activity that for the most part was not explicitly addressed in money transmission statutes before other than some number of states had explicit exemptions.

The Model Act discusses payroll processing explicitly. But again, a number of states have continued to use their adoption of the Model Act to provide an exemption for it, while others now say that it is definitely money transmission. So more clear, not necessarily more consistent.

Reggie Young:

Yeah, I love it.

Evan Minsberg:

Just one other trend I want to mention, again, previously, I think state regulators primarily or entirely concerned themselves with consumer protection and what was in their own statute. There's now a lot more focus in exams from state regulators and other things on anti-money laundering issues, whether a full adoption into their own state statute or by reference to federal law. But there have been some pretty high-profile enforcement actions this year, some of them multi-state, on money transmitters, specifically for anti-money laundering-related allegations.

Reggie Young:

Yeah, interesting. What do you think is driving that shift?

Evan Minsberg:

If I had to guess, it would be a perception that because those state regulators are on the ground examining money transmission participants regularly, they are in a good position to look for AML issues, whereas, let's say, a federal regulator may not always be embedded in with money transmitters so as to be able to identify those problems.

Reggie Young:

Yeah, it makes sense. Are there any regulatory myths, money transmission or outside of money transmission? We'll open the conversation up beyond money transmission because I know you have a lot of experience with a lot of other stuff, bank partnership and just general payment process. Any other myths that you'd love to dispel?

Evan Minsberg:

They're all related to money transmission that I'll mention. One is the idea that if you have one of these FBO, BOBA arrangements, you're good. There's nothing you need to do. I would say that in my experience, where that model is done correctly, in my opinion, you are trading a certain level of statutory regulation for contractual regulation. We could have a whole another call about Banking-as-a-Service and what those relationships look like, but you are effectively moving into a program manager role in which if you are not the one performing the regulated activity and the bank is, you will be expected to do any number of different compliance-related activities to ensure the bank's maintaining compliance. So that's KYC, AML, sanctions checks, managing sub-ledger entries and recordkeeping and reporting.

So it's not as if you are entirely unregulated. It means that you're, in my mind, trading a certain level of compliance from statutory law to now you are a service provider, and you must perform various different things. And it's not just like a silver bullet to instantaneously be able to do things.

Reggie Young:

It's funny to me because this is something I harp on from time to time. It's like, either of those options, you still need an AML procedure internally. The substance of what you need to do in your obligations is just, are you directly filing defense and dealing with state regulators, or are you dealing with your bank who wants reporting and is going to be sample testing your operations, all that stuff? Either way, you have to have some sort of AML program stood up.

Evan Minsberg:

Yeah. You're not going to march off into the sunset with no policies and procedures or something like that.

The other thing I'll say, and despite having spent the last half hour convincing everyone that money transmission is all encompassing, not everything is money transmission, which is something that I'm very careful that all my colleagues wouldn't be like, don't ask Evan, he's going to find some money transmission. He's going to look under a rock and find money transmission there.

There are other business models that are consistent with receiving funds and sending them on that aren't regulated as money transmission. When I work with bank clients, for example, and they say, it looks like somebody is using their deposit account to move money in and out. And we'll go through a process of, what's their business model? Why are they doing that? And are there other reasons they might do it? Like collection agencies, loan servicers, they are separately regulated. Oftentimes states will have different licenses for that activity. If all you do is service loans and you have the appropriate license for loan servicing, I would argue you don't need a second money transmission license.

Others are, we looked at one, I don't do insurance law, but if you are a licensed insurance producer, my understanding is, at least in some states, you are authorized to collect the insurance premiums and send them to your insurance carrier client. Sometimes when we dig in a little bit, we say, oh, there's a separate authorization for this particular industry, and not everything I see is a money transmitter.

Reggie Young:

Yeah. No, interesting. Makes sense. Those are all the quirky cases that you can build entire business models around, like the collections, or I'm thinking like travel agencies. I feel like sometimes I have to deal with that sort of they have their own separate state licensing thing. They get the licenses, it blesses a lot of activity.

Evan Minsberg:

I should mention that as one other trend, it's not specifically a regulator trend. I'm seeing an uptick in- because this sort of awareness of money transmission is increasing across the board, many banks, I think, are asking more questions than they might have in past years about how are you using your commercial deposit account at my bank? I see money coming in, money coming out. You're not just using it for your own operating purposes. What are you doing, and what is authorizing you to do that? And I've been on both ends of that, from receiving those questions and also helping banks think through writing those questions and how to resolve those issues.

Reggie Young:

Yeah. It's tricky, especially the business context because a business's normal operations can involve a lot of money moving. And so it may be entirely legitimate, just like their own spend, but also it could be something else.

Evan Minsberg:

Yeah. Again, could be a total other call, but the question of how far does a bank's AML and other responsibilities extend the customers of their customers? You should be aware of their business model. You should understand money moving through your bank, all those kinds of things. For example, is it your job to 100% due diligence and ensure they have every state license they might possibly need? I think that is a useful conversation to have.

Reggie Young:

Yep. It's like the similar analogous conversation in KYC where it's like, you can do an infinite amount of effort and track people down and meet them in person to verify that they're real. But at some point, you have to draw a line of just what's a reasonable effort to give some reasonable certainty.

Evan Minsberg:

Yeah.

Reggie Young:

Cool. Awesome. Any last thoughts for listeners before we wrap up?

Evan Minsberg:

No, I’ll just say thanks for having me. This is a great opportunity. I enjoyed it.

Reggie Young:

Yeah. I figured you'd be great to help distill some of the voodoo around money transmission. If folks want to go get their money transmission licenses, or their bank is asking them what they're doing with their bank account, how can they get in touch with you?

Evan Minsberg:

Just Google my name. I'm very easy to find. The law firm wants it to be that way.

Reggie Young:

Comes in handy.

Evan Minsberg:

Yeah, for sure.

Reggie Young:

Look up Evan Minsberg if you're ever looking for good payment processing, bank, fintech partnerships, all that fun stuff.

Evan Minsberg:

Yeah. And then we can meet up at Money 20/20 again since we'll all be there.

Reggie Young:

Yep. Definitely. Awesome, Evan. Thanks so much for coming on.

Evan Minsberg:

Awesome. Thank you, Reggie.