Request for Judicial Notice filed by Think Computer Corporation. (Attachments: # (1) Declaration of Aaron Greenspan in Support of Plaintiff's Request for Judicial Notice) (Cable, Marvin) (Filed on 3/14/2013) Modified on 3/15/2013 (bwS, COURT STAFF).
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Michael Brooks Carroll (Bar #54904)
Kevin A. Flautt (Bar #257892)
LAW OFFICES OF MICHAEL BROOKS CARROLL
300 Montgomery Street, Suite 650
San Francisco, California 94104
Telephone: (415) 788-7600
Facsimile: (415) 421-7379
carroll_law@sbcglobal.net
Marvin Cable, Esq. (BBO #680968)
LAW OFFICES OF MARVIN CABLE
P.O. Box 1630
Northampton, MA 01061
Telephone: (413) 268-6500
Facsimile: (413) 268-6500
law@marvincable.com
Attorneys for Plaintiff
THINK COMPUTER CORPORATION
UNITED STATES DISTRICT COURT
FOR THE NORTHERN DISTRICT OF CALIFORNIA
San Jose Division
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THINK COMPUTER CORPORATION,
Plaintiff,
v.
ROBERT VENCHIARUTTI, et al.,
Defendants.
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Case No. CV11-05496-HRL
REQUEST FOR JUDICIAL NOTICE
Before the Honorable Howard R. Lloyd
Complaint Filed: November 14, 2011
First Amended Complaint Filed: January 31, 2012
Trial Date: None Yet Set
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REQUEST FOR JUDICIAL NOTICE - Case No. CV11-05496-HRLPage 2 Case5:11-cv-05496-HRL Document47 Filed03/14/13 Page2 of 302
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Plaintiff Think Computer Corporation hereby requests that the Court take judicial notice of the
following legislative exhibits, true and correct copies of which are attached hereto. These exhibits
concern the legislative history of the California Money Transmission Act.
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Generally, agency reports, legislative hearing transcripts, and testimony before legislative bodies
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are properly the subject of judicial notice. Fed. R. Evid. 201; see United States v. Penn Foundry & Mfg.
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Co., 337 U.S. 198, 216 (1949) (“The official communications which disclose … policy … like reports,
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rules and regulations of agencies or other communications to Congress, are equally reliable and
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authoritative and need no further proof.”); Tempel v. United States, 248 U.S. 121, 130 (1918) (taking
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judicial notice of a report by the Secretary of War); Aramark Facility v. Service Employees, 530 F.3d
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826 n.4; L.H. v. Schwarzenegger, 519 F. Supp. 2d 1072, 1079 (E.D. Cal. 2007) (granting judicial notice
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of a Senate Report); 321 Studios v. MGM Studios, Inc., 307 F. Supp. 2d 1085, 1107 (N.D. Cal. 2004)
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(granting judicial notice of various Congressional hearing transcripts and other legislative materials).
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Exhibit A: March 11, 2013 California State Assembly Banking and Finance Committee
Hearing Agenda;
Exhibit B: March 11, 2013 California State Assembly Banking and Finance Committee
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Hearing Background Paper;
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Exhibit C: March 11, 2013 California State Assembly Banking and Finance Committee
Hearing Transcript;
Exhibit D: March 11, 2013 California State Assembly Banking and Finance Committee
Hearing Testimony and Public Comment Materials.
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REQUEST FOR JUDICIAL NOTICE - Case No. CV11-05496-HRLPage 3 Case5:11-cv-05496-HRL Document47 Filed03/14/13 Page3 of 302
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Respectfully submitted on March 14, 2013,
FOR THE PLAINTIFF:
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Marvin Cable, Esq.
BBO#: 680968
LAW OFFICES OF MARVIN CABLE
P.O. Box 1630
Northampton, MA 01061
P: (413) 268-6500
F: (413) 268-6500
E: law@marvincable.com
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CERTIFICATE OF SERVICE
I hereby certify that on March 14, 2013, the foregoing document, filed through the ECF system,
will be sent electronically to the registered participants as identified on the Notice of Electronic Filing,
and paper copies will be served via first-class mail to those indicated as non-registered participants.
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Marvin Cable, Esq.
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REQUEST FOR JUDICIAL NOTICE - Case No. CV11-05496-HRLPage 4 Case5:11-cv-05496-HRL Document47 Filed03/14/13 Page4 of 302
EXHIBIT A
March 11, 2013 California State Assembly Banking and Finance Committee Hearing
AgendaPage 5 Case5:11-cv-05496-HRL Document47 Filed03/14/13 Page5 of 302
Assembly Committee on Banking & Finance
Emerging Technology and the California Money Transmission Act
March 11, 2013
2:00p.m
California State Capitol, Room 444
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II.
Opening Remarks:
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Chair, Assemblymember Roger Dickinson
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Vice Chair, Assemblymember Mike Morrell
Regulation of the Money Transmission Act:
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III.
IV.
Teveia Barnes, Commissioner, Department of Financial Institutions
Assessments of Emerging Payment Technology, The Money Transmission Act &
Consumer Protection:
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Thomas Brown, Lecturer, UC Berkeley Law School and Partner, Paul Hastings LLP
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John Muller, Vice President & General Counsel, PayPal Inc.
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Michelle Jun, Senior Attorney, Consumers Union
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Rob Barnett, Vice President-Assistant General Counsel at Automatic Data
Processing, Inc.
Public comment.Page 6 Case5:11-cv-05496-HRL Document47 Filed03/14/13 Page6 of 302
EXHIBIT B
March 11, 2013 California State Assembly Banking and Finance Committee Hearing
Background PaperPage 7 Case5:11-cv-05496-HRL Document47 Filed03/14/13 Page7 of 302
EMERGING TECHNOLOGY AND THE CALIFORNIA
MONEY TRANSMISSION ACT
Assembly Committee on Banking & Finance
March 11, 2013
Assemblymember Roger Dickinson, Chair
Mark Farouk-Chief Consultant
Kathleen O'Malley-Senior Consultant
Tiffany Morrison-Committee Secretary
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On August 3, 2000, the National Conference of Commissioners on Uniform State Laws
(NCCUSL) issued its first draft of a model act to provide a uniform regulation for money
services business. One of the main drivers behind the creation of a uniform model act was
to address concerns arising from potential money laundering activities and that states had
begun to implement differing regulatory frameworks. A final version of the act was ratified
by NCCUSL on August 6, 2004. Alaska, Arkansas, Iowa, Vermont, and Washington
implemented the model act in its entirety. The creation of the model act did not end the
patch work of state regulation. Instead, each state made their own changes and additions
to the act.
On September 30, 2010, AB 2789 was signed into law by then Governor Arnold
Schwarzenegger. AB 2789 established the California Money Transmission Act (MTA). The
MTA combined the regulatory and licensing requirements of the Transmission of Money
Abroad Law, the Travelers Check Act and the Payment Instruments Law. In addition to
these changes, the MTA includes licensing for domestic money transfer and non-bank
issued stored value. The MTA is administered by the California Department of Financial
Institutions (DFI). Currently, there are approximately 71 MTA licensees, according to data
available on DFIs website.
WHAT IS MONEY TRANSMISSION?
At the most basic level money transmission is the transfer of funds involving three parties,
1) Sender 2) Money transmitter and 3) Recipient. The transfer of funds may be intrastate,
interstate, or international. Typically this service is conducted at a physical location where
the sender of funds pays a fee to the remittance service and the money is then wired to the
recipient. Though, as will be discussed later, emerging technologies are breaking up this
old model.
Large money transmitters may have a home office, transaction clearing centers, service
center (s), regional offices, and branches. They may also contract with agents. Agents may
include established businesses such as grocery stores, truck stops, check cashers,
pharmacists, travel agents and supermarket chains. The money transmission home office
pays its agents using a fee schedule that provides predetermined charges for money
transmission.
This is how the traditional model of money transmission works. A sender enters an agent
location and wishes to send $500 to a recipient in another location. The sender provides
the agent the funds and instructions for delivery to the recipient. The agent takes the funds
and instructions and usually enters the transaction into a computer terminal owned by the
money transmitter and that is linked to the money transmitter's processing system. Upon
receiving the instructions, the money transmitter will contact its appropriate receiving
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agent for payout to the recipient. The sender and/or receiving agent will inform the
recipient that the transmitted funds are available for pick-up. The availability of funds to
the recipient may range from minutes to several days depending upon the location and
availability of the receiving agent and money transmitter's delivery policy. While
computers are the typical means for the transferring of money, telephone lines and fax
machines are still widely used.
According to World Bank estimates, remittances totaled $414 billion in 2009, of which
$316 billion went to developing countries that involved 192 million migrant workers. For
some individual recipient countries, remittances can be as high as a third of their Gross
Domestic Product (GDP). The top recipients in terms of the share of remittances in GDP
included many smaller economies such as Tajikistan (45%), Moldova (38%), and Honduras
(25%).
Historically, the money transmission involved face-to-face transaction between the
consumer and transmitter agent that would accept the consumer's money and transmit
those funds to another agent outside of the United States for delivery of those funds to the
consumer's family or friends. These transactions were dominated primarily by a few large
transmitters such as Western Union and MoneyGram. Subsequent to the issuance of the
draft NCCUSL money transmission act, states across the country amended their statutes to
provide enhanced regulation to foreign and domestic transmission and non-bank issued
stored value. Forty eight states and the District of Columbia have money transmission
licensing statutes.
As will be discussed later in this document, the definition of money transmission can be
quite broad, both legally and interpretatively. Furthermore, the traditional model of money
transmission has changed as emerging technologies are changing the way businesses
accept payments and the way that consumers send money or pay for goods and services.
Highlights of the MTA:
The following are some highlights of California's MTA (Financial Code Sections 20002172):
1) Defines “payment instrument” as a check, draft, money order, traveler’s check, or other
instrument for the transmission or payment of money or monetary value, whether or
not negotiable. The term does not include a credit card voucher, letter of credit, or any
instrument that is redeemable by the issuer for goods or services provided by the issuer
or its affiliate.
2) Defines “receiving money for transmission” or “money received for transmission” as
receiving money or monetary value in the United States for transmission within or
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outside the United States by electronic or other means. The term does not include sale
or issuance of payment instruments and stored value.
3) Defines “Stored value” as monetary value representing a claim against the issuer that is
stored on an electronic or digital medium and evidenced by an electronic or digital
record, and that is intended and accepted for use as a means of redemption for money
or monetary value or payment for goods or services. The term does not include a credit
card voucher, letter of credit, or any stored value that is only redeemable by the issuer
for goods or services provided by the issuer or its affiliate, except to the extent required
by applicable law to be redeemable in cash for its cash value.
4) Requires licensing for domestic money transmittal services. Prior to enactment,
licensing was only required for international money transfer.
5) Provides for regulation of non-bank issued stored value cards that may be offered by
licensees. In order to offer non-bank stored value the seller of stored value must be
licensed.
6) Prohibits a person from engaging in the business of money transmission in California or
advertising, soliciting, or holding itself out as providing money transmission unless
licensed.
7) Requires specified information to be included in an application for a license which shall
be in the form proscribed by the commissioner of DFI.
8) Authorizes the commissioner to conduct an examination of an applicant, at the
applicant’s expense, and would require the commissioner to approve an application for
a license if the commissioner makes specified findings, including that the applicant has
adequate net worth and is competent to engage in the business of receiving money for
transmission. In order to meet the net worth requirements a licensee that sells or issue
payment instruments or stored value must maintain securities on deposit on a surety
bond of no less than $500,000 or 50% of the average daily balance of outstanding
payment instruments and stored value in CA. A licensee engaged in money
transmission must either maintain securities or a surety bond not less than $250,000
no more than $2,000,000.
9) Requires licensees to file audit reports with the commissioner within 90 days after the
end of each fiscal year.
10)Imposes various fees and would require the commissioner to levy assessments on
licensees for the purposes of administering these provisions regulating money
transmission including:
a) A $5,000 application fee;
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b) An annual license fee of $2,500;
c) An annual branch office fee of $125 per branch office;
d) An annual $25 fee for each branch employee; and,
e) For licensees that sell or issue payment instruments, an annual assessment based on
the volume and aggregate face amounts of payment instruments and stored value
issued or sold in California.
11)A licensee must maintain specified eligible securities including and/or a surety bond
and maintain $500,000 in net-worth.
12)Requires a licensee to provide specified notices and disclosures to customers, including
a notice relative to a customer’s right to a refund, disclosures relating to rates of
exchange, a notice indicating that payment instruments are not insured, and a notice
providing information on making complaints to the commissioner against a licensee.
13)Requires licensees to maintain financial records for a 3-year period.
14)Mandates each licensee to file with the commissioner a certified copy of every receipt
form used by it or by its agent for receiving money for transmission prior to its first use.
15)Authorizes the commissioner to suspend or revoke a license if the commissioner finds
that a licensee or agent of a licensee has, among other things, violated the provisions of
the act or engaged in fraud or unsound practices and would authorize the
commissioner to assess specified civil penalties against a person that violates these
provisions.
16)Makes it a crime for a person to engage in the business of money transmission without
a license or for a person to intentionally make a false statement, misrepresentation, or
false certification in a record filed or required to be maintained under these provisions.
17)Exempts from licensing,
a) The United States or a department, agency, or instrumentality thereof, including any
federal reserve bank and any federal home loan bank.
b) Money transmission by the United States Postal Service or by a contractor on behalf
of the United States Postal Service.
c) A state, county, city, or any other governmental agency or governmental subdivision
of a state.
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d) A commercial bank or industrial bank, the deposits of which are insured by the
Federal Deposit Insurance Corporation or its successor, or any foreign (other
nation) bank.
e) Electronic funds transfer of governmental benefits for a federal, state, county, or
local governmental agency.
f) A board of trade designated as a contract market under the federal Commodity
Exchange Act (7 U.S.C. Secs. 1-25, incl.) or a person that, in the ordinary course of
business, provides clearance and settlement services for a board of trade to the
extent of its operation as or for such a board.
g) A person that provides clearance or settlement services pursuant to a registration as
a clearing agency or an exemption from registration granted under the federal
securities laws to the extent of its operation as such a provider.
h) An operator of a payment system to the extent that it provides processing, clearing,
or settlement services, between or among persons excluded by this section, in
connection with wire transfers, credit card transactions, debit card transactions,
stored value transactions, automated clearing house transfers, or similar funds
transfers, to the extent of its operation as such a provider.
i) A person registered as a securities broker-dealer under federal or state securities
laws to the extent of its operation as such a broker-dealer.
18)If the commissioner finds all of the following with respect to an application for a license,
the commissioner shall approve the application:
a) The applicant has adequate tangible shareholders’ equity, as specified in Section
2040 to engage in the business of money transmission and the financial condition of
the applicant is otherwise such that it will be safe and sound for the applicant to
engage in the business of money transmission.
b) The applicant, the directors and officers of the applicant, any person that controls
the applicant, and the directors and officers of any person that controls the
applicant are of good character and sound financial standing.
c) The applicant is competent to engage in the business of money transmission.
d) The applicant’s plan for engaging in the business of money transmission affords
reasonable promise of successful operation.
e) It is reasonable to believe that the applicant, if licensed, will engage in the business
of money transmission and will comply with all applicable provisions of this chapter
and of any regulation or order issued under this chapter.
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FEDERAL LAW & REGULATIONS:
Federal Regulation E, the Electronic Funds Transfer Act (EFTA) was amended via the DoddFrank Wall Street Reform and Consumer Protection Act (Dodd-Frank) to include regulation
of international remittances and money transfer. Section 1073 of Dodd-Frank expanded
the scope of EFTA to include requirements concerning remittance disclosures to
consumers. The Consumer Financial Protection Bureau (CFPB) has been tasked with
creating rules to implement these changes. Last year, CFPB released draft rules that were
to take effect February of 2013. However, CFPB postponed the final rules until later in the
year to work out potential compliance issues.
A brief description of the new requirements:
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Money transmitters will be required to provide customers with written prepayment disclosures containing information about the specific transfer, such as the
exchange rate, applicable fees and taxes, and the amount to be received by the
designated recipient.
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Money transmitters will be required to provide a written receipt when payment is
made. The receipt must include the information provided on the pre-payment
disclosure, as well as additional information, such as the date of availability, the
recipient's contact information, and information regarding the customer's error
resolution and cancellation rights. As an alternative, the new money transmitter
regulation allows money transmitters to give customers a single written disclosure
prior to payment containing all of the information required on the receipt, so long as
the money transmitter also provides proof of payment such as a stamp on the
earlier document.
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The pre-payment disclosures and receipts must be provided in English and in each
of the foreign languages principally used by the money transmitter to advertise,
solicit, or market money transfer services at a particular office. If you offer
customers the ability to make money transfers using text message or a mobile
application, the new money transmitter regulation provides additional guidance on
how to provide the required disclosures.
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If, (i) due to the laws of a recipient country or (ii) the method by which transactions
are made in the recipient country, a money transmitter cannot determine certain
amounts that are required to be disclosed, exceptions permit the money transmitter
to disclose an estimate of the amount of currency to be received, rather than the
actual amount.
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Money transmitters will be required to provide customers with a 30-minute
cancellation period that allows a customer the opportunity to review both the
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prepayment disclosure and the receipt to ensure that the transfer was sent as the
customer intended. If a customer requests, a money transmitter must promptly
provide the customer a notice describing the customer's "error resolution" and
cancellation rights, using specified language or substantially similar language. Even
after the cancellation period has passed, customers will have a right to a refund or
other remedy if an error occurs in a transaction.
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In the event a customer timely requests the cancellation of a money transfer, the
new money transmitter regulation requires money transmitters to provide
customers with a refund, at no additional cost to the customer, the total amount of
funds provided by the customer, including any fees and, to the extent not prohibited
by law, taxes imposed in connection with the money transfer, within three business
days of receiving the request to cancel the money transfer.
The United States Department of Treasury under the Financial Crimes Enforcement
Network (FinCEN) requires registration of money services businesses (MSB). According to
FinCEN an MSB includes any person doing business, whether or not on a regular basis or as
an organized business concern, in one or more of the following capacities, and that meets a
threshold of $1,000 per day or more transactions:
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Currency dealer or exchanger.
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Check casher.
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Issuer of traveler's checks, money orders or stored value.
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Seller or redeemer of traveler's checks, money orders or stored value;
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Money transmitter.
FinCEN registration does not apply to a bank or a person regulated or registered with the
Securities and Exchange Commission. Entities registered with FinCEN must make
electronic filings under the Bank Secrecy Act (BSA). As of July 1, 2012, all such filings must
be electronic and made through the BSA E-Filing System. Reports that must be filed
through this system include, but are not limited to:
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Currency Transaction Report (FinCEN Form 104)
Designation of Exempt Person (FinCEN Form 110)
Suspicious Activity Report (Form TD F 90-22.47)
Suspicious Activity Report by the Securities and Futures Industries (FinCEN Form
101)
Suspicious Activity Report by Money Services Business (FinCEN Form 109, formerly
90-22.56)
Suspicious Activity Report by Casinos and Card Clubs (FinCEN Form 102)
Currency Transaction Report by Casinos (FinCEN Form 103, formerly 8362)
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Registration of Money Services Business (FinCEN Form 107)
Report of Foreign Bank and Financial Accounts (Form TD F 90-22.1)
EMERGING TECHNOLOGIES:
The last five years have witnessed technological changes that have drastically altered the
old business model of remittances, as well as, the ways in which consumers pay for goods
and services. Whereas, the traditional model involved visiting the location of a money
transmitter agent, new technologies have completely changed the way in which customers
send and use money.
Now a consumer wishing to send money to another person for goods, services, or simply as
a remittance to family or friends, has various online services to choose from, including
applications utilizing smart phones. The way in which consumers pay for goods and
services has transcended checks and credit cards and is rapidly evolving with electronic
payment systems and new innovative payment networks. Large financial institutions are
also getting on the bandwagon as several large financial institutions (BofA, Chase, and even
Golden 1 Credit Union) are offering money transfer services using smart phone and web
based applications.
In the payments space, typical five channels have been available, 1) Cash 2) Check (Paper
or Check 21 substitute check) 3) Automated Clearing House (ACH) transaction 4)
Credit/debit/stored value and 5) Wire transfers. Emerging technologies have created new
payment methods such as web payments, contactless payments, mobile payments, Bitcoin
and other virtual currency.
Between December 2011 and January 2012, the Federal Reserve Board conducted a survey
of consumers concerning the use of mobile financial services
(http://www.federalreserve.gov/econresdata/mobile-devices/files/mobile-device-report201203.pdf). The following are brief findings from their report.
1) Mobile phones and mobile Internet access are in widespread use.
a) 87 percent of the U.S. population has a mobile phone.
b) 44 percent of mobile phones are smartphones (Internet-enabled).
c) 84 percent of smartphone users have accessed the Internet on their phone in the
past week.
2) The ubiquity of mobile phones is changing the way consumers access financial services.
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a) 21 percent of mobile phone owners have used mobile banking in the past 12
months.
b) 11 percent of those not currently using mobile banking think that they will probably
use it within the next 12 months.
c) The most common use of mobile banking is to check account balances or recent
transactions (90 percent of mobile banking users).
d) Transferring money between accounts is the second most common use of mobile
banking (42 percent of mobile banking users).
3) Mobile phones are also changing the way consumers make payments.
a) 12 percent of mobile phone owners have made a mobile payment in the past 12
months.
b) The most common use of mobile payments was to make an online bill payment (47
percent of mobile payment users).
c) 21 percent of mobile payment users transferred money directly to another person's
bank, credit card, or Paypal account.
4) Perceptions of limited usefulness and concerns about security are holding back the
adoption of mobile financial services.
a) The primary reason why mobile phone users had not yet adopted mobile banking
was that they felt their banking needs were being met without the use of mobile
banking (58 percent).
b) Concerns about the security of the technology were the primary reason given for not
using mobile payments (42 percent) and the second most common reason given for
not using mobile banking (48 percent).
c) More than a third of mobile phone users who do not use mobile payments either
don't see any benefit from using mobile payments or find it easier to pay with
another method.
5) The "underbanked" make significant use of mobile financial services.
a) The underbanked make comparatively heavy use of both mobile banking and mobile
payments, with 29 percent having used mobile banking and 17 percent having used
mobile payments in the past 12 months.
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b) 62 percent of the underbanked who use mobile payments have used it to pay bills.
c) 10 percent of the completely unbanked reports using mobile banking in the past 12
months, and 12 percent have made a mobile payment.
Mobile payment devices and systems are turning into new and innovative ways for
businesses to accept electronic payments.
In addition to the money transmission licensing acts across 48 states, James Freis, Director
of FinCEN testified on June 29, 2012, in front of the U.S. House Committee on Financial
Services,
FinCEN’s regulations also have made it clear that the acceptance and transmission of
currency, funds, or other value that substitutes for currency from one person and the
transmission of currency, funds, or other value that substitutes for currency to another
person or location, by any means, constitutes money transmission, and that any person
wherever located doing business wholly or in substantial part within the United States
engaging in money transmission, regardless of any other business lines the person is
engaged in – such as the provision of telecommunication services – would likely be a
money services business under FinCEN’s regulations, and as such must register and
comply with all the reporting, recordkeeping, and monitoring requirements applicable
to a money transmitter.
Payment networks:
Payment networks are the infrastructure, made up of multiple parties, that provide for the
processing of electronic financial transactions, most notably, credit card transactions. A
typical credit card transaction has four parties: the customer, the bank that issued the
customer's card, the merchant, and the merchant's bank. The merchant typically receives
less than the merchant's bank as the transaction is discounted due to the interchange rate
(paid to network) and any fees paid to the merchant bank. The largest payment networks
are Visa, MasterCard, Discover and American Express. The top issuers of credit cards are
American Express, JP Morgan Chase, Bank of America, and Citigroup.
The interchange fee paid by merchants has been the source of great controversy between
merchants and payment networks and issuing banks. Interchange fees are set by the
payment networks and can vary based on type of card used and transaction volume. The
largest criticism of interchange fees have been 1) they are uncompetitive, as fee
competition among the established networks is fairly non-existent. 2) Medium and small
merchants have no ability to negotiate on the fee schedule, 3) Network rules prohibit
passing the fee along to customers.
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One of the most contentious fights concerning interchange involved the "Durbin
amendments" to the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010.
The Durbin amendment specified that financial institutions with assets over $10 billion
could only charge interchange fees that are "reasonable and proportional to the actual
cost." The Durbin Amendment also gave the Federal Reserve the power to regulate debit
card interchange fees, and on December 16, 2010, the Fed proposed a maximum
interchange fee of 12 cents per debit card transaction, which CardHub.com estimated
would cost large banks $14 billion annually. On June 29, 2011, the Fed issued its final rule,
which holds that the maximum interchange fee an issuer can receive from a single debit
card transaction is 21 cents plus 5 basis points multiplied by the amount of the transaction.
On July 13, 2012, a settlement between retailers and the payment card industry (Visa,
MasterCard, several banks) over interchange fees was reached. The settlement will not be
implemented until it receives court approval. The settlement only applies to credit cards
not debit cards.
The settlement establishes:
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Cash payment: $6.05 billion
Credit interchange modification: 10 basis points for eight months. Anticipated value
is approximately $1.2 billion
Ability to charge “checkout fees” at the point of sale for customers paying with a
credit or charge card. Fee cannot exceed 4%. This includes American Express and
Discover although they were not parties to the settlement.
Ability to form buying groups to negotiate interchange rates collectively
The settlement allows members of the class to opt-out of the damages portion of the
settlement agreement if they prefer to litigate independently for more damages. No
retailer can opt-out of the forward looking injunctive portion of the settlement, related to
rule changes such as the surcharge. The defendants have the right to terminate the
settlement agreement should more than 25% of the merchants opt out of the damages
portion. Retailers have until October, 2012, to opt-out.
California enacted Civil Code Section 1748.1 in 2005 which prohibits a retailer in any sales,
service, or lease transaction with a consumer may impose a surcharge on a cardholder who
elects to use a credit card in lieu of payment by cash, check, or similar means. A retailer
may, however, offer discounts for the purpose of inducing payment by cash, check, or other
means not involving the use of a credit card, provided that the discount is offered to all
prospective buyers.
12 | P a g ePage 19 Case5:11-cv-05496-HRL Document47 Filed03/14/13 Page19 of 302
This law will still prohibit retailers from charging a surcharge in California although there
is a settlement.
States do not have the ability to regulate interchange rates between retailers, banks and the
card networks. The main area of nexus is how retailers pass along those charges to
customers. As mentioned previously, CA prohibits retailers from imposing a surcharge;
however this restriction does not apply to non-retailers, such as government agencies. It's
foreseeable that we may see legislation prohibiting fees for these non-retail entities.
The emergence of alternative payment networks has arisen in large part from the desire of
merchants to mitigate the fees and costs associated with the traditional payment networks.
ALTERNATIVE PAYMENT NETWORKS:
Growth in technology has assisted with the rapid development of alternative payment
networks. PayPal started in 1998 to allow people to send money without sharing financial
information. The bulk of PayPal's business came from its relationship with Ebay (Ebay now
owns PayPal) in which buyers paid for goods on Ebay via Paypal's service. PayPal is
currently the global leader in processing payments with over $115 billion processed
annually.
Square Inc. a payment processing company that began by offering a credit card reader to
businesses in order to process credit card transactions including software to facilitate
payments. Square is on track to process $10 billion in payments a year. They also offer
smart phone app that allows customers to pay for goods and services with participating
merchants. Square's main focus has been providing its services to small merchants like
food trucks or taxi drivers. Square makes money by charging a 2.75% fee for every
transaction.
Alipay reports a registered user base of approximately 600 million, and is accepted for
online payment at many retail websites and service providers in China. They process more
than 8.5 million transactions a day, and are partnered with more than 65 financial
institutions including Visa, MasterCard, and all national banks in China. Alipay also
provides payment solutions for more than 500,000 external Chinese merchants for online
retail, virtual gaming, digital communications, commercial services, air ticketing, and utility
fee payment transactions.
Popmoney lets you send money from your bank account to anyone using their name and
email address or mobile number. Popmoney was developed by CashEdge (now part of
Fiserve) and is offered through 1,400 US financial institutions (including US Bank and Citi)
and processes nearly $50 billion in online fund transfers annually.
13 | P a g ePage 20 Case5:11-cv-05496-HRL Document47 Filed03/14/13 Page20 of 302
The Intuit Payment Network was developed to provide small businesses with an
inexpensive way to get paid electronically. The service moves money directly from a
sender’s bank account to a receiver’s bank account for one low flat fee of 50 cents. The
network also offers several other ways to get paid: through QuickBooks invoice links, by
credit card, ecommerce buttons, and through custom web links. Intuit, the maker of
QuickBooks, Quicken, and TurboTax has over 240,000 merchants using the Intuit’s credit
card processing service.
ClearXchange (CXC) was formed in 2011 as the first network created by financial
institutions to let customers send person-to-person payments directly from their checking
and savings accounts with only the recipient’s mobile number or email address. CXC is
equally owned by Bank of America, JPMorgan Chase, and Wells Fargo. Although their
service is just out of pilot mode, the three founding partner banks, when combined, reach
over 50% of all U.S. online and mobile banking customers.
Dwolla was created in 2008 as an alternative payment network to help lower interchange
fees for merchants. Dwolla allows consumers and organizations to send and receive money
for only 25 cents per transaction, no matter how high the transfer amount. The company
currently processes over $50 million per month in transactions and have signed up more
than 100,000 users. Dwolla is currently not licensed as a money transmitter in California.
These developments in payments provide businesses with multiple options for accepting
payments for goods and services. Additionally, these innovations are creating an active
competitive payment processing marketplace where businesses have the ability to price
shop for these services.
The previous list of companies is only a small sample of companies operating in this space.
For a list of money transmitters licensed in California, visit
http://www.dfi.ca.gov/Directory/money_transmitters.html.
Stored Value:
An additional expanding model in the money transmission business is the use of stored
value, typically via a pre-paid card, but new technology is growing the use of stored value
across new mediums. The MTA regulates the issuance of non-bank stored value. The
exempts stored value offered by a bank, or stored value on what is known as a "closedloop" system. A closed loop system is typically a gift card or some other item representing
monetary value that can only be used within the network of a given retailer or merchant.
Money transferred via traditional means using an agent, or via computer can often be
loaded onto a stored value device and provided to the receiver.
14 | P a g ePage 21 Case5:11-cv-05496-HRL Document47 Filed03/14/13 Page21 of 302
ISSUES & QUESTIONS FOR DISCUSSION:
•
The emerging technologies that bring convenience to the consumer and competition
to the market can create regulator confusion. As these technologies avoid storefront
locations or traditional banking relationships, regulatory frameworks must keep up
in order to remain relevant and clear, not just for consumers, but for those that
desire to innovate.
•
The road to becoming licensed as a money transmitter in California can create
significant compliance costs. These costs can occur before the actual transmission
business is off the ground. Licensing fees, net-worth reserves, bonding
requirements, audited financial statements, as well as, compliance with Federal
money laundering laws are among the costs that payment start-ups must consider.
Many of these costs could be borne multiple times over if a potential licensee wishes
to become licensed in more than one state. Policy makers may want to consider
establishing a scaled approach to licensing in so far as potential transaction volume
dictates net-worth requirements. Furthermore, it may be difficult to mitigate some
compliance costs, but what policies and/or regulations may be necessary to avoid
uncertainty in regards to these costs?
•
The MTA creates a potential chicken and egg scenario. Many start-ups in the
payments business rely on venture capital funding. Funding is difficult when one is
not licensed to conduct business, yet one cannot acquire a license without sufficient
funding. Furthermore, this conundrum creates difficulties in creating pilot projects
or limited test runs of products because these market tests could be illegal, yet it is
difficult to determine success of an innovation without testing.
•
Do we need a clearer definition of “money transmission” to clarify when a business
that is sending money from point A to point B is not engaged in transmitting
money? Additionally, what clarifications may be needed to ensure that the MTA
statute provides for functional regulation with a rapidly changing payment system
landscape?
•
What can policy makers do to ensure a correct balance between removing barriers
to market entry while also providing sufficient state oversight?
•
Each state has its own set of money transmission requirements that all differ from
each other to varying degrees. As mentioned previously, these differences can
potentially create barriers for new companies. Often, the requirements of different
states may be slightly different, but functionally the same in wanting to ensure that a
licensee is not financially over-leveraged and that consumers are appropriately
15 | P a g ePage 22 Case5:11-cv-05496-HRL Document47 Filed03/14/13 Page22 of 302
protected. However, policy makers and regulators may wish to consider efforts to
create some uniformity, or even reciprocity in licensing. However, before
embarking on creating the potential for reciprocity it is vital that California
standards are standards that other states may wish to copy and in turn, offer
reciprocity for California licensees. Policy makers may want to consider
encouraging California regulators to work with other state regulators to design
more uniform regulations and standards.
•
An idea circulating among some observers is that the Legislature should repeal the
MTA. This idea may reflect frustration with compliance and regulatory difficulties
facing existing and potential future licensees, a repeal of the MTA would lead to
dangerous consequences. First, the repeal of the MTA would not provide the state
with specific enforcement and licensing authority over entities that transmit money,
issue payment instruments (money orders, traveler's checks) or non-bank issuers
stored value. A complete repeal of the MTA could leave California with little
oversight over entities that take consumer money and transfer it to other parties. If
an entity offers services as a payment system that has no net-worth or bonding
requirements then what protections would consumers have to recover lost funds, or
for the state to hold them accountable? The purpose behind financial asset
requirements is to ensure that if the consumer's funds are in jeopardy they have
some recourse for potential recovery. This is not to say that numerous federal laws
and regulations don’t also regulate this area of operations. However, just like
mortgage lending, the state has a vested interest in maintaining authority over
practices that directly impact California consumers and specifically the safety and
soundness of these entities.
Legislative Responses:
On February 21, 2013 Assemblymember Dickinson, Chair of Assembly Banking & Finance
introduced AB 786. Initially, this legislation includes clarifications on issues relating to networth requirements, the use of certain types of accounts to fulfill liquidity requirements,
clarifications on what entities are not money transmitters, and enhanced enforcement
powers. AB 786 is viewed as a starting point for further discussion involving reform of
California's MTA.
16 | P a g ePage 23 Case5:11-cv-05496-HRL Document47 Filed03/14/13 Page23 of 302
EXHIBIT C
March 11, 2013 California State Assembly Banking and Finance Committee Hearing
TranscriptPage 24 Case5:11-cv-05496-HRL Document47 Filed03/14/13 Page24 of 302
1
CALIFORNIA STATE ASSEMBLY
COMMITTEE ON BANKING AND FINANCE
2
3
4
5
TRANSCRIPT OF OVERSIGHT HEARING
EMERGING TECHNOLOGY AND THE CALIFORNIA MONEY TRANSMISSION
ACT
6
7
8
MARCH 11, 2013
2:00 P.M.
CALIFORNIA STATE CAPITOL, ROOM 444
9
10
APPEARANCES:
11
Chair, Assemblyman Roger Dickinson (Dem – 7)
Vice Chair, Assemblyman Mike Morrell (Rep – 40)
Assemblyman Katcho Achadjian (Rep – 35)
Assemblyman Ed Chau (Dem – 49)
12
13
14
15
Teveia Barnes, Commissioner, California Department of
Financial Institutions
Thomas Brown, Lecturer, UC Berkeley Law School and
Partner, Paul Hastings, LLP
16
17
John Muller, Vice President and General Counsel,
PayPal, Inc.
18
Michelle Jun, Senior Attorney, Consumers Union
19
Rob Barnett, Vice President and Assistant General
Counsel, Automatic Data Processing, Inc.
20
21
Aaron Greenspan, President & CEO, Think Computer
Corporation and CodeX Fellow, Stanford Law School
22
Ron Garret, Ph.D., Entrepreneur, Investor
23
Manuel Cosme, California Chairperson, National
Federation of Independent Business
24
25Page 25 Case5:11-cv-05496-HRL Document47 Filed03/14/13 Page25 of 302
1
1
HEARING CALLED INTO SESSION
2
(2:00 P.M.)
3
4
CHAIRMAN DICKINSON:
We will call the Banking
5
and Finance Committee to order for our hearing of March
6
11th, 2013. Welcome to those of you who have joined us this
7
afternoon.
8
schedule since we’re anticipating being back in session on
9
the floor at about 3:45 to hear from the Chief Justice today
As you may know, we’re on a somewhat limited
10
for her State of the Judiciary.
11
started here even in the absence of a few more members.
12
Hopefully we’ll have some come join us during the course of
13
the hearing, but I do want to give a chance for those we’ve
14
asked to come testify to be able to do so without being too
15
— too truncated.
16
So we’re going to get
So, we’ll get started.
California is at the center of technological
17
innovation and development.
18
and proud of that fact.
19
and innovation, especially in our collective wisdom and our
20
intellectual power that resides with those who lead tech —
21
the technological revolution in our state, in our nation,
22
and indeed around the world.
23
that emerges almost on a daily basis is rapidly changing the
24
world around us as well.
25
I think we’re all both aware
Our state is a wealth of knowledge
And in fact the technologyPage 26 Case5:11-cv-05496-HRL Document47 Filed03/14/13 Page26 of 302
2
1
Among the developments in the financial
2
services field, the way in which we send money, either for
3
goods or services, or to family and friends, is one of those
4
areas that has been rapidly evolving.
5
by the Federal Reserve, 21% of mobile phone owners have used
6
mobile banking in the last twelve months.
7
currently using mobile banking think that they probably will
8
use it within the next twelve months.
9
of mobile banking is to check account balances or recent
According to a survey
11% of those not
The most common use
10
transactions.
11
the second-most common use of mobile banking.
12
payment users transferred money directly to another person’s
13
bank, credit card, or PayPal account.
14
“underbanked” make comparatively heavy use of both mobile
15
banking and mobile payments, with 29% having used mobile
16
banking and 17% having used mobile payments in the past
17
twelve months.
18
And transferring money between accounts is
21% of mobile
Interestingly, the
The U.S. mobile payments market is predicted
19
to reach $90 billion by 2017.
20
payments are expected to reach $534 billion by 2015, and the
21
percentage of payments made using mobile technology is
22
expected to increase year-over-year.
23
other states, the regulation of remittances and mobile
24
payments falls under the Money Transmission Act, or MTA.
25
The MTA regulates the non-bank, foreign and domestic
Traditional global remittance
In California, as inPage 27 Case5:11-cv-05496-HRL Document47 Filed03/14/13 Page27 of 302
3
1
transfer of money and issuance of stored value.
2
under the MTA must demonstrate appropriate financial
3
capacity reserves for safety and soundness.
4
Licensees
The purpose of our hearing today is to give
5
us an overview of the interaction between this law, the
6
current MTA, and growing and changing technology.
7
in which we move money are complex, with an ecosystem made
8
up of mobile payments, internet applications, point of sale
9
applications, SMS remittances and traditional face-to-face
The ways
10
transactions.
11
to be a starting point to bring some common sense reforms to
12
our money transmission laws.
13
account for the changes in technology and ensure that we do
14
not inhibit innovation even as we maintain appropriate and
15
sufficient consumer protections.
16
with the members of — of the Committee, of interested
17
parties and stakeholders, as we move forward with, with
18
considering how best to shape this legislation to accomplish
19
the objectives that I’ve, that I’ve just enumerated.
20
I have introduced AB 786 as a bill designed
Hopefully so that it will
I look forward to working
With that I’ll ask our Vice Chair if he has
21
any comments he’d like to make before we go to our
22
witnesses.
23
VICE CHAIRMAN MORRELL:
No, not a whole lot
24
of comments but it’s good to be here.
And um, we’ve got a
25
lot on our agenda this year; a lot of complicated issues andPage 28 Case5:11-cv-05496-HRL Document47 Filed03/14/13 Page28 of 302
4
1
I’m sure we’ll get through them, and — so thank you for
2
everything Mr. Chair.
3
CHAIRMAN DICKINSON:
Thank you.
With that,
4
we’ll ask our first witness, Commissioner Barnes from the
5
Department of Financial Institutions if she would come
6
forward and join us for whatever remarks she would like to
7
make.
8
9
COMMISSIONER BARNES:
Thank you, Chairman
Dickinson and Vice-Chairman Morrell and — .
10
CHAIRMAN DICKINSON:
11
COMMISSIONER BARNES:
Good afternoon.
And, uh, given the
12
truncated time that we have this afternoon I am fine with
13
simply starting with your questions and going from there.
14
CHAIRMAN DICKINSON:
15
COMMISSIONER BARNES:
16
CHAIRMAN DICKINSON:
That would be fine.
Any questions?
So, let’s start with,
17
how do you see the operations currently, of, of the
18
Department with respect to regulating money transmissions,
19
how is the implementation of the MTA working in your view at
20
this point?
21
COMMISSIONER BARNES:
22
CHAIRMAN DICKINSON:
Thank you.
Maybe, I’m sorry, maybe
23
we should just back up a step and for some — we have some
24
new members and others who may not be so familiar with this,
25
with this area, so perhaps you might take a minute or twoPage 29 Case5:11-cv-05496-HRL Document47 Filed03/14/13 Page29 of 302
5
1
and explain what it is that the Department’s doing with
2
respect to the MTA’s implemenation and then — and then we
3
can go from there to other questions.
4
COMMISSIONER BARNES:
The Money Transmission
5
Act, what we call the MTA, was actually a combination of
6
three different Acts: the Traveler’s Check Act, the Payment
7
Instrument Law, and the Transmission of Money Abroad Law —
8
were all brought together in 2010 in an effort by actually,
9
this Committee, to streamline the regulatory requirements
10
that were put upon financial institutions, financial service
11
providers that were doing money orders, traveler’s checks,
12
and money transmission.
13
doing money transmission regulations on licensees that
14
transmitted funds abroad.
15
Transmission of Money Abroad Law had been in existence from
16
what I can gather well over sixty years.
17
law.
18
At the time in 2010 we were only
And the money transmission; the
So it wasn’t a new
What happened in 2010 in bringing these three
19
laws together is that in the interest of consumer
20
protection, uh, California decided to streamline the
21
regulatory burden because we had some companies that were
22
required to get three different licenses all regulated by
23
the DFI; so if they issued money orders, traveler’s checks
24
and payments abroad, it was considered a burden and everyone
25
could understand that they would consider it a burden toPage 30 Case5:11-cv-05496-HRL Document47 Filed03/14/13 Page30 of 302
6
1
have three separate licenses with three separate types of
2
examination process.
3
in 2010 with the understanding that while there was a need
4
to streamline the law, the legislature also, it is my
5
understanding at looking at the legislative intent — wanted
6
to maintain the protection of the consumer, and the DFI
7
views the MTA as we now — as it is now enacted and we’re
8
administering it — as a consumer protection act.
9
in mind, we saw that in 2010 effected — effective as of
So to bring those three laws together
With that
10
January 1st, 2011, the MTA now covers not only transmissions
11
abroad, but also domestic transmission.
12
non-bank open-loop stored value, and by stored value, it’s
13
the, it’s the, um, the cards, or any medium where you can
14
have value, money, use your credit card to um — or the
15
internet — to set aside value that the consumer can use to
16
redeem products and services.
17
It also now covers
The MTA made it clear and continued the
18
concept that if the stored value was used like a Starbucks
19
card, and Starbucks issued a card, a stored value card, and
20
that consumer used that card only to purchase Starbucks
21
products that that transactions, those, that, um, activity
22
would not be regulated.
23
used to purchase other products and services from third
24
parties, that would be regulated.
25
way to think about it, and the way we think about it as DFI,
However, if the stored value was
And I think the easiestPage 31 Case5:11-cv-05496-HRL Document47 Filed03/14/13 Page31 of 302
7
1
and recognize that we are the regulators for other
2
institutions who hold other people’s money in trust.
3
regulate banks, we regulate credit unions and while it’s not
4
a deposit, we view the holding of other people’s money as —
5
as a trust.
6
it, in a manner to make sure that the institutions who have
7
a license and who we regulate are operating in a safe and
8
sound manner because they’re holding consumer funds in
9
trust.
10
We
And the Money Transmission Act, we administer
The MTA in 2010 expanded the safety and
11
soundness licensing to keep pace with new technologies while
12
at the same time continuing to protect the consumer.
13
technology and the internet was very much top of mind when
14
this law was expanded to include domestic transmissions as
15
well as internet fund transmissions.
16
raised as to whether or not the MTA is working as intended.
17
I strongly believe that the MTA is working as intended.
18
actually think that the fact that we’re having a hearing
19
today to talk about the MTA and how it’s being applied and
20
administered by DFI is one more indication that it is
21
working as intended, because the bulk of the comments that
22
we have received in understanding the MTA have come not from
23
the licensees in the financial sector, but from the
24
licensees in the technology sector and in the internet
25
sector.
So
The question has been
IPage 32 Case5:11-cv-05496-HRL Document47 Filed03/14/13 Page32 of 302
8
1
And I want to be clear that DFI does not
2
regulate technology.
3
regulate the internet.
4
as enumerated in the law — which as the Commissioner I am
5
tasked with implementing and enforcing — our role is to
6
protect the consumer, ensure that the financial institutions
7
who hold other funds — other people’s money in trust, do it
8
in a safe and sound manner, that they not only have the
9
capital that they need, but they also to start a business —
10
but they also have the wherewithal to continue the business
11
that they will be in existence beyond the initial three
12
years that, uh, their management has the skills and the
13
experience to protect these funds and to operate with
14
policies and procedures that are safe and sound, um, and
15
that they’re following the law.
16
only California’s laws, but the Bank Secrecy Act laws, the
17
Money Trans — um, the um, money laundering laws, and some
18
other similar laws that have come out of Washington as well
19
as California to protect the consumer.
20
working as intended?
21
still work that can be done.
22
We don’t regulate software; we don’t
That our role and responsibilities
It is.
That they’re following not
So yes, is the MTA
That being the case, there’s
I am almost celebrating my one-year
23
anniversary with the Department of Financial Institutions as
24
Commissioner.
25
bulletin we announced that we will be issuing regulations to
And in January, in our January monthlyPage 33 Case5:11-cv-05496-HRL Document47 Filed03/14/13 Page33 of 302
9
1
provide some clarity and information because I think the
2
folks who have questions about the Money Transmission Act
3
are those who come from the technology side and from the
4
internet side, and we, uh, intend to add some clarity to
5
that process.
6
Thank you.
CHAIRMAN DICKINSON:
Thank you.
I’m glad you
7
answered that — the question about, “is the MTA working as
8
intended from your point of view?”
9
letter inviting you here this afternoon we had a number of
As you know, in the
10
additional questions.
11
through those, and then we’ll see if the Committee members
12
have other, other questions.
13
how many entities are currently licensed under the MTA; how
14
many are currently under consideration; of those that have
15
applied, how many licensed have been denied and what were
16
the reasons for denial.
17
So maybe, maybe we could just go
So the — the next question is
COMMISSIONER BARNES:
Right.
We have
18
currently have 23 that have MTA licensees — licenses.
There
19
are 20 applications that are, um, under consideration.
Of
20
those who have applied, no one has been denied.
21
also give you some additional information, we’ve had 42
22
applications that have been filed since January 1, 2011.
23
Um, we have issued 26 new licenses since January 1, 2011,
24
and we have, uh, advised over 20 entities that they are not,
25
Just toPage 34 Case5:11-cv-05496-HRL Document47 Filed03/14/13 Page34 of 302
10
1
um, they are, do not come under the Money Transmission uh,
2
Act.
And a couple of more statistics that might be helpful.
3
When the MTA was being discussed in 2010, DFI
4
at that time, had expected, rightly or wrongly, expected
5
about five to seven applications a year.
6
expect 42 applications in the last uh, two years.
7
so, I think, uh, in addition to the 42 applications they
8
have had over 130 —
9
Oh.
We have 73 licenses.
10
Seventy — we have 73 licenses.
11
somebody.
Yes.
They did not
And, um,
What did I say?
I thought I had missed
12
But we also have had over 130 inquires in the
13
last two years, which far exceeds any inquiries in any other
14
licenses that we have.
15
have both regulations and orders with respect to the Money
16
Transmission Act: to give clarity to, um, how we are, uh,
17
administering these laws — this law.
18
And so that’s why it’s important to
CHAIRMAN DICKINSON:
So you — you referred to
19
42 applications and 26 licenses granted in this.
20
that in the last…
21
COMMISSIONER BARNES:
22
CHAIRMAN DICKINSON:
23
COMMISSIONER BARNES:
24
CHAIRMAN DICKINSON:
25
Now, was
Two years.
In the last two years.
Mm-hmm.
So — and no denials.
Does that mean that there are 16 still under consideration?Page 35 Case5:11-cv-05496-HRL Document47 Filed03/14/13 Page35 of 302
11
1
COMMISSIONER BARNES:
There’s actually 20 if
2
my add — if my math isn’t adding up.
Some companies have —
3
may have withdrawn their application.
So in the process —
4
uh, the uh, the application process we actually, um, reach
5
out to companies, or companies that reach out to us — we
6
have pre-filing meetings where we sit down with them, um, to
7
understand their business.
8
has control of the funds — basically, flow charts, to follow
9
the money.
We look at who owns the — who
Where’s the money?
Who has — who has the money?
10
Whose name’s on the money?
11
Uh, and there have been applications where we have
12
determined in sitting down with the applicants that they
13
actually are not in control of the money, someone else is in
14
control of the money — someone who has a license is in
15
control of the money, and so, uh, we have given them, uh,
16
clarification that if they continue to operate in that
17
manner then they would not fall under the MTA.
18
Um.
And how do they control it?
I think the other thing that has happened is
19
there have been, as part of these pre-filing meetings, uh,
20
some companies in the process of their application may
21
determine that it’s better for them to, um, uh, work with
22
another, uh, entity, like a bank that we regulate in DFI so
23
that they don’t require a money transmission license.
24
so someone may either put their application, um, um — I
25
wanna say “pause” — they might wanna suspend their
AndPage 36 Case5:11-cv-05496-HRL Document47 Filed03/14/13 Page36 of 302
12
1
application for a period of time to see if they can partner
2
with another licensed money transmitter, or they might
3
decide to withdraw their application completely.
4
CHAIRMAN DICKINSON:
So, so — so is it then
5
correct — there’s somewhere between 16 and 20 — in that
6
neighborhood — applications pending?
7
8
COMMISSIONER BARNES:
So, actually pending…
Currently, there are 20 under consideration.
9
CHAIRMAN DICKINSON:
Okay.
Uh…
And can you
10
describe for us the average length of time it takes to get
11
an application through the process, recognizing some
12
instances that, as you just described, people will suspend
13
their application for one reason or — or another.
14
COMMISSIONER BARNES:
Right.
Our — our
15
internal performance goal is to process applications within
16
120 days.
17
average 95 days to process.
18
that if we are talking to an applicant and they ask us to —
19
if we ask for additional information, or they’re in, uh,
20
merger discussions — they’ll ask us to suspend their
21
application until they come back to us.
22
active process, and it’s not been suspended, it takes an
23
average, um, I would say 95 days — between 92 and 96 days.
24
25
We actually average around, between I would say —
And, and…
CHAIRMAN DICKINSON:
But bear in mind
But while it is an
So except for those that
may be in some state of suspension, at the initiation of thePage 37 Case5:11-cv-05496-HRL Document47 Filed03/14/13 Page37 of 302
13
1
applicant for, for the applications that are currently under
2
consideration, we could conclude that those were filed some
3
time within the last four to five months?
4
COMMISSIONER BARNES:
N — no.
There… I…
5
Some have been filed within the last four to five months and
6
some have been longer…
7
8
CHAIRMAN DICKINSON:
I’m just taking you at
your 95 days, roughly for processing.
9
COMMISSIONER BARNES:
Right.
95 days for
10
processing.
11
additional information.
12
to an applicant, and, um, we’re trying to determine their
13
source of capital, their source of strength, and they have a
14
parent company and they’ve provided us with information
15
about their, um, their, the, the money — the applicant, but
16
not necessarily their parent, or there’s an additional
17
source of, uh, of, of, um, capital for them we may ask for
18
additional information from them on that.
19
period they may ask us to suspend the application while they
20
gather that information for us.
21
And we also, there are times when we ask for
So, for example, if we’re talking
CHAIRMAN DICKINSON:
And during that
Some have said that they
22
feel the barriers to — to, uh, getting approval, are, um,
23
too steep.
24
especially if they are smaller volume — intend to operate on
25
a smaller volume, dollar volume, in their money transmission
The bonding and some of the other requirementsPage 38 Case5:11-cv-05496-HRL Document47 Filed03/14/13 Page38 of 302
14
1
work.
2
would allow you to comment on that concern that’s been
3
raised?
Have you seen anything, or made any observations that
4
COMMISSIONER BARNES:
5
Money transmitters who are applying for a
6
license are asking the State, now that we are regulating
7
them, to be allowed to hold other people’s money. Lots of
8
money.
9
billions of dollars of other people’s money, for some period
Uh…
We’re talkin’ hundreds of thousands into the
10
of time.
11
of them hold them for…months.
12
for much longer periods of time.
13
other people’s monies in the same vein as I view holding
14
bank deposits and credit union deposits.
Some of them hold them for a couple of days.
15
Some
Some of them can hold them
I view the holding of
The criteria that is in the MTA in terms of
16
fees has been in existence for money transmitter who
17
transmitted monies abroad since 1989.
18
fee schedules — since 1989.
19
requirements are actually less than the capital requirements
20
that we would insist on for a de novo bank or a de novo
21
credit union.
22
Commissioner I am required to consider.
23
the MTA’s list of inquire — items to be considered, as well
24
as what I’m supposed to determine is again there to protect
25
These are the same
These — the capital
The MTA lists some twenty-odd items that as
And, I believe thatPage 39 Case5:11-cv-05496-HRL Document47 Filed03/14/13 Page39 of 302
15
1
the consumer.
2
consumer.
3
Each of these provisions is to protect the
I would hope that applicants, even if there
4
weren’t a Money Transmission Act, that they would understand
5
that the business that they are going into is a very serious
6
business — when you’re holding other people’s money in
7
trust.
8
a storm.
9
customers if there should be some difficulties in your
And that you should have adequate capital to weather
You should have adequate reserves to protect your
10
financial condition.
11
whether it’s a barrier to entry.
12
are these protections for the consumer appropriate.
13
were appropriate since — for over sixty years for the money
14
transmitters who were transmitting it abroad.
15
similar to the provisions that protect consumers at banks.
16
And they’re similar to the provisions that the members of a
17
credit union.
18
I think they’re consumer protections.
19
20
So, I don’t think of it in terms of
I think of it in terms of,
They
They’re
So I don’t think they’re barriers to entry.
CHAIRMAN DICKINSON:
Okay, thank you.
Um,
Mr. Achadjian?
21
ASSEMBLYMAN ACHADJIAN:
Thank you, Mr. Chair.
22
A question on holding onto somebody else’s money.
23
why they shouldn’t hold onto somebody else’s money for
24
longer than, maybe, the hours or the few days it requires to
25
clear a check.
I can see
If you were to deposit a check, large checkPage 40 Case5:11-cv-05496-HRL Document47 Filed03/14/13 Page40 of 302
16
1
with me, or regardless of the amount, and now, if you don’t
2
have a working relationship with a given bank, in other
3
words, they don’t know of your background, they probably
4
want to hold onto that amount until the check clears the
5
other side before they release the, the cash.
6
good — makes good business sense if it’s done properly for
7
the duration that it takes to clear a check.
8
were to deposit a check in a savings account, and you were
9
able to collect interest from the moment you deposit — which
I see that
Even if you
10
is great — but if you were to take money out, they probably
11
say, “not for 24 hours,” or “72 hours,” just to be sure that
12
the check is going to clear the other bank that the person
13
did have checks.
14
check, then turn around, write a check on that money knowing
15
that it’s gonna bounce, or it’s a fraud, so, when you come
16
up with regulations, what are you taking into consideration,
17
not just to protect the consumer, but also protect those who
18
are in the business of serving the consumer?
Otherwise, anyone can come and deposit a
19
COMMISSIONER BARNES:
20
First and foremost I’m going to be thinking
Uh…
21
about the consumer.
22
safety and soundness of the financial service company.
23
so, in looking at the regulation, um, we’ll be looking at
24
whether they’re in good funds.
25
question is going.
I’m also going to be thinking about the
And,
I think that’s where your
I’m not going to want to put thePage 41 Case5:11-cv-05496-HRL Document47 Filed03/14/13 Page41 of 302
17
1
financial services company, um, at risk, for, uh, if the
2
funds aren’t — aren’t available.
3
But in our regulations of and supervision of
4
money transmitters that’s really not been an issue.
5
an issue has been, uh, last week we received a, uh,
6
complaint from a lawyer whose client, uh, is an employer,
7
who, the employer company is in California and the employer
8
hired a payroll processing company outside of the State of
9
California to do their payroll.
More of
And the payroll process —
10
let’s say non-California payroll processing company was —
11
was doing payroll for a California company and they were
12
supposed to take the funds from the employer and then write
13
checks to their employer’s employees and also do the
14
withholding and pay the federal and state taxes.
15
non-California payroll processing company did not make the
16
payroll for the employer, did not pay the taxes or do the
17
withholding, and as a consequence, both protecting the
18
employer who now has to still have that liability to do the
19
taxes, and still has the liability, uh, to their employees —
20
has to make up those funds.
21
out-of-state California — and we’re looking into whether or
22
not they should have applied for a license — if we were
23
regulating that company, we would be looking at their
24
processes and, and policies and procedures for how they take
25
monies and how they distribute the monies in accordance with
And this
And if we were regulating thatPage 42 Case5:11-cv-05496-HRL Document47 Filed03/14/13 Page42 of 302
18
1
the instructions in the contracts that they have with their
2
customer, which is the employer.
3
ASSEMBLYMAN ACHADJIAN:
That — that’s
4
something I’m with you, I have no problem there.
5
companies are outside California, are they required to be
6
bonded?
7
COMMISSIONER BARNES:
The
Well they’re required —
8
required to be licensed.
If there was…
9
into this, just came in.
But let’s say, hypothetically,
We’re still looking
10
they did take the money from the California, uh, company,
11
the employer, um, and they did have control of those funds,
12
they, under the MTA, should have been licensed.
13
have…
14
soundness perspective, which would have…
15
continue to exist, uh, in California?
16
and sound manner?
17
making sure they have good funds before they let the funds
18
released?
19
protection laws in the State of California as well other
20
consumer protection laws as well as Bank Secrecy and money
21
laundering.
They should
We should be looking at them from a safety and
Are they going to
And operate in a safe
Which deals with your question about
And also are they in compliance with consumer
22
ASSEMBLYMAN ACHADJIAN:
And I’m all with you
23
that policies should apply for outside, or even inside,
24
California.
25
are licensed and insured.
They do comply with California laws; that they
In case they go bankrupt we don’tPage 43 Case5:11-cv-05496-HRL Document47 Filed03/14/13 Page43 of 302
19
1
want people who our payroll depends on that, that they’re
2
down the wire like the company has.
3
COMMISSIONER BARNES:
Right.
In California
4
there’s not insurance like FDIC insurance, or for credit
5
unions, NCUA insurance, but there’s in the MTA, and had been
6
in the MTA, for, because of our former laws with, uh, Money
7
Transmission Abroad, the concept of eligible securities.
8
And, money transmitters even before 2011 in California are
9
required to maintain eligible securities, which is
10
effectively, um, liquidity, and also protection for the
11
consumer if the money transmitter were to go into bankruptcy
12
that there should be eligible securities equal to 100% of
13
their money transmissions and stored value, uh, in the
14
United States.
15
functional equivalent of, um, uh, the, uh, the FDIC
16
insurance or NCUA insurance.
17
important to have money transmitters licensed in California
18
so that we can give assurances and regulate that they are in
19
compliance with the eligible security requirements as well
20
as the bonding requirements.
And so that is what I consider the
So that’s why it’s also
21
CHAIRMAN DICKINSON:
22
ASSEMBLYMAN CHAU:
Thank you.
Thank you.
Mr. Chau?
Uh, uh, yes, I
23
have two questions.
24
my colleague’s question.
25
state or not, are required to post a surety bond in short,
First of all, um, this is follow-up to
So all licensees, whether out-of-Page 44 Case5:11-cv-05496-HRL Document47 Filed03/14/13 Page44 of 302
20
1
or no?
2
the amount of the money being transferred?
Or do — do they need to have enough assets to cover
3
COMMISSIONER BARNES:
Yes, all licensees have
4
an eligibility requirement.
5
operate completely outside of California, so they are in
6
another state, you know…
And the question is, if they
7
ASSEMBLYMAN CHAU:
8
COMMISSIONER BARNES:
Right.
They’re in Hawaii, they
9
uh, only deal with consumers in Hawaii; they have no
10
transmissions in California, we do not license them.
11
all licensees; money transmitter — money transmission
12
licensees in California are required to maintain eligible
13
securities equal to 100% of…
14
15
ASSEMBLYMAN CHAU:
But
Of the money being
transferred?
16
COMMISSIONER BARNES:
17
ASSEMBLYMAN CHAU:
Right.
So then that, actually,
18
that number fluctuates, uh, depending on, you know, what the
19
amount of the trans — you know, the funds being transferred…
20
21
COMMISSIONER BARNES:
Yes, it — yes, it can
fluctuate, yes.
22
ASSEMBLYMAN CHAU:
Now second question, just
23
to follow up on your opening remarks, you said that the MTA
24
is operating, uh, as intended, yet there is room for
25
improvement.
Essentially, that’s what you said.
And IPage 45 Case5:11-cv-05496-HRL Document47 Filed03/14/13 Page45 of 302
21
1
think the chair, um, posed one question in reference to the
2
application process.
3
application process could be streamlined probably.
4
besides that issue, what other issues, um, do you see that
5
we need to look into.
6
system a little bit more?
7
Um, so, I think that — that
But
For example, how do we improve the
COMMISSIONER BARNES:
Okay.
Well first, I
8
want to be clear that in adding clarity to the MTA I believe
9
the orders and the regulations that we’re going to be
10
issuing will add clarity and help to improve the process,
11
but I…
12
is very important because that app — all those items that
13
have been listed to be considered I think are very, very
14
important for, uh, whoever is regulating money transmitters;
15
whoever is holding other people’s money, whoever is
16
effectively holding a deposit of somebody else’s money.
17
I have to tell you, I think the law as written today
All of those items that are listed, are
18
really, I wouldn’t necessarily streamline that, except to
19
the extent we determine…
20
keep them in the law, and, but clarify in the regulations
21
that, for example, if we were to identify a, a money
22
transmitter that I would say is low-risk, like they have
23
only one product, and one geographic, they don’t do anything
24
internationally, it’s really simple, they don’t take cash…
25
In looking at everything, um, listed in the MTA to be
I would keep them on the books,Page 46 Case5:11-cv-05496-HRL Document47 Filed03/14/13 Page46 of 302
22
1
considered by DFI, what already — uh, the MTA already allows
2
the Commissioner to take all of those things into
3
consideration, uh, and look at the quality of the
4
management, the assets, and the sorts of strength for the
5
applicant.
6
tools away — to say that you don’t have to send financial
7
statements for the last three years.
8
— be able to look at the quality of the earnings, you know;
9
are there any iss — balance sheet issues.
But I would not, um, want to take any of these
We would want to look
Those protections
10
I would say need to remain.
11
some clarity from a regulatory perspective as to how we look
12
at all of these items.
By the same token, we can give
13
ASSEMBLYMAN CHAU:
14
COMMISSIONER BARNES:
So then…
Because we don’t treat
15
every applicant — it’s really an art form in the sense that
16
we don’t treat every applicant exactly the same.
17
transmitter that’s been operating in thirty-five states that
18
comes to us, you know we’re going to be able — and they’re
19
being examined by other states — we’re going to have the
20
benefit of those prior examinations.
21
states in developing joint exams and joint protocols.
22
have the flexibility to be able to look at that money
23
transmitter, go down the list, but how we get comfort on all
24
of these items may be a different — a different way.
25
that we’re getting comfort from some of their other
So a money
We work with other
So we
It mayPage 47 Case5:11-cv-05496-HRL Document47 Filed03/14/13 Page47 of 302
23
1
examinations.
2
of these areas are important to consider to protect the
3
consumer, and I would ask that if there are amendments to
4
the Money Transmission Act, which is certainly within your
5
purview to do — and you did in 2010 — that we don’t do
6
anything that’s going to harm the consumer.
But I think all of these indicia of risk, all
7
ASSEMBLYMAN CHAU:
8
CHAIRMAN DICKINSON:
9
Sure.
Do you have one — any
more — one more follow-up?
10
ASSEMBLYMAN CHAU:
Just one quick; I’m sorry.
11
Um, how do we, the State of California, stack up against
12
other states in terms of, um, procedures or otherwise, or
13
whether or not…
14
are we just about, uh, on the average, just similar to other
15
states?
16
Are we more stringent than other states, or
COMMISSIONER BARNES:
Um, we were — so the,
17
my un — we were the last state really to come in 2010 to the
18
party of regulating.
19
provide greater protection for our consumers.
20
there are some money transmitters that are startups
21
that…decided to go to other states to…start their business.
22
Um, uh, or they’ve decided to work with, um, money
23
transmitters that are already licensed here.
24
protect our consumers better than some other states.
25
haven’t done a, uh, a state-by-state comparison.
I think, um, uh, eh, I think we
I know that
I think we may
I
I did seePage 48 Case5:11-cv-05496-HRL Document47 Filed03/14/13 Page48 of 302
24
1
the 50-state analysis.
2
California has more money transmissions than any other state
3
in the Union.
4
California in terms of money transmission don’t add up to
5
how many money transmissions that we have in this State.
6
And so, I think for, for, for those reasons it is important
7
to maintain that while we may be different from other — from
8
our sister states in how we regulate money transmissions,
9
um, there’s a reason for that difference.
Um, but I would also caution that
In fact, the next three states under
And that being,
10
uh, a State where technology, innovation, is key, and where
11
technology and innovation is going to be developed in a
12
manner that’s going to make it easier and better for
13
consumers to put funds in the hands of other people, I think
14
that’s a good thing.
15
use those — those technologies myself.
16
be sure that California continues to protect, uh, the
17
consumer.
18
I encourage it.
CHAIRMAN DICKINSON:
I want to be able to
But I also want to
One last thing, uh… Have
19
you seen instances where, uh, an application hasn’t been
20
pursued or has been stymied by the necessity of, of
21
obtaining the bonds and the securities that we’ve been
22
talking about, and yet it’s difficult to get them because a
23
license hasn’t been, um, issued.
24
issue.
25
It’s a chicken and egg
Have you seen any of that in the applications?
COMMISSIONER BARNES:
We have…Page 49 Case5:11-cv-05496-HRL Document47 Filed03/14/13 Page49 of 302
25
1
We have a lawsuit before us so I can’t say I
2
haven’t seen it.
3
individual, a company, who have made, um, those and similar
4
assertions.
5
If this Committee would be interested in having a better
6
understanding of DFI’s response to those types of statements
7
and allegations, we can share with you our briefs.
8
9
10
Um, I’m not at liberty to really discuss that.
We are being represented by the Attorney
General’s office, and um, I think the briefs might be able
to give you guidance, better guidance, in that regard.
11
12
We have a laws — we have been sued…by an
CHAIRMAN DICKINSON:
interested in that.
I think we would be
Thank you, Commissioner.
13
COMMISSIONER BARNES:
14
CHAIRMAN DICKINSON:
Thank you.
I appreciate your, uh,
15
comments this afternoon.
16
panel.
17
have Thomas Brown, who is a lecturer at the UC Berkeley Law
18
School, and a partner in Paul Hastings LLP; John Muller,
19
Vice-President and General Counsel of PayPal, Inc.; Michelle
20
Jun, uh, Senior Attorney, Consumers Union, or “Yoon,” I’m
21
not sure, is it…
And now we will turn to our, our
And if you could please, uh, come forward.
22
MS. JUN:
23
CHAIRMAN DICKINSON:
First we
It’s “Juhn.”
Jun, okay.
Um, Rob, Rob
24
Barnett, Vice-President and Assistant General Counsel at
25
Automatic Data Processing, Inc.
And thank you, um, thankPage 50 Case5:11-cv-05496-HRL Document47 Filed03/14/13 Page50 of 302
26
1
you for being with us this, this afternoon.
2
our time if you could try to keep your opening remarks to
3
about five minutes, then that’ll give the Committee members
4
time to delve into the issues with you.
5
agreeable to you, if we could just go in the order that I
6
introduced each of you, so Mr. Brown, you’d be first.
7
MR. BROWN:
And in light of
And if it’s
Thank you Chairman Dickinson and
8
members of the Committee, it’s an honor to be here to talk
9
about a – a subject that tends not to get the same level of
10
attention, uh, on an annual basis as the business of moving
11
money from place to place.
12
about the ability to engage directly with financial services
13
via um, an iPad or an iPhone or another instrument of mobile
14
technology that seems to get people excited and I think
15
helps to explain some of the reason why we’re all – why
16
we’re all here.
17
There’s — there’s something
Um, I’ve provided written testimony to the
18
Committee and, and am open to taking questions on anything
19
that I addressed there.
20
make, um, a couple of very short points and then save time
21
to take questions.
22
With my oral remarks I wanted to
So the first is that, um, uh, the, the
23
consumer financial services industry both, um, in the State
24
of California, in the United States, is – and is
25
appropriately – a highly-regulated business.
Um, uh, andPage 51 Case5:11-cv-05496-HRL Document47 Filed03/14/13 Page51 of 302
27
1
the set of statutes that govern this business include things
2
like the Truth In Lending Act, uh, the Electronic Funds
3
Transfer Act, uh, in the State of California we of course
4
have the Money Transmission Act, and, and, the consumers’
5
interests in interacting with financial services are largely
6
met through those traditional, um, consumer protection
7
statutes.
8
indust — for industry participants that are interested in
9
being in this business, and those relate to the primary
There are a separate set of requirements for
10
reason that we’re here, and are reflected in things like the
11
California Money Transmission Act.
12
that fall under the general heading of safety and soundness.
13
Um, how much money do you need to have in order to support
14
the activity associated with your program?
15
Assemblymember Achadjian and Assemblymember Chau asked a
16
question about capitalization requirements with respect to
17
businesses that are interested in moving money from one
18
consumer to another.
19
embellish a little bit on what, um, Commissioner Barnes
20
offered is: they’re actually threefold in California.
21
And those are the issues
So, um, both
And the answer, um, uh, just to
So one is if I receive money, um, to transmit
22
it to another, I am required to hold eligible securities
23
that back those funds on a dollar-for-dollar basis.
24
distinguishes the money transmission business from the
25
banking business.
So that
So, the banking business, we sometimesPage 52 Case5:11-cv-05496-HRL Document47 Filed03/14/13 Page52 of 302
28
1
talk about fractional deposits?
2
of volume that the bank is holding they need to hold some
3
fraction of that in eligible securities.
4
the money transmission business, to be clear, right, a
5
business that we theoretically think of as “less regulated,”
6
uh, you are required to hold a dollar in eligible securities
7
for every dollar of float volume.
8
the capital requirement.
9
Right, so for each dollar
So if you were in
So that’s one element of
You’re also then required to have, to meet a
10
certain threshold of capitalization.
11
the minimum threshold as $500,000.
12
California, uh, that threshold is, um, the minimum is two
13
million, uh, or, up, up...
14
$2,000,000.
15
So the statute sets
As a practical matter in
As a practical matter it’s
Um, then the third is that you’re then on top
16
of both the capitalization requirements – so the equity on
17
your balance sheet, in addition of course to having that
18
one-to-one dollar backing of every volume in the system,
19
you’re then required to post a bond.
20
extraordinary amount of safety and soundness for a business
21
that at the end of the day is not all that complicated.
22
One.
23
out in my testimony was that, that even though I obtain a
24
license in California, to the extent I seek to offer that
25
service on a nationwide basis, I then have to get a license
Right.
This is an
And then two, all of the themes that I sort of laidPage 53 Case5:11-cv-05496-HRL Document47 Filed03/14/13 Page53 of 302
29
1
in each state.
2
survey that I put together of, um; the handy bible of state
3
licensing requirements.
4
license in each of the states in which you do business.
5
I believe that that is an onerous load of regulation on the
6
safety and soundness side.
7
articulated in her remarks, has suppressed innovation both
8
here in the State of California, uh, and around the country.
9
It makes it more difficult to achieve the electronification
And, and some of you may have seen the
Uh, you’re required to obtain a
And
And, as the Commissioner
10
of payments, which is something that all of us in California
11
have an interest in facilitating.
12
that I wanted to articulate and I’m happy to take any
13
questions.
14
15
CHAIRMAN DICKINSON:
So those are the points
Thank you.
We’ll turn
to Mr. Muller.
16
MR. MULLER:
Thank you.
Thank you, Chairman,
17
and thank you to the other members of the Committee for the
18
opportunity to testify.
19
Vice President and General Counsel at PayPal, a California
20
company based in, in San Jose, and part of the eBay family
21
of companies.
22
been regulated under the Money Transmission Act and its
23
predecessor since 2002, so, more than ten year now.
24
that is part of a – a decision we made fairly early on in
25
the company’s history about the company’s business model.
My name is John Muller, and I’m the
We’ve been in business since 1999 and we’ve
Um, andPage 54 Case5:11-cv-05496-HRL Document47 Filed03/14/13 Page54 of 302
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1
Um, and really our, our attempt to follow customer demand.
2
Um, the company started, uh, with the, the hot mobile device
3
of its time, which was the Palm Pilot, and an assumption in
4
1999 that soon most people would own Palm Pilots and they
5
would all want to send each other money through the Palm
6
Pilot.
7
wasn’t the case, um, but that there was an interest in
8
people using the internet and e-mail, which were much more
9
widely distributed, um, as the method for sending each other
10
money, and then we quickly learned that in fact, most people
11
wanted to use this new payment method, not just to send each
12
other money, in a traditional type of remittance, but to buy
13
things, um to buy goods and services.
14
marketplace, which is how we wound up as part of the eBay
15
company, uh, and then eventually, with small businesses and
16
larger businesses all over the country starting to operate
17
their own web sites.
18
decide, will we follow the traditional, um, payment
19
processing model at the time (and still to a large extent,
20
today), where the customer gives their financial information
21
to the merchant, and then the merchant sends it through the
22
payment processing system, usually, the card networks; or,
23
would we have the merchant, I’m sorry, the consumer, “shop
24
without sharing,” as we call it.
25
share their financial information with the merchant, and
We quickly learned from customer demand that that
First, on the eBay
And as part of that, um, we had to
So, shop without having toPage 55 Case5:11-cv-05496-HRL Document47 Filed03/14/13 Page55 of 302
31
1
only share it with PayPal as the trusted intermediary.
2
That’s what we decided to do.
3
the consumer who is pushing the money through the system,
4
um, rather than the merchant who is pulling the money, and
5
so at that point it starts to look more like a traditional
6
remittance, and as a result, we did get our license back in,
7
in 2002 as I mentioned.
8
9
In that context, it’s really
Um, so the license, uh, has not inhibited our
growth overall.
We have grown, uh, over those ten years to
10
a point where last year we, we processed worldwide
11
approximately 165 billion in transmissions, again, almost
12
all of that for the purchase of goods and services, or
13
charitable donations, um, and uh, we have overall had a good
14
relationship with the Department of Financial Institutions
15
under the Act, and its predecessor; we haven’t necessarily
16
agreed on every point of interpretation, um, but we have had
17
an open relationship.
18
And so I think our perspective is similar to
19
the Commissioner’s: there are some opportunities for
20
improvement, um, in particular there are some elements of
21
the Act that are still based on the traditional remittance
22
world, of cash-based transactions, or of transactions that,
23
where there is a delay between the sending of the money and
24
the receipt of the payment by the recipient, whereas in our
25
case and the case of other recent technology paymentPage 56 Case5:11-cv-05496-HRL Document47 Filed03/14/13 Page56 of 302
32
1
entrants, in most cases the receipt of the money by the
2
recipient, usually a seller, is, is uh, immediate.
3
think there are opportunities for improvement, but it is an
4
Act we have been able to operate under successfully for
5
these years, and I’ll leave it at that in the interest of
6
time.
7
So we
And thank you.
CHAIRMAN DICKINSON:
Okay, um, thank you.
8
I’m sure we’ll come back to you about what those areas of
9
improvement are that you see.
10
MS. JUN:
Ms. Jun.
Thank you.
Good afternoon, my name
11
is Michelle Jun, and I am a Senior Attorney with Consumers
12
Union, the policy and advocacy arm of Consumer Reports,
13
whose mission is to work towards a fair, just and safe
14
marketplace for all consumers, and to empower consumers to
15
protect themselves.
16
Commissioner for putting on this hearing today that’s
17
focused on the Money Transmission Act.
18
We thank the Committee and the
The MTA provides individual consumers with
19
greater assurance that the companies who they entrust in to
20
transfer their money are not fly-by-night operations.
21
is no federal law which provides for this type of oversight.
22
Thus, it is important that the focus of this hearing is on
23
protecting consumers in our State, who use, and often rely
24
on money transmission services.
25
California Financial Code, or the preamble to the MTA,
Section 2002 of the
TherePage 57 Case5:11-cv-05496-HRL Document47 Filed03/14/13 Page57 of 302
33
1
states this purpose of the law, which is “to protect the
2
interests of persons in this State who use money
3
transmission services.”
4
intended that the MTA is for consumer protection.
It is clear that the Legislature
5
We stress that this Committee must continue
6
to maintain its focus as it explores the MTA, particularly
7
in light of the many consumers who rely on money
8
transmission services, as they either cannot or do not want
9
to utilize mainstream financial services.
A weak money
10
transmission law, of the lack of a money transmission law,
11
would most certainly have disparative impact on the more
12
financially vulnerable populations, including communities of
13
color, immigrants, the unbanked and underbanked.
14
reference to an FDIC report, underbanked populations include
15
about 43 million adults and 21 million households.
16
households use non-bank money orders or non-bank check
17
cashing services, payday loan institutions, rent-to-own
18
agreements or pawn shops on a regular basis.
19
Hispanics and Native Americans are the most likely Americans
20
to be underbanked.
21
In
These
Blacks,
Additionally, the manner in which consumers
22
have used money transmission services has changed
23
substantially where they have been made — where they may be
24
subject to losing more money than they had before if they
25
conducted their business with a less-than-stable orPage 58 Case5:11-cv-05496-HRL Document47 Filed03/14/13 Page58 of 302
34
1
trustworthy company.
2
services were single transactions, such as with a traveler’s
3
check, or international money transfers.
4
electronic payments, there is a greater potential for
5
consumers to lose more money as they utilize payment
6
instruments such as pre-paid and payroll cards.
7
this growth in alternative financial services is projected
8
to grow enormously with wider, and the expected universal
9
adoption of, mobile payments.
In the past, money transmission
With the advent of
Further,
Compliance with the MTA is
10
necessary in shoring up public confidence, which benefits
11
the larger marketplace.
12
in money transmission services, consumers who do not need to
13
use a less secure method are less likely to use an
14
alternative payment method.
15
use a payment in which they are unsure about the solvency or
16
the general credibility of the company behind it, over
17
pulling out an existing credit or debit card?
18
the only skeptics.
19
Without public confidence in MT –
Why would a consumer decide to
We are not
An IBM executive quoted in a recent San
20
Francisco Chronicle article stated, “You have to offer them
21
a compelling reason to use mobile payments.
22
minimum, it has to be just as convenient, just as broadly
23
accepted, and just as safe.”
24
25
At a very, very
Consumers Union encourages this Committee,
and others, to make sure that the MTA continues to pro-- toPage 59 Case5:11-cv-05496-HRL Document47 Filed03/14/13 Page59 of 302
35
1
best protect consumers who make money transmission services.
2
While we certainly want to see the continuation of payments
3
innovation, we believe that protecting consumers’ money
4
always takes precedence, particularly for the most
5
financially vulnerable.
6
For many consumers who use money transmission
7
services, they do not use them for the novelty of making a
8
new way to pay, but rather, rely on the money transmission
9
services to send money to loved ones or to pay bills.
10
Technologies will come and go, but making sure that people’s
11
hard-earned money is safe should always be and remain the
12
focus of the MTA.
13
Thank you.
CHAIRMAN DICKINSON:
14
those comments, we appreciate that.
15
hitting clean-up.
16
MR. BARNETT:
17
CHAIRMAN DICKINSON:
18
MR. BARNETT:
Thank you for those,
Uh, Mr. Barnett,
Thank you, Chair.
Welcome.
Thank you, Chairman Dickinson
19
and other members of the, uh, the Committee for the
20
opportunity to uh, to present, uh, this afternoon.
21
actually in somewhat of a dual capacity.
22
of the, uh, National Payroll Reporting Consortium, who, uh,
23
actually comprises I think probably eleven or twelve of the
24
top payroll, um, service providers, in the country.
25
very large group, providing, um, payroll type benefits,
I’m here
I’m here on behalf
So aPage 60 Case5:11-cv-05496-HRL Document47 Filed03/14/13 Page60 of 302
36
1
payroll services and other, um, payroll-related services to
2
1.5 million employers across the country.
3
in my capacity as Assistant General Counsel and Vice
4
President for our ADP, Automatic Data Processing, uh, and
5
obviously ADP, everyone knows, does payroll, but ADP also
6
does a — a host of other activities that include money-type,
7
money transmission-type activities.
8
the points that I’d just like to make as part of the opening
9
remarks is that one of the things that I’ve heard very
Uh, I’m also here
Uh, and I think one of
10
clearly here, and even Commissioner Barnes pointed out, the
11
purpose and intent of the statute itself was consumer
12
protection.
13
impact, uh, and reality is that it goes much beyond just
14
simple “consumer protection.”
15
“consumer”, “consumer” as very broad, or you can look as it
16
as individuals or services to individuals, as opposed to
17
services to, um, other corporations or businesses, which
18
most service providers in the payroll space obviously are
19
providing services to employers, not to individuals.
20
And, um, whether intentional or not, the, the
Certainly you can define
Uh, and I think from our perspective
21
obviously there are a lot of payroll laws that regulate, um,
22
wage payments and whatnot, uh, and certainly there are
23
federal laws that regulate, through the IRS and other, um,
24
uh, laws, the payment of — of tax payments and that type of
25
activity.
Um, but one of the issues, or one of thePage 61 Case5:11-cv-05496-HRL Document47 Filed03/14/13 Page61 of 302
37
1
challenges that we’ve faced is, given the very broad nature
2
of the definition of “money transmission,” uh, it
3
essentially picks up any and all activity — um, basically
4
you take money from one party on behalf of that party and
5
then with instructions to transmit it to another and you’re
6
considered a money transmitter.
7
effect of that is that you end up regulating, uh, a vast
8
number of business-to-business transactions, which from the
9
basis of the statute, the intent expressed in the statute
And, uh, you know the — the
10
was really more of a consumer protection statute, not one to
11
regulate business activity.
12
Um, certainly not here necessarily to argue
13
whether it should apply or not apply to businesses, uh,
14
generally, but I think one of the challenges that we’ve had
15
in dealing with the — the Department of Financial
16
Institutions — who, in our case has been outstanding,
17
they’ve worked with us very closely, uh, in trying to
18
address and, uh, deal with some of the challenge that we’ve
19
had, so we certainly have no issues with the DFI and
20
certainly appreciate their partnership — but one of the
21
challenges is around the fact that the statute, as
22
previously mentioned, is, was really drafted with the
23
mechanics for over-the-counter, cash-based money
24
transmission, which in our case, you know, we don’t take
25
cash.
Everything that we do is bank-to-bank essentially,Page 62 Case5:11-cv-05496-HRL Document47 Filed03/14/13 Page62 of 302
38
1
uh, and so the, the mechanics of the statute are designed
2
such that they really, uh, require things like receipts and
3
rights to refunds and things that make perfect sense in the
4
context of a consumer transaction, but do not necessarily
5
make as much sense in the context of business-to-business
6
transactions.
7
for us — you know, obviously, ADP, we have resources, that’s
8
not the issue, and we certainly are very seriously committed
9
to our compliance with laws and, and doing the things that
And it’s created a significant, um, challenge
10
we need to do to protect, um, you know, the — the value of,
11
of the services we provide to our clients, and we take our —
12
we take our role as a transmitter of money and a holder of
13
other people’s money quite seriously.
14
business for well over 60 years and have, have, you know,
15
weathered a lot of storms and been able to get through a lot
16
of things that a lot of people haven’t.
17
know, the issues for us is trying to comply with some of
18
these technical requirements in the statute that are really
19
designed for over-the-counter money transmission.
20
it difficult, because obviously, you know, for example, we,
21
you know, we – we do the receipt requirement.
22
600,000 clients across the country that we do all types of
23
money movement activities for.
24
someone when you’re doing a bank-to-bank transfer that’s
25
pre-authorized and in agreement — we have agreements with
We’ve been in this
But one of the, you
It makes
We have
And delivering a receipt toPage 63 Case5:11-cv-05496-HRL Document47 Filed03/14/13 Page63 of 302
39
1
all of our clients that govern the relationship, and
2
identify how it is and when it is we can take money — uh,
3
having to deliver a receipt, uh, in connection with that is
4
— is, is a challenge.
5
certainly a challenge and one that most payroll providers
6
aren’t set up to do in an electronic world.
7
we’re just not taking cash.
8
9
It’s not impossible, but it’s
Um, once again,
Uh, and you know, some of the other
requirements, right to refund language once again, we have
10
contracts that govern exactly when it is that we are to
11
deliver the money to whom, and under what circumstances.
12
Um, and so under the statute you’re required to essentially
13
tell people that they have the right to refund within 10
14
days, and in an over-the-counter transaction that makes
15
sense, um, but in the context of a business-to-business
16
transaction, it’s — it’s much more of a challenge.
17
less sense in that context.
18
things like consumer notices; you’re required to put signs
19
out giving consumers notice of their, their rights.
20
once again, we don’t even have facilities where individual
21
consumers can walk in and buy our services.
22
salesforces that deal directly with people.
23
It makes
And then there’s just other
Right?
And
We have
So I — I think, you know, one of the
24
challenges and one of the things that we see as an
25
opportunity to within the statute is — is, is potentiallyPage 64 Case5:11-cv-05496-HRL Document47 Filed03/14/13 Page64 of 302
40
1
looking at the definition of “money transmission” and — and
2
figuring out and deciding whether or not that was really the
3
intent to have it be applied so broadly to so many people.
4
Um, you know, certainly on — on behalf of the payroll
5
consortium, um, you know, most of those folks in that group
6
don’t feel that, you know, it was necessarily intended to
7
apply to them, um, but we’re here, and you know ADP, we’ve
8
applied for a license and we’ve been working through that
9
process.
Um, but essentially, you know, at some point we
10
have to figure out whether or not was that the intent, or
11
not the intent, and if it was, then maybe there just needs
12
to be some tweaks to the mechanics to address some of these
13
other issues.
14
of other businesses that I’m just not sure were necessarily,
15
uh, intended, uh, to be covered by this.
16
accounts payable businesses, um, COBRA tax credit services—
17
these are all things that, although you know sort of are
18
related to payroll, or actually are provided by a lot of the
19
people that don’t even do payroll, they might do these types
20
of services separate, wholly apart from actual, um, payroll-
21
type-providing services.
22
very vast, and a wide group of businesses that are
23
potentially regulated.
24
obviously, more regulation, um, you know, is difficult in
25
the State given resources, and uh, so it’s our feeling it
Um, I’d also offer up that there are a host
I mean, you know,
And so, I think it brings in a
You know, in this environment,Page 65 Case5:11-cv-05496-HRL Document47 Filed03/14/13 Page65 of 302
41
1
needs to be looked at and decided whether or not if that’s
2
the intent and that’s the direction it wants to go then
3
mechanically it really needs to work in that context.
4
you.
5
CHAIRMAN DICKINSON:
6
all—all four of you.
7
ended.
Thank
Thank you for comments,
And let me, um, let’s start where we
8
MR. BARNETT:
9
CHAIRMAN DICKINSON:
Sure.
I’d like to explore this
10
just a little bit more with you, Mr. — Mr. Barnett.
11
is it your view that — that payroll processors in particular
12
ought not to been seen as money transmitters in the sense of
13
the — of the statute, or would you — would you advocate that
14
business-to-business transactions in general be treated
15
differently than under the Money Transmission Act?
16
something else?
17
Is it—
Or
Or a third…
MR. BARNETT:
Yeah.
I, once again, I’m not
18
necessarily here to argue that it should not be regulated
19
necessarily.
20
it’s written and the legislative intent, and what seems to
21
be the intent at the time it was drafted.
22
purpose, which was really governing over-the — over-the-
23
counter money transmission activities, right?
24
traditional Western Union-type activities.
25
I can only look at the actual — the law as
And the intended
ThePage 66 Case5:11-cv-05496-HRL Document47 Filed03/14/13 Page66 of 302
42
1
Um, I think, you know, obviously there’s a
2
lot of folks here that are, that are being affected by the
3
fact that it’s very broad, but, um, I would think that
4
payroll providers, or certainly companies, in you know,
5
sophisticated companies in business-to-business-type
6
transactions, they should be soph — or, you know, not all
7
are sufficiently sophisticated enough to necessarily protect
8
themselves, but they are individual consumers for the most
9
part.
And so, the intent of providing consumer protection
10
unless you take a very broad read of “consumer,” um, I think
11
the statute the way it’s drafted and the broad nature of it
12
goes well beyond that intent.
13
CHAIRMAN DICKINSON:
Uh, I assume you would
14
grant the point that there are small businesses and maybe
15
even sometimes large businesses, that aren’t necessarily all
16
that sophisticated or — or aware of what their exposure may
17
— may be such as, a contracting with a payroll processor,
18
or, or an entity to take care of paying of taxes, you know
19
those kinds of things, and they may be at risk of — of
20
fraud, or misrepresentation in those transactions.
21
very, very controversial and, and, uh, visible case of that
22
involving Sacramento County, just a couple of years ago,
23
which is, uh, not an unsophisticated organization, I can
24
tell you that from first-hand experience, and yet—and yet,
25
fell victim to using a firm in another state that literally
We had aPage 67 Case5:11-cv-05496-HRL Document47 Filed03/14/13 Page67 of 302
43
1
robbed the County — that’s tax money — and wasn’t discovered
2
until the IRS found that some things didn’t reconcile and
3
brought it to the attention of the County.
4
necessarily exclude businesses from needing some form of
5
protection, you’re just arguing that maybe the notion of the
6
traditional consumer in that context is — is not that broad.
7
Is that — is that fair to say?
8
9
10
MR. BARNETT:
That is fair.
So, you wouldn’t
I mean,
unfortunately, right, there are bad apples in every
industry.
11
CHAIRMAN DICKINSON:
12
MR. BARNETT: I’m not going to say that
Right.
13
payroll providers are all great.
14
that the eleven or so that are part of the Consortium, we’d
15
like to think that we’re above that type of activity.
16
but certainly there are you know, there — there’s needs to
17
regulate at different levels across all businesses.
18
yeah, I would agree.
19
the mechanics of the statute, right, is this — you know, if
20
the intent is to regulate all activities, is this the right
21
mechanical structure for that.
22
out earlier, the Commissioner and her staff uh, in the DFI,
23
have been very cooperative in trying to work with us, but
24
they, you know, at times have felt at times have felt as
25
though there are some constraints with what they can and
And, uh, I’d like to think
Um,
Um, so
I think the challenge for us really is
Um, and, and as I pointedPage 68 Case5:11-cv-05496-HRL Document47 Filed03/14/13 Page68 of 302
44
1
can’t do because of what’s in the statute.
2
for us, you know, the biggest challenge is just sort of
3
conforming to the mechanical natures of the statute.
4
so, I’m not necessarily going to argue that there shouldn’t
5
be regulation.
6
areas in the law that do provide protection, as the
7
Commissioner pointed out, there was an unfortunate
8
circumstance that they’re now aware of, and that does happen
9
from time to time, but that — that sort of activity would
And so I think
Um,
I think there are, as I’ve pointed out other
10
also fall under, you know, IRS examination; there would be
11
other places where there could be protections for businesses
12
like that, maybe apart from the MTA itself.
13
CHAIRMAN DICKINSON:
14
did you want to follow up on this?
15
16
17
Okay.
Mr. Achadjian,
No?
ASSEMBLYMAN ACHADJIAN:
I had a question but
it got answered through the conversation, so thank you.
CHAIRMAN DICKINSON:
Okay.
Thank you.
Uh,
18
Mr. Brown, I wanted to come back — back to you.
19
neglected to say this the first time around, but Go Bears.
20
MR. BROWN:
21
CHAIRMAN DICKINSON:
Uh, and I
[Laughter] Indeed.
You did, you did give us
22
in your written submission some suggestions — oh, I’m sorry,
23
Mr. Barnett, I just, one thing that occurred to me.
24
uh, licensed as a money transmitter in other states?
25
Is ADP,Page 69 Case5:11-cv-05496-HRL Document47 Filed03/14/13 Page69 of 302
45
1
MR. BARNETT:
Yes, we are, we currently have
2
46 applications, and two that are pending, one with
3
California and one with Rhode Island.
4
CHAIRMAN DICKINSON:
Okay.
So there’s —
5
there’s not enough deviation from state to state that you
6
haven’t sought a license in essentially all the states that
7
are regulating?
8
9
MR. BARNETT:
That’s fair.
I think there was
a question earlier to the Commissioner maybe as to whether
10
or not the — the laws are applied.
11
states or so that have laws very similar to California.
12
our, our, our sense is that in having had conversations with
13
other states as part of the licensing process, um, my sense
14
is that a lot of the states, or some portion of the states,
15
um, do not look at it as broadly as, er, as California does.
16
I think as part of our conversation with the — with the DFI,
17
they’ve made it pretty clear that there really is no concept
18
of unregulated money movement in California.
19
I mean, there are 27
And
And in other states, even though the statutes
20
are relatively similar, for whatever reason, some of those
21
states have chosen to regulate some activities, like, you
22
know, stored value for example, sale of checks, that type of
23
activity that under a lot of statutes is actually
24
enumerated, but other types of activities they haven’t had
25
an interest in necessarily regulating, so…
Um, I wouldn’tPage 70 Case5:11-cv-05496-HRL Document47 Filed03/14/13 Page70 of 302
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1
say that it’s necessarily — it’s just I, you know maybe it’s
2
the interpretation, maybe it’s resources, I’m not sure what
3
it is.
4
broader interpretation of the definition of “money
5
transmission.”
6
not unfair.
7
statute ‘cause it is very broad.
But I think California takes a much more, uh, much
It’s a fair — it’s a fair reading of the
8
9
And — and it’s, based upon the statute, it’s
CHAIRMAN DICKINSON:
Mm-hmm.
Okay.
I’m
sorry, Mr. Brown, I wanted to come back to you — back to
10
you.
11
reciprocity be granted by California to, to — to other
12
states.
13
standard to that and I’m not quite sure how it’s
14
articulated, but to ensure that we’re not granting
15
reciprocity in cases where we thought another state’s
16
statute was um, less protective of consumers than — than
17
California’s.
18
Um, one of your suggestions was some type of
I’m assuming that, uh, you would apply some
MR. BROWN:
So, um, I think any proposal on
19
reciprocity is going to need to recognize California’s
20
interest in maintaining, um, uh, some assurance with respect
21
to safety and soundness criteria.
22
that it is helpful to distinguish between “consumer
23
protection” and “safety and soundness.”
24
arguments that safety and soundness requirements, um,
25
ultimately protect consumers, uh, but those, but that is —
Though, I really do think
Um, we can makePage 71 Case5:11-cv-05496-HRL Document47 Filed03/14/13 Page71 of 302
47
1
that is not the primary objective of a safety and soundness
2
requirement.
3
things: it preserves the institution, uh, institutional
4
integrity, um, and, and it serves a bit of a barrier to
5
entry.
6
safety and soundness are by design, designed to filter out
7
certain institutions.
8
secondarily do they protect, um, consumers’ interests, and
9
then not always.
10
The safety and soundness requirement does two
Right, I mean, so, so, things that go to protecting
So that’s sort of, one.
Only
But we, you know, we can come back to that
issue as well.
11
Uh, I do think, um, echoing the earlier
12
remarks about the definition of “money transmission” and how
13
that standard is interpreted in California, there is some
14
cleanup work that can be done with respect to the MTA.
15
as I pointed out in the written submission, the definition
16
under the existing Act is circular.
17
trace through the definitions, “money transmission” is
18
ultimately defined as “money transmission.”
19
CHAIRMAN DICKINSON:
20
MR. BROWN:
Um,
Um, if you actually
[Laughter]
Um, uh, I would tell my students
21
that we can hope for better in drafting statutory text?
22
uh, so, at a high level…
23
particular area of disagreement between California and other
24
states, and that’s with respect to this issue as, of the
25
payee agent.
Um,
But then, there’s a more
Um, I mean, at an abstract level, we shouldPage 72 Case5:11-cv-05496-HRL Document47 Filed03/14/13 Page72 of 302
48
1
all recognize everybody receives money from some people and
2
gives it to others.
3
house.
4
receiving money and giving it to others.
5
traditional businesses also receive money and give it to
6
others.
7
firm.
8
you know, associates and staff and then ultimately to
9
ourselves and we don’t — we don’t necessarily think of that
Uh, like, that happens a lot at my
I have two teenage girls.
Um, and there’s a lot of
Um, uh, but then
Um, you know I happen to be a partner at a law
We receive money from clients and we pay it out to,
10
act as triggering some sort of special-case regulation, even
11
though we’re sort of “holding other people’s money” at some
12
level.
13
what “money transmission” actually means, right, so when —
14
when money is in float, or not at rest, maybe that’s what
15
“money transmission” means, but when I’m giving money to
16
somebody who is the agent of — has been appointed by the
17
person to whom that money is ultimately owed, as their
18
agent, that seems like not so much “money transmission.”
19
And at least two states have explicitly recognized that.
20
New York, and it’s built into a couple of um, state
21
statutes.
22
Committee, um, can look, and to help relieve some of the
23
pressure on — on DFI, particularly as we start to see
24
financial services combine with, with other services through
25
mobile technologies.
And so I do think that we can be more precise as to
So I do think that’s another area where thePage 73 Case5:11-cv-05496-HRL Document47 Filed03/14/13 Page73 of 302
49
1
Um, uh, um, one of my favorite—one of my
2
favorite sort of quasi-payment application is Uber.
3
know if anybody has ever used it; it’s gotten a little of
4
attention for other reasons.
5
of Uber as a payment app.
6
it’s helped me locate the cab, and then I get out of the
7
cab, and then there’s money, um, movement associated with
8
that application, but I don’t think of Uber as a payment
9
provider, though there’s some ways of looking at the statute
10
But I don’t necessarily think
Right?
Um, getting in a cab,
that might subject them…
11
12
I don’t
CHAIRMAN DICKINSON:
So let’s — let’s pause
on that, cause that…
13
MR. BROWN:
14
CHAIRMAN DICKINSON:
That — maybe that’s a
15
fruitful way of illustrating this.
I mean, I’ve not used
16
Uber…
Mm-hmm.
17
MR. BROWN:
18
CHAIRMAN DICKINSON:
Mm-hmm.
…but what I’ve read, it
19
suggests that you contact Uber and you — you let Uber know
20
your location; Uber contacts a taxi or, or…
21
MR. BROWN:
22
CHAIRMAN DICKINSON:
A towncar, or whathaveyou…
23
directs it to your — your location.
24
of — of money in that.
25
you can, you can expand?
…a towncar, and, um,
But there’s no transfer
To my knowledge, I mean, but maybePage 74 Case5:11-cv-05496-HRL Document47 Filed03/14/13 Page74 of 302
50
1
MR. BROWN:
Well, so, so what, so what
2
happens with, um, many transactions of that archetype, and
3
there are many, and it’s not just Uber that uses that basic
4
— that same basic structure, is, um, when I get out of the
5
towncar, it will, it will trigger a charge to the payment
6
credentials that I have on file with that service provider.
7
Uh, and it will then also trigger another transaction to
8
that service provider; now, I believe in Uber’s case they
9
are the agent of payee for the people who have contracted
10
with Uber to help them find customers.
11
gives, gives an example.
12
Um, but, so that
But there are many, many, many others.
Many
13
electronic downloads are delivered through things that look
14
like marketplaces.
15
download a Taylor Swift song.
16
Swift gets paid, and I pay somebody, um, and we’re — I’m
17
paying one person and that same person is then paying Taylor
18
Swift, but again, that – that doesn’t have the feel of, of a
19
traditional transaction at say Western Union, where I go up
20
to a counter and give somebody money and I ask them to send
21
it halfway around the world, even though, you know, Taylor
22
Swift may for all I know be in London right now.
23
um, uh, but so this gets at the difference between money
24
transmission and other types of transactions.
25
Right?
Where I go on, say, iTunes, and
Right?
So, turns out, Taylor
You know,Page 75 Case5:11-cv-05496-HRL Document47 Filed03/14/13 Page75 of 302
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1
ASSEMBLYMAN ACHADJIAN:
I believe to be part
2
of the organization you have an account established, so when
3
you call, and they send you a cab or whoever they have a
4
contract with, they are reaching out your account and
5
withdraw that money and pay the cab company and keep their
6
percentage, whatever that might be.
7
8
MR. BROWN:
Um, but, but, for when
you get out of the cab, um…
9
10
Correct.
ASSEMBLYMAN ACHADJIAN:
It’s already paid
for.
11
MR. BROWN:
You are, but your obligation to
12
the driver — this is, I think, the key distinction, right –
13
your obligation to the driver is released, even if that
14
intermediary fails to deliver funds to the driver, you as
15
the consumer are protected as a matter of contract, in that
16
case, though there are federal overlays that are important
17
here, too.
18
and Regulation Z ealier.
19
is satisfied by your successful payment to the intermediary,
20
in this case, Uber.
21
money transmission chain, even though funds are ultimately
22
being delivered to the driver.
23
I mentioned the Electronic Funds Transfer Act
Um, your obligation to the driver
And for me, that sort of breaks the
ASSEMBLYMAN ACHADJIAN:
Just to follow up my
24
question to the Commissioner.
25
and let’s say I want to transfer money to you in another
If you go to a Western Union,Page 76 Case5:11-cv-05496-HRL Document47 Filed03/14/13 Page76 of 302
52
1
part of the area, and I write a check, if they don’t have a
2
guarantee that that check will clear, don’t they have the
3
right to hold onto it for whatever the new technology allows
4
them to clear that check?
5
MR. BROWN:
6
ASSEMBLYMAN ACHADJIAN:
7
MR. BROWN:
8
Um, so I…
That’s where I was…
That’s where your question was
going.
9
ASSEMBLYMAN ACHADJIAN:
My question was
10
going, as, are we going to regulate both sides, too, so
11
there’s a balance?
12
penalizing the…
13
Or, in support of consumer, then we’re
MR. BROWN:
…the business provider.
That’s
14
an excellent point, and not, not — um, not one that I had,
15
um — not one that I had given sort of a lot of thought to.
16
But it does go to one of the sort of fundamental challenges
17
of operating in these businesses, as, uh, um, Mr. Muller can
18
attest, right, is that consumers will engage in transactions
19
with you and present themselves as though they have funds,
20
and then turn out not to.
21
an obligation to pay the recipient of those funds,
22
independent of whether the consumer actually has the funds,
23
and, and — and that, that is the fundamental risk that you
24
as the intermediary, um, take on.
25
Um, and then, frequently you have
And so your point aboutPage 77 Case5:11-cv-05496-HRL Document47 Filed03/14/13 Page77 of 302
53
1
receiving a check that may not be good is, uh, is an
2
excellent one.
3
ASSEMBLYMAN ACHADJIAN:
Because if it was to
4
happen on a weekend when my bank is closed and I don’t have
5
the cash to forward it to you, I want to write a check;
6
Western Union is open around the clock, then there is a …
7
problem.
Unless we address it early on.
8
MR. BROWN:
9
CHAIRMAN DICKINSON:
Yes.
Uh, I thought if, and I
10
want to make sure I heard you — you correctly, uh, I thought
11
you made, uh, a remark, uh, to the effect of the safeness
12
and soundness evaluation or criteria can operate as a
13
barrier to — to entry and in a way that’s not necessarily
14
protective of consumers.
Did, did — is that the essence…
15
MR. BROWN:
16
CHAIRMAN DICKINSON:
17
MR. BROWN:
That’s a, um…
…of what you said…
That’s a — that’s a fair
18
statement, um, there’s also — there are also some examples
19
of instances where things that we think of as, as benefiting
20
consumers via safety and soundness have actually worked
21
against that interest, and I’ll use one example: there’s an
22
interesting paper that’s been published on this that when
23
you trace the evolution of deposit insurance in the United
24
States, it turns out that state-mandated deposit insurance
25
tended to make banks less safe on — on average.
Um, uh,Page 78 Case5:11-cv-05496-HRL Document47 Filed03/14/13 Page78 of 302
54
1
controlling for all other factors, because it reduces a
2
dimension along which banks are then competing for the
3
attention of consumers, which is not an argument against
4
deposit insurance, it’s just a recognition that things that
5
we do, however well intentioned, can have, um, uh,
6
unintended consequences that work against the benefit that
7
we’re — we’re trying to implement.
8
study looked at, um, developments in state laws at the turn
9
of the century around branch banking and deposit insurance,
So, this particular
10
which were two, you know, progressive innovations designed
11
to help ensure the safety and soundness of the financial
12
institutions, right, one by allowing some diversification,
13
the other by insuring deposits.
14
tended to make banks more — make them safer, because they
15
could be in more geographic areas, and deposit insurance,
16
um, tended to make them less safe.
17
Turned out, branch banking
So, um, so that’s one, but more generally,
18
safety and soundness criteria do serve as a barrier to
19
entry.
20
entrepreneur, who wants to offer a new mobile payment
21
application on, um, uh, an iPad, if I need to go to DFI and
22
spend either 120 days or in some cases several years sort of
23
working with the Commissioner and staff to have my
24
application approved, right, that, that necessarily slows
25
down the degree to which people are introducing
I mean, if I need, as a potential innovator, anPage 79 Case5:11-cv-05496-HRL Document47 Filed03/14/13 Page79 of 302
55
1
applications.
Now, we might think that that’s a tradeoff
2
worth making.
But, it is definitely a tradeoff.
3
the higher we make the capitalization requirements and the
4
more that we assess fees, we can expect that there’s going
5
to be less entry.
6
entrepreneurial energies elsewhere.
7
Uh, and
People will choose to spend their
CHAIRMAN DICKINSON:
Sometimes you want to
8
prevent people from entering the market because they
9
shouldn’t be in the market.
10
MR. BROWN:
11
CHAIRMAN DICKINSON:
Yes.
Uh, other times, uh,
12
barriers to entry can operate as an economic device that,
13
that advan — gives some an advantage to the disadvantage of
14
others.
15
how the California statute operates in that, in that
16
respect?
17
Do you have a – do you have a point of view about
MR. BROWN:
Um, I do, and my – and my point
18
of view here, is sort of view informed by a little bit of
19
history in the evolution of the statute.
20
PayPal is actually a fascinating case.
21
money transmission license was an alternative to a claim
22
that they were — at least this is the story that I have
23
learned over time, um, uh, again, um, Mr. Muller can
24
embellish — was an alternative to being told that they were
25
a bank, but operating without a bank charter.
Uh, so, um, for me
So for PayPal, a
So, uh,Page 80 Case5:11-cv-05496-HRL Document47 Filed03/14/13 Page80 of 302
56
1
California in its willingness to provide a license provided
2
an answer to that claim, a claim that had been raised both
3
by the State of Louisiana and by the State of New York, if
4
memory serves.
5
lower bar and you could support other business operations
6
through a money transmission license that you couldn’t
7
support if you had a bank charter.
8
a time when California’s Money Transmission Act only applied
9
if you were operating and sending funds overseas, one.
Um, so, so, and because it was somewhat a
Um, uh, but this was at
Two,
10
at that point in time, California’s Money Transmission Act
11
actually preceded the development of what’s known as the um,
12
what was promulgated by um, uh, the institute for, for state
13
law development, the Uniform Money Transmission Act.
14
California’s actually became an inspiration for the Money —
15
the Uniform Money Transmission Act.
16
development of the Uniform Money Transmission Act and the
17
application to all businesses involved in receiving money on
18
a domestic basis, you saw the creation of a barrier to entry
19
where one had not existed before.
20
familiar, um, both anecdotally – and more anecdotally than
21
every, anything with, um, with a degree to which
22
California’s now adoption of significant capital
23
requirements has led people to either go to states, to test
24
their products, that don’t have a licensing requirement, or
25
to find somebody who’s already a member of the club and to
And with the
Um, uh, and, and — I amPage 81 Case5:11-cv-05496-HRL Document47 Filed03/14/13 Page81 of 302
57
1
obtain permission to use their charter or their license to
2
offer it.
3
positive development.
So, yeah, uh, and that doesn’t strike me as a
4
CHAIRMAN DICKINSON:
So I want to give Ms.
5
Jun a chance if she wants to weigh in on — on this, because,
6
um, one side of the coin is consumer protection, um; perhaps
7
the other side of the coin, at least one dimension, barriers
8
to – to entry.
9
means less competition, um, less choice for consumers, and
On the other hand, unreasonable barriers
10
presumably higher prices for – for consumers.
11
certainly when we, back in the eighties, talked about
12
airline deregulation and interstate trucking deregulation
13
and all those they were driven by much of the same kind of
14
discussion and principle applied to different subjects.
15
I’m curious if you want to comment on this point.
16
MS. JUN:
I mean
But
Sure, I think there are a number of
17
levels I think I can answer that question, but I think the
18
first thing that I want to mention, um, has to do with
19
whether or not consumers would benefit from increased
20
competition.
21
Um, one thing that comes to mind is the
22
Durbin Amendment.
23
down, merchants would pass on their reaped benefits to
24
consumers.
25
soon, but I highly doubt that will happen.
Everybody said once interchange fees went
We have yet to see that happen.
It may be too
Um, so it’s kindPage 82 Case5:11-cv-05496-HRL Document47 Filed03/14/13 Page82 of 302
58
1
of the same case here.
2
cheaper ways to process the payment, but it would — it
3
probably won’t be reflected in terms of what is back in the
4
consumer’s pocket.
5
Merchants may be able to arrange for
Um, the second point is what we’ve raised
6
again and again, is: the point of this law is for consumer
7
protection.
8
to see where your friend is instantaneously.
9
about people’s money, and for the most part, it’s people who
We’re not talking about making an application
We’re talking
10
are unbanked and underbanked who are using these types of
11
transmission services and it will increasingly be so as the
12
numbers are been very staggering as to the number of people
13
who are using mobile devices to conduct every form of
14
business including payments.
15
foremost, um, it would be that consumer protection should
16
precede any other — any other concern.
17
So the – the first and
CHAIRMAN DICKINSON:
So, so at least from
18
your point of view you don’t see barriers to entry, at least
19
in this endeavor, as, um, adversely affecting consumers in
20
terms of competition because you don’t believe they’ll see
21
the benefit of competition, were there greater competition
22
in this – in this marketplace, and you’re concerned about
23
compromising other protections.
24
you’re looking at it?
25
Is that the gist of howPage 83 Case5:11-cv-05496-HRL Document47 Filed03/14/13 Page83 of 302
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1
MS. JUN:
I mean we don’t sit nearly as
2
closely as DFI in terms of the different inquiries and
3
applications that they obtain, but there are companies that
4
are newer that are more innovative who have been complying
5
with the regulation and have acquired licenses and succeeded
6
in doing so.
7
entry.
Um, so that does not appear to be a barrier of
8
CHAIRMAN DICKINSON:
9
MS. JUN:
10
Okay.
A barrier to entry.
CHAIRMAN DICKINSON:
Okay.
And Mr. Muller, I
11
promised I’d come back and you can certainly talk about this
12
current question on the table if you want, but I’d also like
13
to come back to, uh, your intriguing remark about some
14
improvements could be made in the statute, not withstanding
15
your as I get it, your general satisfaction with the way
16
it’s operating with respect to PayPal.
17
MR. MULLER:
Uh, so just to start on the
18
competition point, um, you know, we do see, uh, increased
19
competition, certainly over the last three years, um, and I
20
think certainly the regulations that the Commissioner
21
mentioned will probably help.
22
a perceived, uh, lack of clarity as to what the boundaries
23
of the Act are.
24
competitors who both build their business around, um, what
25
I’m going to call more “pure” payment processing models, and
Uh, I think there’s at least
Um, and uh, but I think we do seePage 84 Case5:11-cv-05496-HRL Document47 Filed03/14/13 Page84 of 302
60
1
are therefore able to stay outside of the regulation of the
2
Act, and others who make that choice, um, and have been able
3
to get licensed, some companies in recent years like
4
Facebook and Google, who have been able to get licensed and
5
start up their payments business, and smaller ones as well.
6
Um, so uh, so I think the regulations will help and I think
7
the competitive landscape for payments is certainly very
8
vibrant.
Um, and more, now more than ever.
9
Um, on uh, on the question about improvements
10
that we see to the Act, again, you know, trying not to get
11
too technical, but Mr. Barnett mentioned the receipt and the
12
right to refund wording.
13
again, is premised on a delay in the transmission reaching
14
the recipient, among other things, um and in many cases,
15
both through PayPal and through many of our competitors, uh,
16
the recipient knows right away that the funds have reached
17
their account.
18
deliver a receipt, we don’t have any problem with delivering
19
a receipt to both sides of the transaction, it’s simply a
20
question of the specific wording that is mandated by the
21
statute currently, uh, which can be confusing, um, to the
22
sender and the receiver both.
23
Um, you know the right to refund,
Um, so, the wording, uh, you know we do
Um, so that’s one example.
Um, another one relates to, um, the way the
24
statute deals with agency relationships.
25
largely on a model of traditional money remittance, um,
Um, again, basedPage 85 Case5:11-cv-05496-HRL Document47 Filed03/14/13 Page85 of 302
61
1
where the Western Unions and MoneyGrams of the world work
2
through, um, stores and agents around the world.
3
case, for instance, we’re also trying to deliver, uh, more
4
service, and make on-line and mobile shopping more available
5
now to the underbanked, working with companies like, like a
6
CoinStar and a MoneyGram.
7
itself a licensed company and has been for a long, long time
8
— um, should they be treated as if they were just an agent,
9
or a corner store with respect to PayPal when PayPal and
Um, in our
Um, so if MoneyGram, which is
10
MoneyGram are working together.
11
opportunity there to make some changes to the Act that can
12
help clarify, um, these new types of relationships.
13
So we think there’s, um,
CHAIRMAN DICKINSON:
Well thank you.
I think
14
there’s one other aspect of this competition issue, um, or
15
service issue, that strikes me and that’s whether there are
16
certain categories of consumers that aren’t getting service
17
that could, or could get better service, so it’s another
18
aspect of this, but we’ll leave that for another day to
19
explore, unless there are questions from other members…
20
ASSEMBLYMAN ACHADJIAN:
I’m just watching the
21
clock to see if we can bring it to an end because we have
22
another commitment…
23
CHAIRMAN DICKINSON:
Right, that’s what we’re
24
aiming at, so, uh, so thank you all for — I appreciate your
25
comments very much and certainly as we look at trying toPage 86 Case5:11-cv-05496-HRL Document47 Filed03/14/13 Page86 of 302
62
1
shape something productive out of the legislation I’ve
2
introduced I’m sure we’ll be continuing this discussion with
3
you and others.
4
MR. BARNETT:
5
MR. BROWN:
6
CHAIRMAN DICKINSON:
Thank you.
Thanks.
Thank you all again.
7
Uh, and now, uh, we will take public testimony, uh, briefly,
8
so if there are people here who would like to address the
9
Committee, we can — we can do that now.
So if you could
10
tell us who you are, and uh, I know in at least one case we
11
have a lengthy letter; we’re going to need to keep your
12
comments to a couple minutes, so I’ll — I’ll just let you
13
know when you hit that marker.
14
MR. GREENSPAN:
15
CHAIRMAN DICKINSON:
16
MR. GREENSPAN:
Good afternoon.
Good afternoon.
My name is Aaron Greenspan.
17
I am the CEO of Think Computer Corporation, a startup in
18
Palo Alto, and a CodeX Fellow at Stanford Law School.
19
There’s no way that I can fit everything I have to say about
20
the MTA and AB 786 into a few minutes, but it is my hope
21
that if you come away with anything from this hearing, it is
22
the following: which is that, with the MTA, we all lose.
23
It is not difficult to see what I have lost.
24
In 2009, I started working full-time on a mobile payments
25
project called FaceCash.
FaceCash’s origins go back to myPage 87 Case5:11-cv-05496-HRL Document47 Filed03/14/13 Page87 of 302
63
1
time at Harvard College, from which I graduated early with a
2
degree in economics in 2004.
3
enrolled in a seminar about facial recognition, and I later
4
realized that some of the insights I gained from this course
5
could be used to make payments safer.
6
technology will granted tomorrow as it turns out.
7
As a freshman at Harvard I
The patent on this
So as everyone here surely knows, identity
8
theft is an extremely serious problem; according to a recent
9
Javelin report, identity thieves stole $54 billion in 2009.
10
I’m sure it’s higher now.
11
the fact that the plastic payment card networks that we all
12
use daily are fundamentally insecure and for a number of
13
reasons cannot be upgraded.
14
network more secure is to build a new one.
15
I set out to do.
16
Much of this can be attributed to
The only way to make the
So that is what
After substantial investment of approximately
17
$1 million of my own money, FaceCash went live in April,
18
2010.
19
the California Department of Financial Institutions due to
20
the new MTA.
21
mandatory pre-application interview, among other self-
22
contradictory, ignorant, confusing and false statements,
23
Deputy Commissioner Venchiarutti personally threatened to
24
call law enforcement officials with instructions to throw me
25
in jail because he did not like the kinds of questions I had
It was shut down on June 30th, 2011 at the request of
I tried to apply for a license, but at myPage 88 Case5:11-cv-05496-HRL Document47 Filed03/14/13 Page88 of 302
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been asking him about the MTA — so I felt as though I had no
2
choice but to abandon my investment, my product, and my
3
employees.
4
So that’s what I lost.
But again, with the
5
MTA, we all lose.
6
lost tax revenue, and this is all because the MTA is a
7
protectionist law written solely for the purpose of
8
preserving the monopoly power of a few financial
9
institutions represented by the law’s initial and sole
My employees lost their jobs, the state
10
sponsor, The Money Services Round Table.
11
monopoly allows its members, and banks who also benef —
12
benefit from the law, to keep charging consumers outrageous
13
prices for basic financial services whose actual marginal
14
cost is near zero.
15
The Round Table’s
When the MTA was proposed, it was described
16
in terms of quote “consumer protection;” the same is now
17
true, as we’ve been discussing, of AB 786.
18
the matter is that both the MTA and AB 786 harm consumers,
19
and especially entrepreneurs.
20
members — one of them, MoneyGram, recently settled with the
21
U.S. Department of Justice for $100 million over criminal
22
charges filed regarding an even larger decade-long fraud.
23
In effect, thanks to the money transmission laws like the
24
MTA, consumers have been forced into the arms of corporate
25
criminals because of these pointless barriers to entry based
But the truth of
So do the Round Table’sPage 89 Case5:11-cv-05496-HRL Document47 Filed03/14/13 Page89 of 302
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1
on this totally false premise that rich people are
2
inherently more trustworthy.
3
Another Round Table member, Sigue
4
Corporation, settled with the DOJ in 2008 for $15 million
5
for failing to comply with Bank Secrecy Act requirements.
6
Both still are licensed by the DFI.
7
DFI’s own General Counsel told me that he was personally
8
“appalled” by the MTA.
9
Perhaps this is why the
Today, Assembly Bill 786 only stands to make
10
the presently bad situation far worse.
11
proposed new thought crime in AB 786 section 2155 is
12
completely outrageous, and broadly interpreted, would allow
13
the DFI to lock me up in a federal prison just for having
14
asked what the Deputy Commissioner considered to be the
15
“wrong” questions a year and a half ago.
16
CHAIRMAN DICKINSON:
In particular, the
Mr. Greenspan, uh, I —
17
you’re perfectly free to criticize, I don’t have a problem
18
with that, just I have a problem with time, and I have given
19
you, uh, an extra, minute.
20
say.
21
you could, because we have an unforgiving time constraint
22
this afternoon, if there’s one more thing you would like to
23
say in summary, why don’t you give that to us, and then this
24
conversation will go on.
25
Because I know you have a lot to
We will take your letter into account.
But if you, ifPage 90 Case5:11-cv-05496-HRL Document47 Filed03/14/13 Page90 of 302
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MR. GREENSPAN:
I will give you the laundry
2
list of why I believe the — the MTA should be repealed, and
3
is unconstitutional.
4
because I’m a libertarian who hates regulation.
5
there should be federal regulation of this; I know that
6
Congress is looking at it.
7
airline analogy from before – uh, the states are not in a
8
position to regulate internet transmissions.
9
have already said so, but aside from that it doesn’t make
And I say it should be repealed not
10
any sense.
11
It’s incredibly dangerous.
12
13
But the states – I like your
The courts
It’s like having a different FAA in each state.
CHAIRMAN DICKINSON:
Okay.
I know you’ve got
more to say, but let’s leave it there, it’s a good one.
14
MR. GREENSPAN:
15
CHAIRMAN DICKINSON:
16
MR. GARRET:
17
I think
be as quick as I can.
I understand.
Okay.
Next.
Um, thank you, my – I’ll try to
My name is Ron Garret.
18
CHAIRMAN DICKINSON:
19
MR. GARRET:
I…
Um…
Welcome.
Thank you.
Um, I sent a
20
letter into the public comments which was not included in
21
the public comments.
22
of it as I can before I run out of time.
23
It’s two pages long; I’ll read as much
Um, I’m here mainly in my capacity as a
24
consumer whose interests the MTA is ostensibly designed to
25
protect, but also as a software engineer, entrepreneur andPage 91 Case5:11-cv-05496-HRL Document47 Filed03/14/13 Page91 of 302
67
1
an investor who has significant experience in digital
2
security technology and financial systems.
3
claiming some domain expertise, let me provide my
4
credentials.
Since I’m
5
I hold a Ph.D. in Computer Science and
6
Applications from Virginia Tech, I’ve had substantial
7
industrial experience designing and implementing secure
8
financial systems, I wrote the billing system for the
9
original release of Google AdWords in September of 2000, and
10
I subsequently designed and implemented the billing system
11
for two other startups.
12
In December of 2008 I launched a – an effort
13
to start a company whose goal was to eliminate credit card
14
fraud.
15
got off the ground, in large measure – measure because of
16
regulatory hurdles.
17
can definitely say that extant financial regulations in the
18
United States in general, and the California MTA in
19
particular, are doing more harm than good, at least when
20
measured according to how well they concept – protect
21
consumers from fraud.
22
you my story.
23
The upshot of the story is that the company never
It is because of this experience that I
To back up this claim, let me tell
The fundamental problem with all non-cash
24
payment methods currently in used – currently in use in the
25
United States, which includes credit cards, checks, andPage 92 Case5:11-cv-05496-HRL Document47 Filed03/14/13 Page92 of 302
68
1
debit cards, is that they are based on fundamentally
2
insecure protocols designed in the 1950s.
3
transaction the buyer must provide the seller with
4
information: account number, expiration date, billing zip
5
code, whathaveyou.
6
information is not relevant.
7
information is bound to a particular transaction.
8
reusable.
9
it cannot be fixed, except by making a fundamental change to
10
To conduct a
The exact nature and quantity of this
What matters is that the
It’s
This is the basis for all credit card fraud and
the protocol.
11
With the advent of electronic commerce, the
12
risk of a fraudster being caught has been reduced nearly to
13
zero.
14
credit card fraud that we are all familiar with.
The result, unsurprisingly, has been an epidemic of
15
There is a technological solution to this
16
problem: it’s called Public Key Encryption.
17
get into the details of that, you’ll just have to take my
18
word for it for now, but using PKE it is possible to design
19
protocols where the information provided a buyer to conduct
20
a transaction is strongly bound to that particular
21
transaction, and so cannot be reused.
22
technology would completely solve the credit card fraud
23
problem.
I don’t want to
The adoption of this
24
And in the interest of time, I will just tell
25
you that after three years I gave up on this effort, and thePage 93 Case5:11-cv-05496-HRL Document47 Filed03/14/13 Page93 of 302
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1
last straw was exploring the possibility of getting a money
2
transmitter license.
3
out to be so expensive and time-consuming and unpredictable
4
that I decided not to pursue it.
5
It turned out, that the process turned
CHAIRMAN DICKINSON:
Okay.
Thank you.
Uh,
6
and I, uh, am informed that we did include your letter in
7
the materials that were made available to the public.
8
9
MR. GARRET:
Oh, it was?
I must have missed
it then.
10
CHAIRMAN DICKINSON:
It was included in the –
11
it was included in the materials the Committee members
12
received, and it is on the Committee’s web site, so we have
13
made it part of the record, and thank — thank you.
14
MR. GARRET:
15
MR. COSME:
Good enough.
Hi, I’ll be brief and to the
16
point.
17
Professional Small Business Services.
18
payroll providers that was discussed a little bit earlier.
19
And um, and I’m also the California Chairperson for the
20
National Federation of Independent Businesses.
My name is Manuel Cosme.
I’m the co-owner of
21
CHAIRMAN DICKINSON:
22
MR. COSME:
We’re one of the
Welcome.
Thank you for this opportunity.
23
Uh, as I understand it, um, according to the statute,
24
there’s a $5,000 non-refundable license fee, I think, and
25
there’s a $500,000 minimum for surety bond, right?
WePage 94 Case5:11-cv-05496-HRL Document47 Filed03/14/13 Page94 of 302
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provide payroll services for small businesses.
2
employees is about four.
3
100 dollars a month.
4
service bureaus to come up with those kinds of funds doesn’t
5
make sense.
6
statute according to what I read, is that we issue
7
executable checks.
8
becomes negotiable.
9
the owners.
10
The average
That billing runs between 72 to
And, and to require the, um, payroll
Um, the services we provide, um, is that in the
These executable checks, when signed,
But that’s only when they are signed by
So, okay, I would like to see a little
11
clarity on this law, so there is a distinction between the
12
services we provide, which goes directly from the business
13
owner to IRS or EDD, or those that, uh, perhaps take funds –
14
what happened in, uh, with this, Sacramento.
15
CHAIRMAN DICKINSON:
16
MR. COSME:
Mm-hmm.
Where the funds was actually sent
17
to a trust fund, and then from there they paid the agencies
18
and there was a — by the way the State of New York had a
19
similar problem.
20
21
22
CHAIRMAN DICKINSON:
Well, the other firm was
in New York that, that was a victim, so, yeah.
MR. COSME:
That’s – yeah, exactly, so um but
23
there is a distinction between the — the small payroll
24
service bureaus that are throughout the State of California,
25
as opposed to those.
Um, so…Page 95 Case5:11-cv-05496-HRL Document47 Filed03/14/13 Page95 of 302
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CHAIRMAN DICKINSON:
Right, and I certainly
2
by my comments didn’t mean to suggest that all payroll
3
forms, uh, firms, or anything like that — I mean, that’s –
4
that’s the aberration, but, to be sure.
5
MR. COSME:
Yeah, um, and so, quite a few
6
comments were mentioned today and I thought they were
7
excellent.
8
those into consideration, especially from the representative
9
of ADP.
Um, and I’m hoping that um, you take some of
10
CHAIRMAN DICKINSON:
11
MR. COSME:
12
CHAIRMAN DICKINSON:
Okay.
Alright?
Yes.
Thank you for all
13
three very much.
14
no one else who wishes to address the Committee this
15
afternoon, we — we are adjourned.
Appreciate your testimony.
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17
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(Hearing adjourned at 3:45 P.M.)
And if there’sPage 96 Case5:11-cv-05496-HRL Document47 Filed03/14/13 Page96 of 302
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CERTIFICATION
2
3
I, Aaron Greenspan, certify that the foregoing is a
4
correct transcript from the official digital video recording
5
of the proceedings in the above-entitled matter.
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March 13, 2013Page 97 Case5:11-cv-05496-HRL Document47 Filed03/14/13 Page97 of 302
EXHIBIT D
March 11, 2013 California State Assembly Banking and Finance Committee Hearing
Testimony and Public Comment MaterialsPage 98 Case5:11-cv-05496-HRL Documen t47 Filed03/14/13 Page98 of 302
TESTIMONY
AND
PUBLIC COMMENTPage 99 Case5:11-cv-05496-HRL Document47 Filed03/14/13 Page99 of 302
Statement of
_ Thomas P. Brown
Lecturer, Berkeley Law School, University of California
and
Partner, Paul Hastings LLP
before the
Banking and Finance Committee
California State Assembly
State Capitol, Room 444
Sacramento, California
March 11, 2013Page 100 Case5:11-cv-05496-HRL Document47 Filed03/14/13 Page100 of 302
Chairman Dickinson, members of the Committee, thank you for inviting me to appear
before you today to discuss the California Money Transmission Act-and its effect on innovation
in the payments industry.! With this written submission, I intend to (1) provide the Committee
with some background on the role that California has played in incubating new technologies for
value exchange, (2) sketch the regulatory framework that governs the payment industry; (3)
discuss some of the issues that have arisen since the California Money Transmission Act was last
amended; and (4) offer some thoughts about possible modifications to the California Monéy
Transmission Act that would address some of these issues. . |
INTRODUCTION
California is widely regarded as the nation’s innovation and technology capital. Many of
the technologies that shape the modern economy were conceived, developed and perfected in
California. The smart phone, integrated circuit, and, of course, the World Wide Web have
changed how people work and live. Bach was brought to life by people and businesses resident
in California.
California has also served as an incubator for innovation in industries not generally
associated with technology. In particular, California has been home to companies that have
_ shaped the consumer financial services industry. Since A.P. Giannini founded the Bank of Italy
in San Francisco in 1904, California businesses and entrepreneurs have played key roles in the
development of consumer credit, credit cards, debit cards and electronic payments.” These
‘Tam appearing today in my capacity as an adjunct professor at Berkeley Law School. In my
private practice, ] have represented and currently represent a number of clients that participate in
the payments industry. The opinions expressed in today’s testimony are my own and may not
represent those of my firm or my clients.
? The Money Transmission Act itself recognizes California’s status as a hub of innovation. See _
Cal. Fin. Code § 2001(a) (“Money transmission businesses conduct a significant amount of
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Michael Brooks Carroll (Bar #54904)
Kevin A. Flautt (Bar #257892)
LAW OFFICES OF MICHAEL BROOKS CARROLL
300 Montgomery Street, Suite 650
San Francisco, California 94104
Telephone: (415) 788-7600
Facsimile: (415) 421-7379
carroll_law@sbcglobal.net
Marvin Cable, Esq. (BBO #680968)
LAW OFFICES OF MARVIN CABLE
P.O. Box 1630
Northampton, MA 01061
Telephone: (413) 268-6500
Facsimile: (413) 268-6500
law@marvincable.com
Attorneys for Plaintiff
THINK COMPUTER CORPORATION
UNITED STATES DISTRICT COURT
FOR THE NORTHERN DISTRICT OF CALIFORNIA
San Jose Division
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THINK COMPUTER CORPORATION,
Plaintiff,
v.
ROBERT VENCHIARUTTI, et al.,
Defendants.
)
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)
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)
Case No. CV11-05496-HRL
REQUEST FOR JUDICIAL NOTICE
Before the Honorable Howard R. Lloyd
Complaint Filed: November 14, 2011
First Amended Complaint Filed: January 31, 2012
Trial Date: None Yet Set
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REQUEST FOR JUDICIAL NOTICE - Case No. CV11-05496-HRL
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Plaintiff Think Computer Corporation hereby requests that the Court take judicial notice of the
following legislative exhibits, true and correct copies of which are attached hereto. These exhibits
concern the legislative history of the California Money Transmission Act.
4
Generally, agency reports, legislative hearing transcripts, and testimony before legislative bodies
5
are properly the subject of judicial notice. Fed. R. Evid. 201; see United States v. Penn Foundry & Mfg.
6
Co., 337 U.S. 198, 216 (1949) (“The official communications which disclose … policy … like reports,
7
rules and regulations of agencies or other communications to Congress, are equally reliable and
8
authoritative and need no further proof.”); Tempel v. United States, 248 U.S. 121, 130 (1918) (taking
9
judicial notice of a report by the Secretary of War); Aramark Facility v. Service Employees, 530 F.3d
10
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826 n.4; L.H. v. Schwarzenegger, 519 F. Supp. 2d 1072, 1079 (E.D. Cal. 2007) (granting judicial notice
12
of a Senate Report); 321 Studios v. MGM Studios, Inc., 307 F. Supp. 2d 1085, 1107 (N.D. Cal. 2004)
13
(granting judicial notice of various Congressional hearing transcripts and other legislative materials).
14
15
16
Exhibit A: March 11, 2013 California State Assembly Banking and Finance Committee
Hearing Agenda;
Exhibit B: March 11, 2013 California State Assembly Banking and Finance Committee
17
Hearing Background Paper;
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19
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Exhibit C: March 11, 2013 California State Assembly Banking and Finance Committee
Hearing Transcript;
Exhibit D: March 11, 2013 California State Assembly Banking and Finance Committee
Hearing Testimony and Public Comment Materials.
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REQUEST FOR JUDICIAL NOTICE - Case No. CV11-05496-HRL
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Respectfully submitted on March 14, 2013,
FOR THE PLAINTIFF:
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Marvin Cable, Esq.
BBO#: 680968
LAW OFFICES OF MARVIN CABLE
P.O. Box 1630
Northampton, MA 01061
P: (413) 268-6500
F: (413) 268-6500
E: law@marvincable.com
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CERTIFICATE OF SERVICE
I hereby certify that on March 14, 2013, the foregoing document, filed through the ECF system,
will be sent electronically to the registered participants as identified on the Notice of Electronic Filing,
and paper copies will be served via first-class mail to those indicated as non-registered participants.
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Marvin Cable, Esq.
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REQUEST FOR JUDICIAL NOTICE - Case No. CV11-05496-HRL
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EXHIBIT A
March 11, 2013 California State Assembly Banking and Finance Committee Hearing
Agenda
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Assembly Committee on Banking & Finance
Emerging Technology and the California Money Transmission Act
March 11, 2013
2:00p.m
California State Capitol, Room 444
I.
II.
Opening Remarks:
•
Chair, Assemblymember Roger Dickinson
•
Vice Chair, Assemblymember Mike Morrell
Regulation of the Money Transmission Act:
•
III.
IV.
Teveia Barnes, Commissioner, Department of Financial Institutions
Assessments of Emerging Payment Technology, The Money Transmission Act &
Consumer Protection:
•
Thomas Brown, Lecturer, UC Berkeley Law School and Partner, Paul Hastings LLP
•
John Muller, Vice President & General Counsel, PayPal Inc.
•
Michelle Jun, Senior Attorney, Consumers Union
•
Rob Barnett, Vice President-Assistant General Counsel at Automatic Data
Processing, Inc.
Public comment.
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EXHIBIT B
March 11, 2013 California State Assembly Banking and Finance Committee Hearing
Background Paper
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EMERGING TECHNOLOGY AND THE CALIFORNIA
MONEY TRANSMISSION ACT
Assembly Committee on Banking & Finance
March 11, 2013
Assemblymember Roger Dickinson, Chair
Mark Farouk-Chief Consultant
Kathleen O'Malley-Senior Consultant
Tiffany Morrison-Committee Secretary
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On August 3, 2000, the National Conference of Commissioners on Uniform State Laws
(NCCUSL) issued its first draft of a model act to provide a uniform regulation for money
services business. One of the main drivers behind the creation of a uniform model act was
to address concerns arising from potential money laundering activities and that states had
begun to implement differing regulatory frameworks. A final version of the act was ratified
by NCCUSL on August 6, 2004. Alaska, Arkansas, Iowa, Vermont, and Washington
implemented the model act in its entirety. The creation of the model act did not end the
patch work of state regulation. Instead, each state made their own changes and additions
to the act.
On September 30, 2010, AB 2789 was signed into law by then Governor Arnold
Schwarzenegger. AB 2789 established the California Money Transmission Act (MTA). The
MTA combined the regulatory and licensing requirements of the Transmission of Money
Abroad Law, the Travelers Check Act and the Payment Instruments Law. In addition to
these changes, the MTA includes licensing for domestic money transfer and non-bank
issued stored value. The MTA is administered by the California Department of Financial
Institutions (DFI). Currently, there are approximately 71 MTA licensees, according to data
available on DFIs website.
WHAT IS MONEY TRANSMISSION?
At the most basic level money transmission is the transfer of funds involving three parties,
1) Sender 2) Money transmitter and 3) Recipient. The transfer of funds may be intrastate,
interstate, or international. Typically this service is conducted at a physical location where
the sender of funds pays a fee to the remittance service and the money is then wired to the
recipient. Though, as will be discussed later, emerging technologies are breaking up this
old model.
Large money transmitters may have a home office, transaction clearing centers, service
center (s), regional offices, and branches. They may also contract with agents. Agents may
include established businesses such as grocery stores, truck stops, check cashers,
pharmacists, travel agents and supermarket chains. The money transmission home office
pays its agents using a fee schedule that provides predetermined charges for money
transmission.
This is how the traditional model of money transmission works. A sender enters an agent
location and wishes to send $500 to a recipient in another location. The sender provides
the agent the funds and instructions for delivery to the recipient. The agent takes the funds
and instructions and usually enters the transaction into a computer terminal owned by the
money transmitter and that is linked to the money transmitter's processing system. Upon
receiving the instructions, the money transmitter will contact its appropriate receiving
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agent for payout to the recipient. The sender and/or receiving agent will inform the
recipient that the transmitted funds are available for pick-up. The availability of funds to
the recipient may range from minutes to several days depending upon the location and
availability of the receiving agent and money transmitter's delivery policy. While
computers are the typical means for the transferring of money, telephone lines and fax
machines are still widely used.
According to World Bank estimates, remittances totaled $414 billion in 2009, of which
$316 billion went to developing countries that involved 192 million migrant workers. For
some individual recipient countries, remittances can be as high as a third of their Gross
Domestic Product (GDP). The top recipients in terms of the share of remittances in GDP
included many smaller economies such as Tajikistan (45%), Moldova (38%), and Honduras
(25%).
Historically, the money transmission involved face-to-face transaction between the
consumer and transmitter agent that would accept the consumer's money and transmit
those funds to another agent outside of the United States for delivery of those funds to the
consumer's family or friends. These transactions were dominated primarily by a few large
transmitters such as Western Union and MoneyGram. Subsequent to the issuance of the
draft NCCUSL money transmission act, states across the country amended their statutes to
provide enhanced regulation to foreign and domestic transmission and non-bank issued
stored value. Forty eight states and the District of Columbia have money transmission
licensing statutes.
As will be discussed later in this document, the definition of money transmission can be
quite broad, both legally and interpretatively. Furthermore, the traditional model of money
transmission has changed as emerging technologies are changing the way businesses
accept payments and the way that consumers send money or pay for goods and services.
Highlights of the MTA:
The following are some highlights of California's MTA (Financial Code Sections 20002172):
1) Defines “payment instrument” as a check, draft, money order, traveler’s check, or other
instrument for the transmission or payment of money or monetary value, whether or
not negotiable. The term does not include a credit card voucher, letter of credit, or any
instrument that is redeemable by the issuer for goods or services provided by the issuer
or its affiliate.
2) Defines “receiving money for transmission” or “money received for transmission” as
receiving money or monetary value in the United States for transmission within or
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outside the United States by electronic or other means. The term does not include sale
or issuance of payment instruments and stored value.
3) Defines “Stored value” as monetary value representing a claim against the issuer that is
stored on an electronic or digital medium and evidenced by an electronic or digital
record, and that is intended and accepted for use as a means of redemption for money
or monetary value or payment for goods or services. The term does not include a credit
card voucher, letter of credit, or any stored value that is only redeemable by the issuer
for goods or services provided by the issuer or its affiliate, except to the extent required
by applicable law to be redeemable in cash for its cash value.
4) Requires licensing for domestic money transmittal services. Prior to enactment,
licensing was only required for international money transfer.
5) Provides for regulation of non-bank issued stored value cards that may be offered by
licensees. In order to offer non-bank stored value the seller of stored value must be
licensed.
6) Prohibits a person from engaging in the business of money transmission in California or
advertising, soliciting, or holding itself out as providing money transmission unless
licensed.
7) Requires specified information to be included in an application for a license which shall
be in the form proscribed by the commissioner of DFI.
8) Authorizes the commissioner to conduct an examination of an applicant, at the
applicant’s expense, and would require the commissioner to approve an application for
a license if the commissioner makes specified findings, including that the applicant has
adequate net worth and is competent to engage in the business of receiving money for
transmission. In order to meet the net worth requirements a licensee that sells or issue
payment instruments or stored value must maintain securities on deposit on a surety
bond of no less than $500,000 or 50% of the average daily balance of outstanding
payment instruments and stored value in CA. A licensee engaged in money
transmission must either maintain securities or a surety bond not less than $250,000
no more than $2,000,000.
9) Requires licensees to file audit reports with the commissioner within 90 days after the
end of each fiscal year.
10)Imposes various fees and would require the commissioner to levy assessments on
licensees for the purposes of administering these provisions regulating money
transmission including:
a) A $5,000 application fee;
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b) An annual license fee of $2,500;
c) An annual branch office fee of $125 per branch office;
d) An annual $25 fee for each branch employee; and,
e) For licensees that sell or issue payment instruments, an annual assessment based on
the volume and aggregate face amounts of payment instruments and stored value
issued or sold in California.
11)A licensee must maintain specified eligible securities including and/or a surety bond
and maintain $500,000 in net-worth.
12)Requires a licensee to provide specified notices and disclosures to customers, including
a notice relative to a customer’s right to a refund, disclosures relating to rates of
exchange, a notice indicating that payment instruments are not insured, and a notice
providing information on making complaints to the commissioner against a licensee.
13)Requires licensees to maintain financial records for a 3-year period.
14)Mandates each licensee to file with the commissioner a certified copy of every receipt
form used by it or by its agent for receiving money for transmission prior to its first use.
15)Authorizes the commissioner to suspend or revoke a license if the commissioner finds
that a licensee or agent of a licensee has, among other things, violated the provisions of
the act or engaged in fraud or unsound practices and would authorize the
commissioner to assess specified civil penalties against a person that violates these
provisions.
16)Makes it a crime for a person to engage in the business of money transmission without
a license or for a person to intentionally make a false statement, misrepresentation, or
false certification in a record filed or required to be maintained under these provisions.
17)Exempts from licensing,
a) The United States or a department, agency, or instrumentality thereof, including any
federal reserve bank and any federal home loan bank.
b) Money transmission by the United States Postal Service or by a contractor on behalf
of the United States Postal Service.
c) A state, county, city, or any other governmental agency or governmental subdivision
of a state.
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d) A commercial bank or industrial bank, the deposits of which are insured by the
Federal Deposit Insurance Corporation or its successor, or any foreign (other
nation) bank.
e) Electronic funds transfer of governmental benefits for a federal, state, county, or
local governmental agency.
f) A board of trade designated as a contract market under the federal Commodity
Exchange Act (7 U.S.C. Secs. 1-25, incl.) or a person that, in the ordinary course of
business, provides clearance and settlement services for a board of trade to the
extent of its operation as or for such a board.
g) A person that provides clearance or settlement services pursuant to a registration as
a clearing agency or an exemption from registration granted under the federal
securities laws to the extent of its operation as such a provider.
h) An operator of a payment system to the extent that it provides processing, clearing,
or settlement services, between or among persons excluded by this section, in
connection with wire transfers, credit card transactions, debit card transactions,
stored value transactions, automated clearing house transfers, or similar funds
transfers, to the extent of its operation as such a provider.
i) A person registered as a securities broker-dealer under federal or state securities
laws to the extent of its operation as such a broker-dealer.
18)If the commissioner finds all of the following with respect to an application for a license,
the commissioner shall approve the application:
a) The applicant has adequate tangible shareholders’ equity, as specified in Section
2040 to engage in the business of money transmission and the financial condition of
the applicant is otherwise such that it will be safe and sound for the applicant to
engage in the business of money transmission.
b) The applicant, the directors and officers of the applicant, any person that controls
the applicant, and the directors and officers of any person that controls the
applicant are of good character and sound financial standing.
c) The applicant is competent to engage in the business of money transmission.
d) The applicant’s plan for engaging in the business of money transmission affords
reasonable promise of successful operation.
e) It is reasonable to believe that the applicant, if licensed, will engage in the business
of money transmission and will comply with all applicable provisions of this chapter
and of any regulation or order issued under this chapter.
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FEDERAL LAW & REGULATIONS:
Federal Regulation E, the Electronic Funds Transfer Act (EFTA) was amended via the DoddFrank Wall Street Reform and Consumer Protection Act (Dodd-Frank) to include regulation
of international remittances and money transfer. Section 1073 of Dodd-Frank expanded
the scope of EFTA to include requirements concerning remittance disclosures to
consumers. The Consumer Financial Protection Bureau (CFPB) has been tasked with
creating rules to implement these changes. Last year, CFPB released draft rules that were
to take effect February of 2013. However, CFPB postponed the final rules until later in the
year to work out potential compliance issues.
A brief description of the new requirements:
•
Money transmitters will be required to provide customers with written prepayment disclosures containing information about the specific transfer, such as the
exchange rate, applicable fees and taxes, and the amount to be received by the
designated recipient.
•
Money transmitters will be required to provide a written receipt when payment is
made. The receipt must include the information provided on the pre-payment
disclosure, as well as additional information, such as the date of availability, the
recipient's contact information, and information regarding the customer's error
resolution and cancellation rights. As an alternative, the new money transmitter
regulation allows money transmitters to give customers a single written disclosure
prior to payment containing all of the information required on the receipt, so long as
the money transmitter also provides proof of payment such as a stamp on the
earlier document.
•
The pre-payment disclosures and receipts must be provided in English and in each
of the foreign languages principally used by the money transmitter to advertise,
solicit, or market money transfer services at a particular office. If you offer
customers the ability to make money transfers using text message or a mobile
application, the new money transmitter regulation provides additional guidance on
how to provide the required disclosures.
•
If, (i) due to the laws of a recipient country or (ii) the method by which transactions
are made in the recipient country, a money transmitter cannot determine certain
amounts that are required to be disclosed, exceptions permit the money transmitter
to disclose an estimate of the amount of currency to be received, rather than the
actual amount.
•
Money transmitters will be required to provide customers with a 30-minute
cancellation period that allows a customer the opportunity to review both the
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prepayment disclosure and the receipt to ensure that the transfer was sent as the
customer intended. If a customer requests, a money transmitter must promptly
provide the customer a notice describing the customer's "error resolution" and
cancellation rights, using specified language or substantially similar language. Even
after the cancellation period has passed, customers will have a right to a refund or
other remedy if an error occurs in a transaction.
•
In the event a customer timely requests the cancellation of a money transfer, the
new money transmitter regulation requires money transmitters to provide
customers with a refund, at no additional cost to the customer, the total amount of
funds provided by the customer, including any fees and, to the extent not prohibited
by law, taxes imposed in connection with the money transfer, within three business
days of receiving the request to cancel the money transfer.
The United States Department of Treasury under the Financial Crimes Enforcement
Network (FinCEN) requires registration of money services businesses (MSB). According to
FinCEN an MSB includes any person doing business, whether or not on a regular basis or as
an organized business concern, in one or more of the following capacities, and that meets a
threshold of $1,000 per day or more transactions:
•
Currency dealer or exchanger.
•
Check casher.
•
Issuer of traveler's checks, money orders or stored value.
•
Seller or redeemer of traveler's checks, money orders or stored value;
•
Money transmitter.
FinCEN registration does not apply to a bank or a person regulated or registered with the
Securities and Exchange Commission. Entities registered with FinCEN must make
electronic filings under the Bank Secrecy Act (BSA). As of July 1, 2012, all such filings must
be electronic and made through the BSA E-Filing System. Reports that must be filed
through this system include, but are not limited to:
•
•
•
•
•
•
•
Currency Transaction Report (FinCEN Form 104)
Designation of Exempt Person (FinCEN Form 110)
Suspicious Activity Report (Form TD F 90-22.47)
Suspicious Activity Report by the Securities and Futures Industries (FinCEN Form
101)
Suspicious Activity Report by Money Services Business (FinCEN Form 109, formerly
90-22.56)
Suspicious Activity Report by Casinos and Card Clubs (FinCEN Form 102)
Currency Transaction Report by Casinos (FinCEN Form 103, formerly 8362)
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•
•
Registration of Money Services Business (FinCEN Form 107)
Report of Foreign Bank and Financial Accounts (Form TD F 90-22.1)
EMERGING TECHNOLOGIES:
The last five years have witnessed technological changes that have drastically altered the
old business model of remittances, as well as, the ways in which consumers pay for goods
and services. Whereas, the traditional model involved visiting the location of a money
transmitter agent, new technologies have completely changed the way in which customers
send and use money.
Now a consumer wishing to send money to another person for goods, services, or simply as
a remittance to family or friends, has various online services to choose from, including
applications utilizing smart phones. The way in which consumers pay for goods and
services has transcended checks and credit cards and is rapidly evolving with electronic
payment systems and new innovative payment networks. Large financial institutions are
also getting on the bandwagon as several large financial institutions (BofA, Chase, and even
Golden 1 Credit Union) are offering money transfer services using smart phone and web
based applications.
In the payments space, typical five channels have been available, 1) Cash 2) Check (Paper
or Check 21 substitute check) 3) Automated Clearing House (ACH) transaction 4)
Credit/debit/stored value and 5) Wire transfers. Emerging technologies have created new
payment methods such as web payments, contactless payments, mobile payments, Bitcoin
and other virtual currency.
Between December 2011 and January 2012, the Federal Reserve Board conducted a survey
of consumers concerning the use of mobile financial services
(http://www.federalreserve.gov/econresdata/mobile-devices/files/mobile-device-report201203.pdf). The following are brief findings from their report.
1) Mobile phones and mobile Internet access are in widespread use.
a) 87 percent of the U.S. population has a mobile phone.
b) 44 percent of mobile phones are smartphones (Internet-enabled).
c) 84 percent of smartphone users have accessed the Internet on their phone in the
past week.
2) The ubiquity of mobile phones is changing the way consumers access financial services.
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a) 21 percent of mobile phone owners have used mobile banking in the past 12
months.
b) 11 percent of those not currently using mobile banking think that they will probably
use it within the next 12 months.
c) The most common use of mobile banking is to check account balances or recent
transactions (90 percent of mobile banking users).
d) Transferring money between accounts is the second most common use of mobile
banking (42 percent of mobile banking users).
3) Mobile phones are also changing the way consumers make payments.
a) 12 percent of mobile phone owners have made a mobile payment in the past 12
months.
b) The most common use of mobile payments was to make an online bill payment (47
percent of mobile payment users).
c) 21 percent of mobile payment users transferred money directly to another person's
bank, credit card, or Paypal account.
4) Perceptions of limited usefulness and concerns about security are holding back the
adoption of mobile financial services.
a) The primary reason why mobile phone users had not yet adopted mobile banking
was that they felt their banking needs were being met without the use of mobile
banking (58 percent).
b) Concerns about the security of the technology were the primary reason given for not
using mobile payments (42 percent) and the second most common reason given for
not using mobile banking (48 percent).
c) More than a third of mobile phone users who do not use mobile payments either
don't see any benefit from using mobile payments or find it easier to pay with
another method.
5) The "underbanked" make significant use of mobile financial services.
a) The underbanked make comparatively heavy use of both mobile banking and mobile
payments, with 29 percent having used mobile banking and 17 percent having used
mobile payments in the past 12 months.
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b) 62 percent of the underbanked who use mobile payments have used it to pay bills.
c) 10 percent of the completely unbanked reports using mobile banking in the past 12
months, and 12 percent have made a mobile payment.
Mobile payment devices and systems are turning into new and innovative ways for
businesses to accept electronic payments.
In addition to the money transmission licensing acts across 48 states, James Freis, Director
of FinCEN testified on June 29, 2012, in front of the U.S. House Committee on Financial
Services,
FinCEN’s regulations also have made it clear that the acceptance and transmission of
currency, funds, or other value that substitutes for currency from one person and the
transmission of currency, funds, or other value that substitutes for currency to another
person or location, by any means, constitutes money transmission, and that any person
wherever located doing business wholly or in substantial part within the United States
engaging in money transmission, regardless of any other business lines the person is
engaged in – such as the provision of telecommunication services – would likely be a
money services business under FinCEN’s regulations, and as such must register and
comply with all the reporting, recordkeeping, and monitoring requirements applicable
to a money transmitter.
Payment networks:
Payment networks are the infrastructure, made up of multiple parties, that provide for the
processing of electronic financial transactions, most notably, credit card transactions. A
typical credit card transaction has four parties: the customer, the bank that issued the
customer's card, the merchant, and the merchant's bank. The merchant typically receives
less than the merchant's bank as the transaction is discounted due to the interchange rate
(paid to network) and any fees paid to the merchant bank. The largest payment networks
are Visa, MasterCard, Discover and American Express. The top issuers of credit cards are
American Express, JP Morgan Chase, Bank of America, and Citigroup.
The interchange fee paid by merchants has been the source of great controversy between
merchants and payment networks and issuing banks. Interchange fees are set by the
payment networks and can vary based on type of card used and transaction volume. The
largest criticism of interchange fees have been 1) they are uncompetitive, as fee
competition among the established networks is fairly non-existent. 2) Medium and small
merchants have no ability to negotiate on the fee schedule, 3) Network rules prohibit
passing the fee along to customers.
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One of the most contentious fights concerning interchange involved the "Durbin
amendments" to the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010.
The Durbin amendment specified that financial institutions with assets over $10 billion
could only charge interchange fees that are "reasonable and proportional to the actual
cost." The Durbin Amendment also gave the Federal Reserve the power to regulate debit
card interchange fees, and on December 16, 2010, the Fed proposed a maximum
interchange fee of 12 cents per debit card transaction, which CardHub.com estimated
would cost large banks $14 billion annually. On June 29, 2011, the Fed issued its final rule,
which holds that the maximum interchange fee an issuer can receive from a single debit
card transaction is 21 cents plus 5 basis points multiplied by the amount of the transaction.
On July 13, 2012, a settlement between retailers and the payment card industry (Visa,
MasterCard, several banks) over interchange fees was reached. The settlement will not be
implemented until it receives court approval. The settlement only applies to credit cards
not debit cards.
The settlement establishes:
•
•
•
•
Cash payment: $6.05 billion
Credit interchange modification: 10 basis points for eight months. Anticipated value
is approximately $1.2 billion
Ability to charge “checkout fees” at the point of sale for customers paying with a
credit or charge card. Fee cannot exceed 4%. This includes American Express and
Discover although they were not parties to the settlement.
Ability to form buying groups to negotiate interchange rates collectively
The settlement allows members of the class to opt-out of the damages portion of the
settlement agreement if they prefer to litigate independently for more damages. No
retailer can opt-out of the forward looking injunctive portion of the settlement, related to
rule changes such as the surcharge. The defendants have the right to terminate the
settlement agreement should more than 25% of the merchants opt out of the damages
portion. Retailers have until October, 2012, to opt-out.
California enacted Civil Code Section 1748.1 in 2005 which prohibits a retailer in any sales,
service, or lease transaction with a consumer may impose a surcharge on a cardholder who
elects to use a credit card in lieu of payment by cash, check, or similar means. A retailer
may, however, offer discounts for the purpose of inducing payment by cash, check, or other
means not involving the use of a credit card, provided that the discount is offered to all
prospective buyers.
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This law will still prohibit retailers from charging a surcharge in California although there
is a settlement.
States do not have the ability to regulate interchange rates between retailers, banks and the
card networks. The main area of nexus is how retailers pass along those charges to
customers. As mentioned previously, CA prohibits retailers from imposing a surcharge;
however this restriction does not apply to non-retailers, such as government agencies. It's
foreseeable that we may see legislation prohibiting fees for these non-retail entities.
The emergence of alternative payment networks has arisen in large part from the desire of
merchants to mitigate the fees and costs associated with the traditional payment networks.
ALTERNATIVE PAYMENT NETWORKS:
Growth in technology has assisted with the rapid development of alternative payment
networks. PayPal started in 1998 to allow people to send money without sharing financial
information. The bulk of PayPal's business came from its relationship with Ebay (Ebay now
owns PayPal) in which buyers paid for goods on Ebay via Paypal's service. PayPal is
currently the global leader in processing payments with over $115 billion processed
annually.
Square Inc. a payment processing company that began by offering a credit card reader to
businesses in order to process credit card transactions including software to facilitate
payments. Square is on track to process $10 billion in payments a year. They also offer
smart phone app that allows customers to pay for goods and services with participating
merchants. Square's main focus has been providing its services to small merchants like
food trucks or taxi drivers. Square makes money by charging a 2.75% fee for every
transaction.
Alipay reports a registered user base of approximately 600 million, and is accepted for
online payment at many retail websites and service providers in China. They process more
than 8.5 million transactions a day, and are partnered with more than 65 financial
institutions including Visa, MasterCard, and all national banks in China. Alipay also
provides payment solutions for more than 500,000 external Chinese merchants for online
retail, virtual gaming, digital communications, commercial services, air ticketing, and utility
fee payment transactions.
Popmoney lets you send money from your bank account to anyone using their name and
email address or mobile number. Popmoney was developed by CashEdge (now part of
Fiserve) and is offered through 1,400 US financial institutions (including US Bank and Citi)
and processes nearly $50 billion in online fund transfers annually.
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The Intuit Payment Network was developed to provide small businesses with an
inexpensive way to get paid electronically. The service moves money directly from a
sender’s bank account to a receiver’s bank account for one low flat fee of 50 cents. The
network also offers several other ways to get paid: through QuickBooks invoice links, by
credit card, ecommerce buttons, and through custom web links. Intuit, the maker of
QuickBooks, Quicken, and TurboTax has over 240,000 merchants using the Intuit’s credit
card processing service.
ClearXchange (CXC) was formed in 2011 as the first network created by financial
institutions to let customers send person-to-person payments directly from their checking
and savings accounts with only the recipient’s mobile number or email address. CXC is
equally owned by Bank of America, JPMorgan Chase, and Wells Fargo. Although their
service is just out of pilot mode, the three founding partner banks, when combined, reach
over 50% of all U.S. online and mobile banking customers.
Dwolla was created in 2008 as an alternative payment network to help lower interchange
fees for merchants. Dwolla allows consumers and organizations to send and receive money
for only 25 cents per transaction, no matter how high the transfer amount. The company
currently processes over $50 million per month in transactions and have signed up more
than 100,000 users. Dwolla is currently not licensed as a money transmitter in California.
These developments in payments provide businesses with multiple options for accepting
payments for goods and services. Additionally, these innovations are creating an active
competitive payment processing marketplace where businesses have the ability to price
shop for these services.
The previous list of companies is only a small sample of companies operating in this space.
For a list of money transmitters licensed in California, visit
http://www.dfi.ca.gov/Directory/money_transmitters.html.
Stored Value:
An additional expanding model in the money transmission business is the use of stored
value, typically via a pre-paid card, but new technology is growing the use of stored value
across new mediums. The MTA regulates the issuance of non-bank stored value. The
exempts stored value offered by a bank, or stored value on what is known as a "closedloop" system. A closed loop system is typically a gift card or some other item representing
monetary value that can only be used within the network of a given retailer or merchant.
Money transferred via traditional means using an agent, or via computer can often be
loaded onto a stored value device and provided to the receiver.
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ISSUES & QUESTIONS FOR DISCUSSION:
•
The emerging technologies that bring convenience to the consumer and competition
to the market can create regulator confusion. As these technologies avoid storefront
locations or traditional banking relationships, regulatory frameworks must keep up
in order to remain relevant and clear, not just for consumers, but for those that
desire to innovate.
•
The road to becoming licensed as a money transmitter in California can create
significant compliance costs. These costs can occur before the actual transmission
business is off the ground. Licensing fees, net-worth reserves, bonding
requirements, audited financial statements, as well as, compliance with Federal
money laundering laws are among the costs that payment start-ups must consider.
Many of these costs could be borne multiple times over if a potential licensee wishes
to become licensed in more than one state. Policy makers may want to consider
establishing a scaled approach to licensing in so far as potential transaction volume
dictates net-worth requirements. Furthermore, it may be difficult to mitigate some
compliance costs, but what policies and/or regulations may be necessary to avoid
uncertainty in regards to these costs?
•
The MTA creates a potential chicken and egg scenario. Many start-ups in the
payments business rely on venture capital funding. Funding is difficult when one is
not licensed to conduct business, yet one cannot acquire a license without sufficient
funding. Furthermore, this conundrum creates difficulties in creating pilot projects
or limited test runs of products because these market tests could be illegal, yet it is
difficult to determine success of an innovation without testing.
•
Do we need a clearer definition of “money transmission” to clarify when a business
that is sending money from point A to point B is not engaged in transmitting
money? Additionally, what clarifications may be needed to ensure that the MTA
statute provides for functional regulation with a rapidly changing payment system
landscape?
•
What can policy makers do to ensure a correct balance between removing barriers
to market entry while also providing sufficient state oversight?
•
Each state has its own set of money transmission requirements that all differ from
each other to varying degrees. As mentioned previously, these differences can
potentially create barriers for new companies. Often, the requirements of different
states may be slightly different, but functionally the same in wanting to ensure that a
licensee is not financially over-leveraged and that consumers are appropriately
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protected. However, policy makers and regulators may wish to consider efforts to
create some uniformity, or even reciprocity in licensing. However, before
embarking on creating the potential for reciprocity it is vital that California
standards are standards that other states may wish to copy and in turn, offer
reciprocity for California licensees. Policy makers may want to consider
encouraging California regulators to work with other state regulators to design
more uniform regulations and standards.
•
An idea circulating among some observers is that the Legislature should repeal the
MTA. This idea may reflect frustration with compliance and regulatory difficulties
facing existing and potential future licensees, a repeal of the MTA would lead to
dangerous consequences. First, the repeal of the MTA would not provide the state
with specific enforcement and licensing authority over entities that transmit money,
issue payment instruments (money orders, traveler's checks) or non-bank issuers
stored value. A complete repeal of the MTA could leave California with little
oversight over entities that take consumer money and transfer it to other parties. If
an entity offers services as a payment system that has no net-worth or bonding
requirements then what protections would consumers have to recover lost funds, or
for the state to hold them accountable? The purpose behind financial asset
requirements is to ensure that if the consumer's funds are in jeopardy they have
some recourse for potential recovery. This is not to say that numerous federal laws
and regulations don’t also regulate this area of operations. However, just like
mortgage lending, the state has a vested interest in maintaining authority over
practices that directly impact California consumers and specifically the safety and
soundness of these entities.
Legislative Responses:
On February 21, 2013 Assemblymember Dickinson, Chair of Assembly Banking & Finance
introduced AB 786. Initially, this legislation includes clarifications on issues relating to networth requirements, the use of certain types of accounts to fulfill liquidity requirements,
clarifications on what entities are not money transmitters, and enhanced enforcement
powers. AB 786 is viewed as a starting point for further discussion involving reform of
California's MTA.
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EXHIBIT C
March 11, 2013 California State Assembly Banking and Finance Committee Hearing
Transcript
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1
CALIFORNIA STATE ASSEMBLY
COMMITTEE ON BANKING AND FINANCE
2
3
4
5
TRANSCRIPT OF OVERSIGHT HEARING
EMERGING TECHNOLOGY AND THE CALIFORNIA MONEY TRANSMISSION
ACT
6
7
8
MARCH 11, 2013
2:00 P.M.
CALIFORNIA STATE CAPITOL, ROOM 444
9
10
APPEARANCES:
11
Chair, Assemblyman Roger Dickinson (Dem – 7)
Vice Chair, Assemblyman Mike Morrell (Rep – 40)
Assemblyman Katcho Achadjian (Rep – 35)
Assemblyman Ed Chau (Dem – 49)
12
13
14
15
Teveia Barnes, Commissioner, California Department of
Financial Institutions
Thomas Brown, Lecturer, UC Berkeley Law School and
Partner, Paul Hastings, LLP
16
17
John Muller, Vice President and General Counsel,
PayPal, Inc.
18
Michelle Jun, Senior Attorney, Consumers Union
19
Rob Barnett, Vice President and Assistant General
Counsel, Automatic Data Processing, Inc.
20
21
Aaron Greenspan, President & CEO, Think Computer
Corporation and CodeX Fellow, Stanford Law School
22
Ron Garret, Ph.D., Entrepreneur, Investor
23
Manuel Cosme, California Chairperson, National
Federation of Independent Business
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1
1
HEARING CALLED INTO SESSION
2
(2:00 P.M.)
3
4
CHAIRMAN DICKINSON:
We will call the Banking
5
and Finance Committee to order for our hearing of March
6
11th, 2013. Welcome to those of you who have joined us this
7
afternoon.
8
schedule since we’re anticipating being back in session on
9
the floor at about 3:45 to hear from the Chief Justice today
As you may know, we’re on a somewhat limited
10
for her State of the Judiciary.
11
started here even in the absence of a few more members.
12
Hopefully we’ll have some come join us during the course of
13
the hearing, but I do want to give a chance for those we’ve
14
asked to come testify to be able to do so without being too
15
— too truncated.
16
So we’re going to get
So, we’ll get started.
California is at the center of technological
17
innovation and development.
18
and proud of that fact.
19
and innovation, especially in our collective wisdom and our
20
intellectual power that resides with those who lead tech —
21
the technological revolution in our state, in our nation,
22
and indeed around the world.
23
that emerges almost on a daily basis is rapidly changing the
24
world around us as well.
25
I think we’re all both aware
Our state is a wealth of knowledge
And in fact the technology
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2
1
Among the developments in the financial
2
services field, the way in which we send money, either for
3
goods or services, or to family and friends, is one of those
4
areas that has been rapidly evolving.
5
by the Federal Reserve, 21% of mobile phone owners have used
6
mobile banking in the last twelve months.
7
currently using mobile banking think that they probably will
8
use it within the next twelve months.
9
of mobile banking is to check account balances or recent
According to a survey
11% of those not
The most common use
10
transactions.
11
the second-most common use of mobile banking.
12
payment users transferred money directly to another person’s
13
bank, credit card, or PayPal account.
14
“underbanked” make comparatively heavy use of both mobile
15
banking and mobile payments, with 29% having used mobile
16
banking and 17% having used mobile payments in the past
17
twelve months.
18
And transferring money between accounts is
21% of mobile
Interestingly, the
The U.S. mobile payments market is predicted
19
to reach $90 billion by 2017.
20
payments are expected to reach $534 billion by 2015, and the
21
percentage of payments made using mobile technology is
22
expected to increase year-over-year.
23
other states, the regulation of remittances and mobile
24
payments falls under the Money Transmission Act, or MTA.
25
The MTA regulates the non-bank, foreign and domestic
Traditional global remittance
In California, as in
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transfer of money and issuance of stored value.
2
under the MTA must demonstrate appropriate financial
3
capacity reserves for safety and soundness.
4
Licensees
The purpose of our hearing today is to give
5
us an overview of the interaction between this law, the
6
current MTA, and growing and changing technology.
7
in which we move money are complex, with an ecosystem made
8
up of mobile payments, internet applications, point of sale
9
applications, SMS remittances and traditional face-to-face
The ways
10
transactions.
11
to be a starting point to bring some common sense reforms to
12
our money transmission laws.
13
account for the changes in technology and ensure that we do
14
not inhibit innovation even as we maintain appropriate and
15
sufficient consumer protections.
16
with the members of — of the Committee, of interested
17
parties and stakeholders, as we move forward with, with
18
considering how best to shape this legislation to accomplish
19
the objectives that I’ve, that I’ve just enumerated.
20
I have introduced AB 786 as a bill designed
Hopefully so that it will
I look forward to working
With that I’ll ask our Vice Chair if he has
21
any comments he’d like to make before we go to our
22
witnesses.
23
VICE CHAIRMAN MORRELL:
No, not a whole lot
24
of comments but it’s good to be here.
And um, we’ve got a
25
lot on our agenda this year; a lot of complicated issues and
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I’m sure we’ll get through them, and — so thank you for
2
everything Mr. Chair.
3
CHAIRMAN DICKINSON:
Thank you.
With that,
4
we’ll ask our first witness, Commissioner Barnes from the
5
Department of Financial Institutions if she would come
6
forward and join us for whatever remarks she would like to
7
make.
8
9
COMMISSIONER BARNES:
Thank you, Chairman
Dickinson and Vice-Chairman Morrell and — .
10
CHAIRMAN DICKINSON:
11
COMMISSIONER BARNES:
Good afternoon.
And, uh, given the
12
truncated time that we have this afternoon I am fine with
13
simply starting with your questions and going from there.
14
CHAIRMAN DICKINSON:
15
COMMISSIONER BARNES:
16
CHAIRMAN DICKINSON:
That would be fine.
Any questions?
So, let’s start with,
17
how do you see the operations currently, of, of the
18
Department with respect to regulating money transmissions,
19
how is the implementation of the MTA working in your view at
20
this point?
21
COMMISSIONER BARNES:
22
CHAIRMAN DICKINSON:
Thank you.
Maybe, I’m sorry, maybe
23
we should just back up a step and for some — we have some
24
new members and others who may not be so familiar with this,
25
with this area, so perhaps you might take a minute or two
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and explain what it is that the Department’s doing with
2
respect to the MTA’s implemenation and then — and then we
3
can go from there to other questions.
4
COMMISSIONER BARNES:
The Money Transmission
5
Act, what we call the MTA, was actually a combination of
6
three different Acts: the Traveler’s Check Act, the Payment
7
Instrument Law, and the Transmission of Money Abroad Law —
8
were all brought together in 2010 in an effort by actually,
9
this Committee, to streamline the regulatory requirements
10
that were put upon financial institutions, financial service
11
providers that were doing money orders, traveler’s checks,
12
and money transmission.
13
doing money transmission regulations on licensees that
14
transmitted funds abroad.
15
Transmission of Money Abroad Law had been in existence from
16
what I can gather well over sixty years.
17
law.
18
At the time in 2010 we were only
And the money transmission; the
So it wasn’t a new
What happened in 2010 in bringing these three
19
laws together is that in the interest of consumer
20
protection, uh, California decided to streamline the
21
regulatory burden because we had some companies that were
22
required to get three different licenses all regulated by
23
the DFI; so if they issued money orders, traveler’s checks
24
and payments abroad, it was considered a burden and everyone
25
could understand that they would consider it a burden to
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have three separate licenses with three separate types of
2
examination process.
3
in 2010 with the understanding that while there was a need
4
to streamline the law, the legislature also, it is my
5
understanding at looking at the legislative intent — wanted
6
to maintain the protection of the consumer, and the DFI
7
views the MTA as we now — as it is now enacted and we’re
8
administering it — as a consumer protection act.
9
in mind, we saw that in 2010 effected — effective as of
So to bring those three laws together
With that
10
January 1st, 2011, the MTA now covers not only transmissions
11
abroad, but also domestic transmission.
12
non-bank open-loop stored value, and by stored value, it’s
13
the, it’s the, um, the cards, or any medium where you can
14
have value, money, use your credit card to um — or the
15
internet — to set aside value that the consumer can use to
16
redeem products and services.
17
It also now covers
The MTA made it clear and continued the
18
concept that if the stored value was used like a Starbucks
19
card, and Starbucks issued a card, a stored value card, and
20
that consumer used that card only to purchase Starbucks
21
products that that transactions, those, that, um, activity
22
would not be regulated.
23
used to purchase other products and services from third
24
parties, that would be regulated.
25
way to think about it, and the way we think about it as DFI,
However, if the stored value was
And I think the easiest
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and recognize that we are the regulators for other
2
institutions who hold other people’s money in trust.
3
regulate banks, we regulate credit unions and while it’s not
4
a deposit, we view the holding of other people’s money as —
5
as a trust.
6
it, in a manner to make sure that the institutions who have
7
a license and who we regulate are operating in a safe and
8
sound manner because they’re holding consumer funds in
9
trust.
10
We
And the Money Transmission Act, we administer
The MTA in 2010 expanded the safety and
11
soundness licensing to keep pace with new technologies while
12
at the same time continuing to protect the consumer.
13
technology and the internet was very much top of mind when
14
this law was expanded to include domestic transmissions as
15
well as internet fund transmissions.
16
raised as to whether or not the MTA is working as intended.
17
I strongly believe that the MTA is working as intended.
18
actually think that the fact that we’re having a hearing
19
today to talk about the MTA and how it’s being applied and
20
administered by DFI is one more indication that it is
21
working as intended, because the bulk of the comments that
22
we have received in understanding the MTA have come not from
23
the licensees in the financial sector, but from the
24
licensees in the technology sector and in the internet
25
sector.
So
The question has been
I
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And I want to be clear that DFI does not
2
regulate technology.
3
regulate the internet.
4
as enumerated in the law — which as the Commissioner I am
5
tasked with implementing and enforcing — our role is to
6
protect the consumer, ensure that the financial institutions
7
who hold other funds — other people’s money in trust, do it
8
in a safe and sound manner, that they not only have the
9
capital that they need, but they also to start a business —
10
but they also have the wherewithal to continue the business
11
that they will be in existence beyond the initial three
12
years that, uh, their management has the skills and the
13
experience to protect these funds and to operate with
14
policies and procedures that are safe and sound, um, and
15
that they’re following the law.
16
only California’s laws, but the Bank Secrecy Act laws, the
17
Money Trans — um, the um, money laundering laws, and some
18
other similar laws that have come out of Washington as well
19
as California to protect the consumer.
20
working as intended?
21
still work that can be done.
22
We don’t regulate software; we don’t
That our role and responsibilities
It is.
That they’re following not
So yes, is the MTA
That being the case, there’s
I am almost celebrating my one-year
23
anniversary with the Department of Financial Institutions as
24
Commissioner.
25
bulletin we announced that we will be issuing regulations to
And in January, in our January monthly
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provide some clarity and information because I think the
2
folks who have questions about the Money Transmission Act
3
are those who come from the technology side and from the
4
internet side, and we, uh, intend to add some clarity to
5
that process.
6
Thank you.
CHAIRMAN DICKINSON:
Thank you.
I’m glad you
7
answered that — the question about, “is the MTA working as
8
intended from your point of view?”
9
letter inviting you here this afternoon we had a number of
As you know, in the
10
additional questions.
11
through those, and then we’ll see if the Committee members
12
have other, other questions.
13
how many entities are currently licensed under the MTA; how
14
many are currently under consideration; of those that have
15
applied, how many licensed have been denied and what were
16
the reasons for denial.
17
So maybe, maybe we could just go
So the — the next question is
COMMISSIONER BARNES:
Right.
We have
18
currently have 23 that have MTA licensees — licenses.
There
19
are 20 applications that are, um, under consideration.
Of
20
those who have applied, no one has been denied.
21
also give you some additional information, we’ve had 42
22
applications that have been filed since January 1, 2011.
23
Um, we have issued 26 new licenses since January 1, 2011,
24
and we have, uh, advised over 20 entities that they are not,
25
Just to
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um, they are, do not come under the Money Transmission uh,
2
Act.
And a couple of more statistics that might be helpful.
3
When the MTA was being discussed in 2010, DFI
4
at that time, had expected, rightly or wrongly, expected
5
about five to seven applications a year.
6
expect 42 applications in the last uh, two years.
7
so, I think, uh, in addition to the 42 applications they
8
have had over 130 —
9
Oh.
We have 73 licenses.
10
Seventy — we have 73 licenses.
11
somebody.
Yes.
They did not
And, um,
What did I say?
I thought I had missed
12
But we also have had over 130 inquires in the
13
last two years, which far exceeds any inquiries in any other
14
licenses that we have.
15
have both regulations and orders with respect to the Money
16
Transmission Act: to give clarity to, um, how we are, uh,
17
administering these laws — this law.
18
And so that’s why it’s important to
CHAIRMAN DICKINSON:
So you — you referred to
19
42 applications and 26 licenses granted in this.
20
that in the last…
21
COMMISSIONER BARNES:
22
CHAIRMAN DICKINSON:
23
COMMISSIONER BARNES:
24
CHAIRMAN DICKINSON:
25
Now, was
Two years.
In the last two years.
Mm-hmm.
So — and no denials.
Does that mean that there are 16 still under consideration?
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COMMISSIONER BARNES:
There’s actually 20 if
2
my add — if my math isn’t adding up.
Some companies have —
3
may have withdrawn their application.
So in the process —
4
uh, the uh, the application process we actually, um, reach
5
out to companies, or companies that reach out to us — we
6
have pre-filing meetings where we sit down with them, um, to
7
understand their business.
8
has control of the funds — basically, flow charts, to follow
9
the money.
We look at who owns the — who
Where’s the money?
Who has — who has the money?
10
Whose name’s on the money?
11
Uh, and there have been applications where we have
12
determined in sitting down with the applicants that they
13
actually are not in control of the money, someone else is in
14
control of the money — someone who has a license is in
15
control of the money, and so, uh, we have given them, uh,
16
clarification that if they continue to operate in that
17
manner then they would not fall under the MTA.
18
Um.
And how do they control it?
I think the other thing that has happened is
19
there have been, as part of these pre-filing meetings, uh,
20
some companies in the process of their application may
21
determine that it’s better for them to, um, uh, work with
22
another, uh, entity, like a bank that we regulate in DFI so
23
that they don’t require a money transmission license.
24
so someone may either put their application, um, um — I
25
wanna say “pause” — they might wanna suspend their
And
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application for a period of time to see if they can partner
2
with another licensed money transmitter, or they might
3
decide to withdraw their application completely.
4
CHAIRMAN DICKINSON:
So, so — so is it then
5
correct — there’s somewhere between 16 and 20 — in that
6
neighborhood — applications pending?
7
8
COMMISSIONER BARNES:
So, actually pending…
Currently, there are 20 under consideration.
9
CHAIRMAN DICKINSON:
Okay.
Uh…
And can you
10
describe for us the average length of time it takes to get
11
an application through the process, recognizing some
12
instances that, as you just described, people will suspend
13
their application for one reason or — or another.
14
COMMISSIONER BARNES:
Right.
Our — our
15
internal performance goal is to process applications within
16
120 days.
17
average 95 days to process.
18
that if we are talking to an applicant and they ask us to —
19
if we ask for additional information, or they’re in, uh,
20
merger discussions — they’ll ask us to suspend their
21
application until they come back to us.
22
active process, and it’s not been suspended, it takes an
23
average, um, I would say 95 days — between 92 and 96 days.
24
25
We actually average around, between I would say —
And, and…
CHAIRMAN DICKINSON:
But bear in mind
But while it is an
So except for those that
may be in some state of suspension, at the initiation of the
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applicant for, for the applications that are currently under
2
consideration, we could conclude that those were filed some
3
time within the last four to five months?
4
COMMISSIONER BARNES:
N — no.
There… I…
5
Some have been filed within the last four to five months and
6
some have been longer…
7
8
CHAIRMAN DICKINSON:
I’m just taking you at
your 95 days, roughly for processing.
9
COMMISSIONER BARNES:
Right.
95 days for
10
processing.
11
additional information.
12
to an applicant, and, um, we’re trying to determine their
13
source of capital, their source of strength, and they have a
14
parent company and they’ve provided us with information
15
about their, um, their, the, the money — the applicant, but
16
not necessarily their parent, or there’s an additional
17
source of, uh, of, of, um, capital for them we may ask for
18
additional information from them on that.
19
period they may ask us to suspend the application while they
20
gather that information for us.
21
And we also, there are times when we ask for
So, for example, if we’re talking
CHAIRMAN DICKINSON:
And during that
Some have said that they
22
feel the barriers to — to, uh, getting approval, are, um,
23
too steep.
24
especially if they are smaller volume — intend to operate on
25
a smaller volume, dollar volume, in their money transmission
The bonding and some of the other requirements
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work.
2
would allow you to comment on that concern that’s been
3
raised?
Have you seen anything, or made any observations that
4
COMMISSIONER BARNES:
5
Money transmitters who are applying for a
6
license are asking the State, now that we are regulating
7
them, to be allowed to hold other people’s money. Lots of
8
money.
9
billions of dollars of other people’s money, for some period
Uh…
We’re talkin’ hundreds of thousands into the
10
of time.
11
of them hold them for…months.
12
for much longer periods of time.
13
other people’s monies in the same vein as I view holding
14
bank deposits and credit union deposits.
Some of them hold them for a couple of days.
15
Some
Some of them can hold them
I view the holding of
The criteria that is in the MTA in terms of
16
fees has been in existence for money transmitter who
17
transmitted monies abroad since 1989.
18
fee schedules — since 1989.
19
requirements are actually less than the capital requirements
20
that we would insist on for a de novo bank or a de novo
21
credit union.
22
Commissioner I am required to consider.
23
the MTA’s list of inquire — items to be considered, as well
24
as what I’m supposed to determine is again there to protect
25
These are the same
These — the capital
The MTA lists some twenty-odd items that as
And, I believe that
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the consumer.
2
consumer.
3
Each of these provisions is to protect the
I would hope that applicants, even if there
4
weren’t a Money Transmission Act, that they would understand
5
that the business that they are going into is a very serious
6
business — when you’re holding other people’s money in
7
trust.
8
a storm.
9
customers if there should be some difficulties in your
And that you should have adequate capital to weather
You should have adequate reserves to protect your
10
financial condition.
11
whether it’s a barrier to entry.
12
are these protections for the consumer appropriate.
13
were appropriate since — for over sixty years for the money
14
transmitters who were transmitting it abroad.
15
similar to the provisions that protect consumers at banks.
16
And they’re similar to the provisions that the members of a
17
credit union.
18
I think they’re consumer protections.
19
20
So, I don’t think of it in terms of
I think of it in terms of,
They
They’re
So I don’t think they’re barriers to entry.
CHAIRMAN DICKINSON:
Okay, thank you.
Um,
Mr. Achadjian?
21
ASSEMBLYMAN ACHADJIAN:
Thank you, Mr. Chair.
22
A question on holding onto somebody else’s money.
23
why they shouldn’t hold onto somebody else’s money for
24
longer than, maybe, the hours or the few days it requires to
25
clear a check.
I can see
If you were to deposit a check, large check
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with me, or regardless of the amount, and now, if you don’t
2
have a working relationship with a given bank, in other
3
words, they don’t know of your background, they probably
4
want to hold onto that amount until the check clears the
5
other side before they release the, the cash.
6
good — makes good business sense if it’s done properly for
7
the duration that it takes to clear a check.
8
were to deposit a check in a savings account, and you were
9
able to collect interest from the moment you deposit — which
I see that
Even if you
10
is great — but if you were to take money out, they probably
11
say, “not for 24 hours,” or “72 hours,” just to be sure that
12
the check is going to clear the other bank that the person
13
did have checks.
14
check, then turn around, write a check on that money knowing
15
that it’s gonna bounce, or it’s a fraud, so, when you come
16
up with regulations, what are you taking into consideration,
17
not just to protect the consumer, but also protect those who
18
are in the business of serving the consumer?
Otherwise, anyone can come and deposit a
19
COMMISSIONER BARNES:
20
First and foremost I’m going to be thinking
Uh…
21
about the consumer.
22
safety and soundness of the financial service company.
23
so, in looking at the regulation, um, we’ll be looking at
24
whether they’re in good funds.
25
question is going.
I’m also going to be thinking about the
And,
I think that’s where your
I’m not going to want to put the
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financial services company, um, at risk, for, uh, if the
2
funds aren’t — aren’t available.
3
But in our regulations of and supervision of
4
money transmitters that’s really not been an issue.
5
an issue has been, uh, last week we received a, uh,
6
complaint from a lawyer whose client, uh, is an employer,
7
who, the employer company is in California and the employer
8
hired a payroll processing company outside of the State of
9
California to do their payroll.
More of
And the payroll process —
10
let’s say non-California payroll processing company was —
11
was doing payroll for a California company and they were
12
supposed to take the funds from the employer and then write
13
checks to their employer’s employees and also do the
14
withholding and pay the federal and state taxes.
15
non-California payroll processing company did not make the
16
payroll for the employer, did not pay the taxes or do the
17
withholding, and as a consequence, both protecting the
18
employer who now has to still have that liability to do the
19
taxes, and still has the liability, uh, to their employees —
20
has to make up those funds.
21
out-of-state California — and we’re looking into whether or
22
not they should have applied for a license — if we were
23
regulating that company, we would be looking at their
24
processes and, and policies and procedures for how they take
25
monies and how they distribute the monies in accordance with
And this
And if we were regulating that
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the instructions in the contracts that they have with their
2
customer, which is the employer.
3
ASSEMBLYMAN ACHADJIAN:
That — that’s
4
something I’m with you, I have no problem there.
5
companies are outside California, are they required to be
6
bonded?
7
COMMISSIONER BARNES:
The
Well they’re required —
8
required to be licensed.
If there was…
9
into this, just came in.
But let’s say, hypothetically,
We’re still looking
10
they did take the money from the California, uh, company,
11
the employer, um, and they did have control of those funds,
12
they, under the MTA, should have been licensed.
13
have…
14
soundness perspective, which would have…
15
continue to exist, uh, in California?
16
and sound manner?
17
making sure they have good funds before they let the funds
18
released?
19
protection laws in the State of California as well other
20
consumer protection laws as well as Bank Secrecy and money
21
laundering.
They should
We should be looking at them from a safety and
Are they going to
And operate in a safe
Which deals with your question about
And also are they in compliance with consumer
22
ASSEMBLYMAN ACHADJIAN:
And I’m all with you
23
that policies should apply for outside, or even inside,
24
California.
25
are licensed and insured.
They do comply with California laws; that they
In case they go bankrupt we don’t
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want people who our payroll depends on that, that they’re
2
down the wire like the company has.
3
COMMISSIONER BARNES:
Right.
In California
4
there’s not insurance like FDIC insurance, or for credit
5
unions, NCUA insurance, but there’s in the MTA, and had been
6
in the MTA, for, because of our former laws with, uh, Money
7
Transmission Abroad, the concept of eligible securities.
8
And, money transmitters even before 2011 in California are
9
required to maintain eligible securities, which is
10
effectively, um, liquidity, and also protection for the
11
consumer if the money transmitter were to go into bankruptcy
12
that there should be eligible securities equal to 100% of
13
their money transmissions and stored value, uh, in the
14
United States.
15
functional equivalent of, um, uh, the, uh, the FDIC
16
insurance or NCUA insurance.
17
important to have money transmitters licensed in California
18
so that we can give assurances and regulate that they are in
19
compliance with the eligible security requirements as well
20
as the bonding requirements.
And so that is what I consider the
So that’s why it’s also
21
CHAIRMAN DICKINSON:
22
ASSEMBLYMAN CHAU:
Thank you.
Thank you.
Mr. Chau?
Uh, uh, yes, I
23
have two questions.
24
my colleague’s question.
25
state or not, are required to post a surety bond in short,
First of all, um, this is follow-up to
So all licensees, whether out-of-
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1
or no?
2
the amount of the money being transferred?
Or do — do they need to have enough assets to cover
3
COMMISSIONER BARNES:
Yes, all licensees have
4
an eligibility requirement.
5
operate completely outside of California, so they are in
6
another state, you know…
And the question is, if they
7
ASSEMBLYMAN CHAU:
8
COMMISSIONER BARNES:
Right.
They’re in Hawaii, they
9
uh, only deal with consumers in Hawaii; they have no
10
transmissions in California, we do not license them.
11
all licensees; money transmitter — money transmission
12
licensees in California are required to maintain eligible
13
securities equal to 100% of…
14
15
ASSEMBLYMAN CHAU:
But
Of the money being
transferred?
16
COMMISSIONER BARNES:
17
ASSEMBLYMAN CHAU:
Right.
So then that, actually,
18
that number fluctuates, uh, depending on, you know, what the
19
amount of the trans — you know, the funds being transferred…
20
21
COMMISSIONER BARNES:
Yes, it — yes, it can
fluctuate, yes.
22
ASSEMBLYMAN CHAU:
Now second question, just
23
to follow up on your opening remarks, you said that the MTA
24
is operating, uh, as intended, yet there is room for
25
improvement.
Essentially, that’s what you said.
And I
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1
think the chair, um, posed one question in reference to the
2
application process.
3
application process could be streamlined probably.
4
besides that issue, what other issues, um, do you see that
5
we need to look into.
6
system a little bit more?
7
Um, so, I think that — that
But
For example, how do we improve the
COMMISSIONER BARNES:
Okay.
Well first, I
8
want to be clear that in adding clarity to the MTA I believe
9
the orders and the regulations that we’re going to be
10
issuing will add clarity and help to improve the process,
11
but I…
12
is very important because that app — all those items that
13
have been listed to be considered I think are very, very
14
important for, uh, whoever is regulating money transmitters;
15
whoever is holding other people’s money, whoever is
16
effectively holding a deposit of somebody else’s money.
17
I have to tell you, I think the law as written today
All of those items that are listed, are
18
really, I wouldn’t necessarily streamline that, except to
19
the extent we determine…
20
keep them in the law, and, but clarify in the regulations
21
that, for example, if we were to identify a, a money
22
transmitter that I would say is low-risk, like they have
23
only one product, and one geographic, they don’t do anything
24
internationally, it’s really simple, they don’t take cash…
25
In looking at everything, um, listed in the MTA to be
I would keep them on the books,
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1
considered by DFI, what already — uh, the MTA already allows
2
the Commissioner to take all of those things into
3
consideration, uh, and look at the quality of the
4
management, the assets, and the sorts of strength for the
5
applicant.
6
tools away — to say that you don’t have to send financial
7
statements for the last three years.
8
— be able to look at the quality of the earnings, you know;
9
are there any iss — balance sheet issues.
But I would not, um, want to take any of these
We would want to look
Those protections
10
I would say need to remain.
11
some clarity from a regulatory perspective as to how we look
12
at all of these items.
By the same token, we can give
13
ASSEMBLYMAN CHAU:
14
COMMISSIONER BARNES:
So then…
Because we don’t treat
15
every applicant — it’s really an art form in the sense that
16
we don’t treat every applicant exactly the same.
17
transmitter that’s been operating in thirty-five states that
18
comes to us, you know we’re going to be able — and they’re
19
being examined by other states — we’re going to have the
20
benefit of those prior examinations.
21
states in developing joint exams and joint protocols.
22
have the flexibility to be able to look at that money
23
transmitter, go down the list, but how we get comfort on all
24
of these items may be a different — a different way.
25
that we’re getting comfort from some of their other
So a money
We work with other
So we
It may
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1
examinations.
2
of these areas are important to consider to protect the
3
consumer, and I would ask that if there are amendments to
4
the Money Transmission Act, which is certainly within your
5
purview to do — and you did in 2010 — that we don’t do
6
anything that’s going to harm the consumer.
But I think all of these indicia of risk, all
7
ASSEMBLYMAN CHAU:
8
CHAIRMAN DICKINSON:
9
Sure.
Do you have one — any
more — one more follow-up?
10
ASSEMBLYMAN CHAU:
Just one quick; I’m sorry.
11
Um, how do we, the State of California, stack up against
12
other states in terms of, um, procedures or otherwise, or
13
whether or not…
14
are we just about, uh, on the average, just similar to other
15
states?
16
Are we more stringent than other states, or
COMMISSIONER BARNES:
Um, we were — so the,
17
my un — we were the last state really to come in 2010 to the
18
party of regulating.
19
provide greater protection for our consumers.
20
there are some money transmitters that are startups
21
that…decided to go to other states to…start their business.
22
Um, uh, or they’ve decided to work with, um, money
23
transmitters that are already licensed here.
24
protect our consumers better than some other states.
25
haven’t done a, uh, a state-by-state comparison.
I think, um, uh, eh, I think we
I know that
I think we may
I
I did see
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1
the 50-state analysis.
2
California has more money transmissions than any other state
3
in the Union.
4
California in terms of money transmission don’t add up to
5
how many money transmissions that we have in this State.
6
And so, I think for, for, for those reasons it is important
7
to maintain that while we may be different from other — from
8
our sister states in how we regulate money transmissions,
9
um, there’s a reason for that difference.
Um, but I would also caution that
In fact, the next three states under
And that being,
10
uh, a State where technology, innovation, is key, and where
11
technology and innovation is going to be developed in a
12
manner that’s going to make it easier and better for
13
consumers to put funds in the hands of other people, I think
14
that’s a good thing.
15
use those — those technologies myself.
16
be sure that California continues to protect, uh, the
17
consumer.
18
I encourage it.
CHAIRMAN DICKINSON:
I want to be able to
But I also want to
One last thing, uh… Have
19
you seen instances where, uh, an application hasn’t been
20
pursued or has been stymied by the necessity of, of
21
obtaining the bonds and the securities that we’ve been
22
talking about, and yet it’s difficult to get them because a
23
license hasn’t been, um, issued.
24
issue.
25
It’s a chicken and egg
Have you seen any of that in the applications?
COMMISSIONER BARNES:
We have…
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1
We have a lawsuit before us so I can’t say I
2
haven’t seen it.
3
individual, a company, who have made, um, those and similar
4
assertions.
5
If this Committee would be interested in having a better
6
understanding of DFI’s response to those types of statements
7
and allegations, we can share with you our briefs.
8
9
10
Um, I’m not at liberty to really discuss that.
We are being represented by the Attorney
General’s office, and um, I think the briefs might be able
to give you guidance, better guidance, in that regard.
11
12
We have a laws — we have been sued…by an
CHAIRMAN DICKINSON:
interested in that.
I think we would be
Thank you, Commissioner.
13
COMMISSIONER BARNES:
14
CHAIRMAN DICKINSON:
Thank you.
I appreciate your, uh,
15
comments this afternoon.
16
panel.
17
have Thomas Brown, who is a lecturer at the UC Berkeley Law
18
School, and a partner in Paul Hastings LLP; John Muller,
19
Vice-President and General Counsel of PayPal, Inc.; Michelle
20
Jun, uh, Senior Attorney, Consumers Union, or “Yoon,” I’m
21
not sure, is it…
And now we will turn to our, our
And if you could please, uh, come forward.
22
MS. JUN:
23
CHAIRMAN DICKINSON:
First we
It’s “Juhn.”
Jun, okay.
Um, Rob, Rob
24
Barnett, Vice-President and Assistant General Counsel at
25
Automatic Data Processing, Inc.
And thank you, um, thank
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you for being with us this, this afternoon.
2
our time if you could try to keep your opening remarks to
3
about five minutes, then that’ll give the Committee members
4
time to delve into the issues with you.
5
agreeable to you, if we could just go in the order that I
6
introduced each of you, so Mr. Brown, you’d be first.
7
MR. BROWN:
And in light of
And if it’s
Thank you Chairman Dickinson and
8
members of the Committee, it’s an honor to be here to talk
9
about a – a subject that tends not to get the same level of
10
attention, uh, on an annual basis as the business of moving
11
money from place to place.
12
about the ability to engage directly with financial services
13
via um, an iPad or an iPhone or another instrument of mobile
14
technology that seems to get people excited and I think
15
helps to explain some of the reason why we’re all – why
16
we’re all here.
17
There’s — there’s something
Um, I’ve provided written testimony to the
18
Committee and, and am open to taking questions on anything
19
that I addressed there.
20
make, um, a couple of very short points and then save time
21
to take questions.
22
With my oral remarks I wanted to
So the first is that, um, uh, the, the
23
consumer financial services industry both, um, in the State
24
of California, in the United States, is – and is
25
appropriately – a highly-regulated business.
Um, uh, and
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the set of statutes that govern this business include things
2
like the Truth In Lending Act, uh, the Electronic Funds
3
Transfer Act, uh, in the State of California we of course
4
have the Money Transmission Act, and, and, the consumers’
5
interests in interacting with financial services are largely
6
met through those traditional, um, consumer protection
7
statutes.
8
indust — for industry participants that are interested in
9
being in this business, and those relate to the primary
There are a separate set of requirements for
10
reason that we’re here, and are reflected in things like the
11
California Money Transmission Act.
12
that fall under the general heading of safety and soundness.
13
Um, how much money do you need to have in order to support
14
the activity associated with your program?
15
Assemblymember Achadjian and Assemblymember Chau asked a
16
question about capitalization requirements with respect to
17
businesses that are interested in moving money from one
18
consumer to another.
19
embellish a little bit on what, um, Commissioner Barnes
20
offered is: they’re actually threefold in California.
21
And those are the issues
So, um, both
And the answer, um, uh, just to
So one is if I receive money, um, to transmit
22
it to another, I am required to hold eligible securities
23
that back those funds on a dollar-for-dollar basis.
24
distinguishes the money transmission business from the
25
banking business.
So that
So, the banking business, we sometimes
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1
talk about fractional deposits?
2
of volume that the bank is holding they need to hold some
3
fraction of that in eligible securities.
4
the money transmission business, to be clear, right, a
5
business that we theoretically think of as “less regulated,”
6
uh, you are required to hold a dollar in eligible securities
7
for every dollar of float volume.
8
the capital requirement.
9
Right, so for each dollar
So if you were in
So that’s one element of
You’re also then required to have, to meet a
10
certain threshold of capitalization.
11
the minimum threshold as $500,000.
12
California, uh, that threshold is, um, the minimum is two
13
million, uh, or, up, up...
14
$2,000,000.
15
So the statute sets
As a practical matter in
As a practical matter it’s
Um, then the third is that you’re then on top
16
of both the capitalization requirements – so the equity on
17
your balance sheet, in addition of course to having that
18
one-to-one dollar backing of every volume in the system,
19
you’re then required to post a bond.
20
extraordinary amount of safety and soundness for a business
21
that at the end of the day is not all that complicated.
22
One.
23
out in my testimony was that, that even though I obtain a
24
license in California, to the extent I seek to offer that
25
service on a nationwide basis, I then have to get a license
Right.
This is an
And then two, all of the themes that I sort of laid
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1
in each state.
2
survey that I put together of, um; the handy bible of state
3
licensing requirements.
4
license in each of the states in which you do business.
5
I believe that that is an onerous load of regulation on the
6
safety and soundness side.
7
articulated in her remarks, has suppressed innovation both
8
here in the State of California, uh, and around the country.
9
It makes it more difficult to achieve the electronification
And, and some of you may have seen the
Uh, you’re required to obtain a
And
And, as the Commissioner
10
of payments, which is something that all of us in California
11
have an interest in facilitating.
12
that I wanted to articulate and I’m happy to take any
13
questions.
14
15
CHAIRMAN DICKINSON:
So those are the points
Thank you.
We’ll turn
to Mr. Muller.
16
MR. MULLER:
Thank you.
Thank you, Chairman,
17
and thank you to the other members of the Committee for the
18
opportunity to testify.
19
Vice President and General Counsel at PayPal, a California
20
company based in, in San Jose, and part of the eBay family
21
of companies.
22
been regulated under the Money Transmission Act and its
23
predecessor since 2002, so, more than ten year now.
24
that is part of a – a decision we made fairly early on in
25
the company’s history about the company’s business model.
My name is John Muller, and I’m the
We’ve been in business since 1999 and we’ve
Um, and
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Um, and really our, our attempt to follow customer demand.
2
Um, the company started, uh, with the, the hot mobile device
3
of its time, which was the Palm Pilot, and an assumption in
4
1999 that soon most people would own Palm Pilots and they
5
would all want to send each other money through the Palm
6
Pilot.
7
wasn’t the case, um, but that there was an interest in
8
people using the internet and e-mail, which were much more
9
widely distributed, um, as the method for sending each other
10
money, and then we quickly learned that in fact, most people
11
wanted to use this new payment method, not just to send each
12
other money, in a traditional type of remittance, but to buy
13
things, um to buy goods and services.
14
marketplace, which is how we wound up as part of the eBay
15
company, uh, and then eventually, with small businesses and
16
larger businesses all over the country starting to operate
17
their own web sites.
18
decide, will we follow the traditional, um, payment
19
processing model at the time (and still to a large extent,
20
today), where the customer gives their financial information
21
to the merchant, and then the merchant sends it through the
22
payment processing system, usually, the card networks; or,
23
would we have the merchant, I’m sorry, the consumer, “shop
24
without sharing,” as we call it.
25
share their financial information with the merchant, and
We quickly learned from customer demand that that
First, on the eBay
And as part of that, um, we had to
So, shop without having to
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1
only share it with PayPal as the trusted intermediary.
2
That’s what we decided to do.
3
the consumer who is pushing the money through the system,
4
um, rather than the merchant who is pulling the money, and
5
so at that point it starts to look more like a traditional
6
remittance, and as a result, we did get our license back in,
7
in 2002 as I mentioned.
8
9
In that context, it’s really
Um, so the license, uh, has not inhibited our
growth overall.
We have grown, uh, over those ten years to
10
a point where last year we, we processed worldwide
11
approximately 165 billion in transmissions, again, almost
12
all of that for the purchase of goods and services, or
13
charitable donations, um, and uh, we have overall had a good
14
relationship with the Department of Financial Institutions
15
under the Act, and its predecessor; we haven’t necessarily
16
agreed on every point of interpretation, um, but we have had
17
an open relationship.
18
And so I think our perspective is similar to
19
the Commissioner’s: there are some opportunities for
20
improvement, um, in particular there are some elements of
21
the Act that are still based on the traditional remittance
22
world, of cash-based transactions, or of transactions that,
23
where there is a delay between the sending of the money and
24
the receipt of the payment by the recipient, whereas in our
25
case and the case of other recent technology payment
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1
entrants, in most cases the receipt of the money by the
2
recipient, usually a seller, is, is uh, immediate.
3
think there are opportunities for improvement, but it is an
4
Act we have been able to operate under successfully for
5
these years, and I’ll leave it at that in the interest of
6
time.
7
So we
And thank you.
CHAIRMAN DICKINSON:
Okay, um, thank you.
8
I’m sure we’ll come back to you about what those areas of
9
improvement are that you see.
10
MS. JUN:
Ms. Jun.
Thank you.
Good afternoon, my name
11
is Michelle Jun, and I am a Senior Attorney with Consumers
12
Union, the policy and advocacy arm of Consumer Reports,
13
whose mission is to work towards a fair, just and safe
14
marketplace for all consumers, and to empower consumers to
15
protect themselves.
16
Commissioner for putting on this hearing today that’s
17
focused on the Money Transmission Act.
18
We thank the Committee and the
The MTA provides individual consumers with
19
greater assurance that the companies who they entrust in to
20
transfer their money are not fly-by-night operations.
21
is no federal law which provides for this type of oversight.
22
Thus, it is important that the focus of this hearing is on
23
protecting consumers in our State, who use, and often rely
24
on money transmission services.
25
California Financial Code, or the preamble to the MTA,
Section 2002 of the
There
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1
states this purpose of the law, which is “to protect the
2
interests of persons in this State who use money
3
transmission services.”
4
intended that the MTA is for consumer protection.
It is clear that the Legislature
5
We stress that this Committee must continue
6
to maintain its focus as it explores the MTA, particularly
7
in light of the many consumers who rely on money
8
transmission services, as they either cannot or do not want
9
to utilize mainstream financial services.
A weak money
10
transmission law, of the lack of a money transmission law,
11
would most certainly have disparative impact on the more
12
financially vulnerable populations, including communities of
13
color, immigrants, the unbanked and underbanked.
14
reference to an FDIC report, underbanked populations include
15
about 43 million adults and 21 million households.
16
households use non-bank money orders or non-bank check
17
cashing services, payday loan institutions, rent-to-own
18
agreements or pawn shops on a regular basis.
19
Hispanics and Native Americans are the most likely Americans
20
to be underbanked.
21
In
These
Blacks,
Additionally, the manner in which consumers
22
have used money transmission services has changed
23
substantially where they have been made — where they may be
24
subject to losing more money than they had before if they
25
conducted their business with a less-than-stable or
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1
trustworthy company.
2
services were single transactions, such as with a traveler’s
3
check, or international money transfers.
4
electronic payments, there is a greater potential for
5
consumers to lose more money as they utilize payment
6
instruments such as pre-paid and payroll cards.
7
this growth in alternative financial services is projected
8
to grow enormously with wider, and the expected universal
9
adoption of, mobile payments.
In the past, money transmission
With the advent of
Further,
Compliance with the MTA is
10
necessary in shoring up public confidence, which benefits
11
the larger marketplace.
12
in money transmission services, consumers who do not need to
13
use a less secure method are less likely to use an
14
alternative payment method.
15
use a payment in which they are unsure about the solvency or
16
the general credibility of the company behind it, over
17
pulling out an existing credit or debit card?
18
the only skeptics.
19
Without public confidence in MT –
Why would a consumer decide to
We are not
An IBM executive quoted in a recent San
20
Francisco Chronicle article stated, “You have to offer them
21
a compelling reason to use mobile payments.
22
minimum, it has to be just as convenient, just as broadly
23
accepted, and just as safe.”
24
25
At a very, very
Consumers Union encourages this Committee,
and others, to make sure that the MTA continues to pro-- to
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best protect consumers who make money transmission services.
2
While we certainly want to see the continuation of payments
3
innovation, we believe that protecting consumers’ money
4
always takes precedence, particularly for the most
5
financially vulnerable.
6
For many consumers who use money transmission
7
services, they do not use them for the novelty of making a
8
new way to pay, but rather, rely on the money transmission
9
services to send money to loved ones or to pay bills.
10
Technologies will come and go, but making sure that people’s
11
hard-earned money is safe should always be and remain the
12
focus of the MTA.
13
Thank you.
CHAIRMAN DICKINSON:
14
those comments, we appreciate that.
15
hitting clean-up.
16
MR. BARNETT:
17
CHAIRMAN DICKINSON:
18
MR. BARNETT:
Thank you for those,
Uh, Mr. Barnett,
Thank you, Chair.
Welcome.
Thank you, Chairman Dickinson
19
and other members of the, uh, the Committee for the
20
opportunity to uh, to present, uh, this afternoon.
21
actually in somewhat of a dual capacity.
22
of the, uh, National Payroll Reporting Consortium, who, uh,
23
actually comprises I think probably eleven or twelve of the
24
top payroll, um, service providers, in the country.
25
very large group, providing, um, payroll type benefits,
I’m here
I’m here on behalf
So a
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payroll services and other, um, payroll-related services to
2
1.5 million employers across the country.
3
in my capacity as Assistant General Counsel and Vice
4
President for our ADP, Automatic Data Processing, uh, and
5
obviously ADP, everyone knows, does payroll, but ADP also
6
does a — a host of other activities that include money-type,
7
money transmission-type activities.
8
the points that I’d just like to make as part of the opening
9
remarks is that one of the things that I’ve heard very
Uh, I’m also here
Uh, and I think one of
10
clearly here, and even Commissioner Barnes pointed out, the
11
purpose and intent of the statute itself was consumer
12
protection.
13
impact, uh, and reality is that it goes much beyond just
14
simple “consumer protection.”
15
“consumer”, “consumer” as very broad, or you can look as it
16
as individuals or services to individuals, as opposed to
17
services to, um, other corporations or businesses, which
18
most service providers in the payroll space obviously are
19
providing services to employers, not to individuals.
20
And, um, whether intentional or not, the, the
Certainly you can define
Uh, and I think from our perspective
21
obviously there are a lot of payroll laws that regulate, um,
22
wage payments and whatnot, uh, and certainly there are
23
federal laws that regulate, through the IRS and other, um,
24
uh, laws, the payment of — of tax payments and that type of
25
activity.
Um, but one of the issues, or one of the
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1
challenges that we’ve faced is, given the very broad nature
2
of the definition of “money transmission,” uh, it
3
essentially picks up any and all activity — um, basically
4
you take money from one party on behalf of that party and
5
then with instructions to transmit it to another and you’re
6
considered a money transmitter.
7
effect of that is that you end up regulating, uh, a vast
8
number of business-to-business transactions, which from the
9
basis of the statute, the intent expressed in the statute
And, uh, you know the — the
10
was really more of a consumer protection statute, not one to
11
regulate business activity.
12
Um, certainly not here necessarily to argue
13
whether it should apply or not apply to businesses, uh,
14
generally, but I think one of the challenges that we’ve had
15
in dealing with the — the Department of Financial
16
Institutions — who, in our case has been outstanding,
17
they’ve worked with us very closely, uh, in trying to
18
address and, uh, deal with some of the challenge that we’ve
19
had, so we certainly have no issues with the DFI and
20
certainly appreciate their partnership — but one of the
21
challenges is around the fact that the statute, as
22
previously mentioned, is, was really drafted with the
23
mechanics for over-the-counter, cash-based money
24
transmission, which in our case, you know, we don’t take
25
cash.
Everything that we do is bank-to-bank essentially,
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1
uh, and so the, the mechanics of the statute are designed
2
such that they really, uh, require things like receipts and
3
rights to refunds and things that make perfect sense in the
4
context of a consumer transaction, but do not necessarily
5
make as much sense in the context of business-to-business
6
transactions.
7
for us — you know, obviously, ADP, we have resources, that’s
8
not the issue, and we certainly are very seriously committed
9
to our compliance with laws and, and doing the things that
And it’s created a significant, um, challenge
10
we need to do to protect, um, you know, the — the value of,
11
of the services we provide to our clients, and we take our —
12
we take our role as a transmitter of money and a holder of
13
other people’s money quite seriously.
14
business for well over 60 years and have, have, you know,
15
weathered a lot of storms and been able to get through a lot
16
of things that a lot of people haven’t.
17
know, the issues for us is trying to comply with some of
18
these technical requirements in the statute that are really
19
designed for over-the-counter money transmission.
20
it difficult, because obviously, you know, for example, we,
21
you know, we – we do the receipt requirement.
22
600,000 clients across the country that we do all types of
23
money movement activities for.
24
someone when you’re doing a bank-to-bank transfer that’s
25
pre-authorized and in agreement — we have agreements with
We’ve been in this
But one of the, you
It makes
We have
And delivering a receipt to
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1
all of our clients that govern the relationship, and
2
identify how it is and when it is we can take money — uh,
3
having to deliver a receipt, uh, in connection with that is
4
— is, is a challenge.
5
certainly a challenge and one that most payroll providers
6
aren’t set up to do in an electronic world.
7
we’re just not taking cash.
8
9
It’s not impossible, but it’s
Um, once again,
Uh, and you know, some of the other
requirements, right to refund language once again, we have
10
contracts that govern exactly when it is that we are to
11
deliver the money to whom, and under what circumstances.
12
Um, and so under the statute you’re required to essentially
13
tell people that they have the right to refund within 10
14
days, and in an over-the-counter transaction that makes
15
sense, um, but in the context of a business-to-business
16
transaction, it’s — it’s much more of a challenge.
17
less sense in that context.
18
things like consumer notices; you’re required to put signs
19
out giving consumers notice of their, their rights.
20
once again, we don’t even have facilities where individual
21
consumers can walk in and buy our services.
22
salesforces that deal directly with people.
23
It makes
And then there’s just other
Right?
And
We have
So I — I think, you know, one of the
24
challenges and one of the things that we see as an
25
opportunity to within the statute is — is, is potentially
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1
looking at the definition of “money transmission” and — and
2
figuring out and deciding whether or not that was really the
3
intent to have it be applied so broadly to so many people.
4
Um, you know, certainly on — on behalf of the payroll
5
consortium, um, you know, most of those folks in that group
6
don’t feel that, you know, it was necessarily intended to
7
apply to them, um, but we’re here, and you know ADP, we’ve
8
applied for a license and we’ve been working through that
9
process.
Um, but essentially, you know, at some point we
10
have to figure out whether or not was that the intent, or
11
not the intent, and if it was, then maybe there just needs
12
to be some tweaks to the mechanics to address some of these
13
other issues.
14
of other businesses that I’m just not sure were necessarily,
15
uh, intended, uh, to be covered by this.
16
accounts payable businesses, um, COBRA tax credit services—
17
these are all things that, although you know sort of are
18
related to payroll, or actually are provided by a lot of the
19
people that don’t even do payroll, they might do these types
20
of services separate, wholly apart from actual, um, payroll-
21
type-providing services.
22
very vast, and a wide group of businesses that are
23
potentially regulated.
24
obviously, more regulation, um, you know, is difficult in
25
the State given resources, and uh, so it’s our feeling it
Um, I’d also offer up that there are a host
I mean, you know,
And so, I think it brings in a
You know, in this environment,
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1
needs to be looked at and decided whether or not if that’s
2
the intent and that’s the direction it wants to go then
3
mechanically it really needs to work in that context.
4
you.
5
CHAIRMAN DICKINSON:
6
all—all four of you.
7
ended.
Thank
Thank you for comments,
And let me, um, let’s start where we
8
MR. BARNETT:
9
CHAIRMAN DICKINSON:
Sure.
I’d like to explore this
10
just a little bit more with you, Mr. — Mr. Barnett.
11
is it your view that — that payroll processors in particular
12
ought not to been seen as money transmitters in the sense of
13
the — of the statute, or would you — would you advocate that
14
business-to-business transactions in general be treated
15
differently than under the Money Transmission Act?
16
something else?
17
Is it—
Or
Or a third…
MR. BARNETT:
Yeah.
I, once again, I’m not
18
necessarily here to argue that it should not be regulated
19
necessarily.
20
it’s written and the legislative intent, and what seems to
21
be the intent at the time it was drafted.
22
purpose, which was really governing over-the — over-the-
23
counter money transmission activities, right?
24
traditional Western Union-type activities.
25
I can only look at the actual — the law as
And the intended
The
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1
Um, I think, you know, obviously there’s a
2
lot of folks here that are, that are being affected by the
3
fact that it’s very broad, but, um, I would think that
4
payroll providers, or certainly companies, in you know,
5
sophisticated companies in business-to-business-type
6
transactions, they should be soph — or, you know, not all
7
are sufficiently sophisticated enough to necessarily protect
8
themselves, but they are individual consumers for the most
9
part.
And so, the intent of providing consumer protection
10
unless you take a very broad read of “consumer,” um, I think
11
the statute the way it’s drafted and the broad nature of it
12
goes well beyond that intent.
13
CHAIRMAN DICKINSON:
Uh, I assume you would
14
grant the point that there are small businesses and maybe
15
even sometimes large businesses, that aren’t necessarily all
16
that sophisticated or — or aware of what their exposure may
17
— may be such as, a contracting with a payroll processor,
18
or, or an entity to take care of paying of taxes, you know
19
those kinds of things, and they may be at risk of — of
20
fraud, or misrepresentation in those transactions.
21
very, very controversial and, and, uh, visible case of that
22
involving Sacramento County, just a couple of years ago,
23
which is, uh, not an unsophisticated organization, I can
24
tell you that from first-hand experience, and yet—and yet,
25
fell victim to using a firm in another state that literally
We had a
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1
robbed the County — that’s tax money — and wasn’t discovered
2
until the IRS found that some things didn’t reconcile and
3
brought it to the attention of the County.
4
necessarily exclude businesses from needing some form of
5
protection, you’re just arguing that maybe the notion of the
6
traditional consumer in that context is — is not that broad.
7
Is that — is that fair to say?
8
9
10
MR. BARNETT:
That is fair.
So, you wouldn’t
I mean,
unfortunately, right, there are bad apples in every
industry.
11
CHAIRMAN DICKINSON:
12
MR. BARNETT: I’m not going to say that
Right.
13
payroll providers are all great.
14
that the eleven or so that are part of the Consortium, we’d
15
like to think that we’re above that type of activity.
16
but certainly there are you know, there — there’s needs to
17
regulate at different levels across all businesses.
18
yeah, I would agree.
19
the mechanics of the statute, right, is this — you know, if
20
the intent is to regulate all activities, is this the right
21
mechanical structure for that.
22
out earlier, the Commissioner and her staff uh, in the DFI,
23
have been very cooperative in trying to work with us, but
24
they, you know, at times have felt at times have felt as
25
though there are some constraints with what they can and
And, uh, I’d like to think
Um,
Um, so
I think the challenge for us really is
Um, and, and as I pointed
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1
can’t do because of what’s in the statute.
2
for us, you know, the biggest challenge is just sort of
3
conforming to the mechanical natures of the statute.
4
so, I’m not necessarily going to argue that there shouldn’t
5
be regulation.
6
areas in the law that do provide protection, as the
7
Commissioner pointed out, there was an unfortunate
8
circumstance that they’re now aware of, and that does happen
9
from time to time, but that — that sort of activity would
And so I think
Um,
I think there are, as I’ve pointed out other
10
also fall under, you know, IRS examination; there would be
11
other places where there could be protections for businesses
12
like that, maybe apart from the MTA itself.
13
CHAIRMAN DICKINSON:
14
did you want to follow up on this?
15
16
17
Okay.
Mr. Achadjian,
No?
ASSEMBLYMAN ACHADJIAN:
I had a question but
it got answered through the conversation, so thank you.
CHAIRMAN DICKINSON:
Okay.
Thank you.
Uh,
18
Mr. Brown, I wanted to come back — back to you.
19
neglected to say this the first time around, but Go Bears.
20
MR. BROWN:
21
CHAIRMAN DICKINSON:
Uh, and I
[Laughter] Indeed.
You did, you did give us
22
in your written submission some suggestions — oh, I’m sorry,
23
Mr. Barnett, I just, one thing that occurred to me.
24
uh, licensed as a money transmitter in other states?
25
Is ADP,
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1
MR. BARNETT:
Yes, we are, we currently have
2
46 applications, and two that are pending, one with
3
California and one with Rhode Island.
4
CHAIRMAN DICKINSON:
Okay.
So there’s —
5
there’s not enough deviation from state to state that you
6
haven’t sought a license in essentially all the states that
7
are regulating?
8
9
MR. BARNETT:
That’s fair.
I think there was
a question earlier to the Commissioner maybe as to whether
10
or not the — the laws are applied.
11
states or so that have laws very similar to California.
12
our, our, our sense is that in having had conversations with
13
other states as part of the licensing process, um, my sense
14
is that a lot of the states, or some portion of the states,
15
um, do not look at it as broadly as, er, as California does.
16
I think as part of our conversation with the — with the DFI,
17
they’ve made it pretty clear that there really is no concept
18
of unregulated money movement in California.
19
I mean, there are 27
And
And in other states, even though the statutes
20
are relatively similar, for whatever reason, some of those
21
states have chosen to regulate some activities, like, you
22
know, stored value for example, sale of checks, that type of
23
activity that under a lot of statutes is actually
24
enumerated, but other types of activities they haven’t had
25
an interest in necessarily regulating, so…
Um, I wouldn’t
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1
say that it’s necessarily — it’s just I, you know maybe it’s
2
the interpretation, maybe it’s resources, I’m not sure what
3
it is.
4
broader interpretation of the definition of “money
5
transmission.”
6
not unfair.
7
statute ‘cause it is very broad.
But I think California takes a much more, uh, much
It’s a fair — it’s a fair reading of the
8
9
And — and it’s, based upon the statute, it’s
CHAIRMAN DICKINSON:
Mm-hmm.
Okay.
I’m
sorry, Mr. Brown, I wanted to come back to you — back to
10
you.
11
reciprocity be granted by California to, to — to other
12
states.
13
standard to that and I’m not quite sure how it’s
14
articulated, but to ensure that we’re not granting
15
reciprocity in cases where we thought another state’s
16
statute was um, less protective of consumers than — than
17
California’s.
18
Um, one of your suggestions was some type of
I’m assuming that, uh, you would apply some
MR. BROWN:
So, um, I think any proposal on
19
reciprocity is going to need to recognize California’s
20
interest in maintaining, um, uh, some assurance with respect
21
to safety and soundness criteria.
22
that it is helpful to distinguish between “consumer
23
protection” and “safety and soundness.”
24
arguments that safety and soundness requirements, um,
25
ultimately protect consumers, uh, but those, but that is —
Though, I really do think
Um, we can make
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1
that is not the primary objective of a safety and soundness
2
requirement.
3
things: it preserves the institution, uh, institutional
4
integrity, um, and, and it serves a bit of a barrier to
5
entry.
6
safety and soundness are by design, designed to filter out
7
certain institutions.
8
secondarily do they protect, um, consumers’ interests, and
9
then not always.
10
The safety and soundness requirement does two
Right, I mean, so, so, things that go to protecting
So that’s sort of, one.
Only
But we, you know, we can come back to that
issue as well.
11
Uh, I do think, um, echoing the earlier
12
remarks about the definition of “money transmission” and how
13
that standard is interpreted in California, there is some
14
cleanup work that can be done with respect to the MTA.
15
as I pointed out in the written submission, the definition
16
under the existing Act is circular.
17
trace through the definitions, “money transmission” is
18
ultimately defined as “money transmission.”
19
CHAIRMAN DICKINSON:
20
MR. BROWN:
Um,
Um, if you actually
[Laughter]
Um, uh, I would tell my students
21
that we can hope for better in drafting statutory text?
22
uh, so, at a high level…
23
particular area of disagreement between California and other
24
states, and that’s with respect to this issue as, of the
25
payee agent.
Um,
But then, there’s a more
Um, I mean, at an abstract level, we should
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all recognize everybody receives money from some people and
2
gives it to others.
3
house.
4
receiving money and giving it to others.
5
traditional businesses also receive money and give it to
6
others.
7
firm.
8
you know, associates and staff and then ultimately to
9
ourselves and we don’t — we don’t necessarily think of that
Uh, like, that happens a lot at my
I have two teenage girls.
Um, and there’s a lot of
Um, uh, but then
Um, you know I happen to be a partner at a law
We receive money from clients and we pay it out to,
10
act as triggering some sort of special-case regulation, even
11
though we’re sort of “holding other people’s money” at some
12
level.
13
what “money transmission” actually means, right, so when —
14
when money is in float, or not at rest, maybe that’s what
15
“money transmission” means, but when I’m giving money to
16
somebody who is the agent of — has been appointed by the
17
person to whom that money is ultimately owed, as their
18
agent, that seems like not so much “money transmission.”
19
And at least two states have explicitly recognized that.
20
New York, and it’s built into a couple of um, state
21
statutes.
22
Committee, um, can look, and to help relieve some of the
23
pressure on — on DFI, particularly as we start to see
24
financial services combine with, with other services through
25
mobile technologies.
And so I do think that we can be more precise as to
So I do think that’s another area where the
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Um, uh, um, one of my favorite—one of my
2
favorite sort of quasi-payment application is Uber.
3
know if anybody has ever used it; it’s gotten a little of
4
attention for other reasons.
5
of Uber as a payment app.
6
it’s helped me locate the cab, and then I get out of the
7
cab, and then there’s money, um, movement associated with
8
that application, but I don’t think of Uber as a payment
9
provider, though there’s some ways of looking at the statute
10
But I don’t necessarily think
Right?
Um, getting in a cab,
that might subject them…
11
12
I don’t
CHAIRMAN DICKINSON:
So let’s — let’s pause
on that, cause that…
13
MR. BROWN:
14
CHAIRMAN DICKINSON:
That — maybe that’s a
15
fruitful way of illustrating this.
I mean, I’ve not used
16
Uber…
Mm-hmm.
17
MR. BROWN:
18
CHAIRMAN DICKINSON:
Mm-hmm.
…but what I’ve read, it
19
suggests that you contact Uber and you — you let Uber know
20
your location; Uber contacts a taxi or, or…
21
MR. BROWN:
22
CHAIRMAN DICKINSON:
A towncar, or whathaveyou…
23
directs it to your — your location.
24
of — of money in that.
25
you can, you can expand?
…a towncar, and, um,
But there’s no transfer
To my knowledge, I mean, but maybe
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MR. BROWN:
Well, so, so what, so what
2
happens with, um, many transactions of that archetype, and
3
there are many, and it’s not just Uber that uses that basic
4
— that same basic structure, is, um, when I get out of the
5
towncar, it will, it will trigger a charge to the payment
6
credentials that I have on file with that service provider.
7
Uh, and it will then also trigger another transaction to
8
that service provider; now, I believe in Uber’s case they
9
are the agent of payee for the people who have contracted
10
with Uber to help them find customers.
11
gives, gives an example.
12
Um, but, so that
But there are many, many, many others.
Many
13
electronic downloads are delivered through things that look
14
like marketplaces.
15
download a Taylor Swift song.
16
Swift gets paid, and I pay somebody, um, and we’re — I’m
17
paying one person and that same person is then paying Taylor
18
Swift, but again, that – that doesn’t have the feel of, of a
19
traditional transaction at say Western Union, where I go up
20
to a counter and give somebody money and I ask them to send
21
it halfway around the world, even though, you know, Taylor
22
Swift may for all I know be in London right now.
23
um, uh, but so this gets at the difference between money
24
transmission and other types of transactions.
25
Right?
Where I go on, say, iTunes, and
Right?
So, turns out, Taylor
You know,
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ASSEMBLYMAN ACHADJIAN:
I believe to be part
2
of the organization you have an account established, so when
3
you call, and they send you a cab or whoever they have a
4
contract with, they are reaching out your account and
5
withdraw that money and pay the cab company and keep their
6
percentage, whatever that might be.
7
8
MR. BROWN:
Um, but, but, for when
you get out of the cab, um…
9
10
Correct.
ASSEMBLYMAN ACHADJIAN:
It’s already paid
for.
11
MR. BROWN:
You are, but your obligation to
12
the driver — this is, I think, the key distinction, right –
13
your obligation to the driver is released, even if that
14
intermediary fails to deliver funds to the driver, you as
15
the consumer are protected as a matter of contract, in that
16
case, though there are federal overlays that are important
17
here, too.
18
and Regulation Z ealier.
19
is satisfied by your successful payment to the intermediary,
20
in this case, Uber.
21
money transmission chain, even though funds are ultimately
22
being delivered to the driver.
23
I mentioned the Electronic Funds Transfer Act
Um, your obligation to the driver
And for me, that sort of breaks the
ASSEMBLYMAN ACHADJIAN:
Just to follow up my
24
question to the Commissioner.
25
and let’s say I want to transfer money to you in another
If you go to a Western Union,
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part of the area, and I write a check, if they don’t have a
2
guarantee that that check will clear, don’t they have the
3
right to hold onto it for whatever the new technology allows
4
them to clear that check?
5
MR. BROWN:
6
ASSEMBLYMAN ACHADJIAN:
7
MR. BROWN:
8
Um, so I…
That’s where I was…
That’s where your question was
going.
9
ASSEMBLYMAN ACHADJIAN:
My question was
10
going, as, are we going to regulate both sides, too, so
11
there’s a balance?
12
penalizing the…
13
Or, in support of consumer, then we’re
MR. BROWN:
…the business provider.
That’s
14
an excellent point, and not, not — um, not one that I had,
15
um — not one that I had given sort of a lot of thought to.
16
But it does go to one of the sort of fundamental challenges
17
of operating in these businesses, as, uh, um, Mr. Muller can
18
attest, right, is that consumers will engage in transactions
19
with you and present themselves as though they have funds,
20
and then turn out not to.
21
an obligation to pay the recipient of those funds,
22
independent of whether the consumer actually has the funds,
23
and, and — and that, that is the fundamental risk that you
24
as the intermediary, um, take on.
25
Um, and then, frequently you have
And so your point about
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receiving a check that may not be good is, uh, is an
2
excellent one.
3
ASSEMBLYMAN ACHADJIAN:
Because if it was to
4
happen on a weekend when my bank is closed and I don’t have
5
the cash to forward it to you, I want to write a check;
6
Western Union is open around the clock, then there is a …
7
problem.
Unless we address it early on.
8
MR. BROWN:
9
CHAIRMAN DICKINSON:
Yes.
Uh, I thought if, and I
10
want to make sure I heard you — you correctly, uh, I thought
11
you made, uh, a remark, uh, to the effect of the safeness
12
and soundness evaluation or criteria can operate as a
13
barrier to — to entry and in a way that’s not necessarily
14
protective of consumers.
Did, did — is that the essence…
15
MR. BROWN:
16
CHAIRMAN DICKINSON:
17
MR. BROWN:
That’s a, um…
…of what you said…
That’s a — that’s a fair
18
statement, um, there’s also — there are also some examples
19
of instances where things that we think of as, as benefiting
20
consumers via safety and soundness have actually worked
21
against that interest, and I’ll use one example: there’s an
22
interesting paper that’s been published on this that when
23
you trace the evolution of deposit insurance in the United
24
States, it turns out that state-mandated deposit insurance
25
tended to make banks less safe on — on average.
Um, uh,
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controlling for all other factors, because it reduces a
2
dimension along which banks are then competing for the
3
attention of consumers, which is not an argument against
4
deposit insurance, it’s just a recognition that things that
5
we do, however well intentioned, can have, um, uh,
6
unintended consequences that work against the benefit that
7
we’re — we’re trying to implement.
8
study looked at, um, developments in state laws at the turn
9
of the century around branch banking and deposit insurance,
So, this particular
10
which were two, you know, progressive innovations designed
11
to help ensure the safety and soundness of the financial
12
institutions, right, one by allowing some diversification,
13
the other by insuring deposits.
14
tended to make banks more — make them safer, because they
15
could be in more geographic areas, and deposit insurance,
16
um, tended to make them less safe.
17
Turned out, branch banking
So, um, so that’s one, but more generally,
18
safety and soundness criteria do serve as a barrier to
19
entry.
20
entrepreneur, who wants to offer a new mobile payment
21
application on, um, uh, an iPad, if I need to go to DFI and
22
spend either 120 days or in some cases several years sort of
23
working with the Commissioner and staff to have my
24
application approved, right, that, that necessarily slows
25
down the degree to which people are introducing
I mean, if I need, as a potential innovator, an
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applications.
Now, we might think that that’s a tradeoff
2
worth making.
But, it is definitely a tradeoff.
3
the higher we make the capitalization requirements and the
4
more that we assess fees, we can expect that there’s going
5
to be less entry.
6
entrepreneurial energies elsewhere.
7
Uh, and
People will choose to spend their
CHAIRMAN DICKINSON:
Sometimes you want to
8
prevent people from entering the market because they
9
shouldn’t be in the market.
10
MR. BROWN:
11
CHAIRMAN DICKINSON:
Yes.
Uh, other times, uh,
12
barriers to entry can operate as an economic device that,
13
that advan — gives some an advantage to the disadvantage of
14
others.
15
how the California statute operates in that, in that
16
respect?
17
Do you have a – do you have a point of view about
MR. BROWN:
Um, I do, and my – and my point
18
of view here, is sort of view informed by a little bit of
19
history in the evolution of the statute.
20
PayPal is actually a fascinating case.
21
money transmission license was an alternative to a claim
22
that they were — at least this is the story that I have
23
learned over time, um, uh, again, um, Mr. Muller can
24
embellish — was an alternative to being told that they were
25
a bank, but operating without a bank charter.
Uh, so, um, for me
So for PayPal, a
So, uh,
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California in its willingness to provide a license provided
2
an answer to that claim, a claim that had been raised both
3
by the State of Louisiana and by the State of New York, if
4
memory serves.
5
lower bar and you could support other business operations
6
through a money transmission license that you couldn’t
7
support if you had a bank charter.
8
a time when California’s Money Transmission Act only applied
9
if you were operating and sending funds overseas, one.
Um, so, so, and because it was somewhat a
Um, uh, but this was at
Two,
10
at that point in time, California’s Money Transmission Act
11
actually preceded the development of what’s known as the um,
12
what was promulgated by um, uh, the institute for, for state
13
law development, the Uniform Money Transmission Act.
14
California’s actually became an inspiration for the Money —
15
the Uniform Money Transmission Act.
16
development of the Uniform Money Transmission Act and the
17
application to all businesses involved in receiving money on
18
a domestic basis, you saw the creation of a barrier to entry
19
where one had not existed before.
20
familiar, um, both anecdotally – and more anecdotally than
21
every, anything with, um, with a degree to which
22
California’s now adoption of significant capital
23
requirements has led people to either go to states, to test
24
their products, that don’t have a licensing requirement, or
25
to find somebody who’s already a member of the club and to
And with the
Um, uh, and, and — I am
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obtain permission to use their charter or their license to
2
offer it.
3
positive development.
So, yeah, uh, and that doesn’t strike me as a
4
CHAIRMAN DICKINSON:
So I want to give Ms.
5
Jun a chance if she wants to weigh in on — on this, because,
6
um, one side of the coin is consumer protection, um; perhaps
7
the other side of the coin, at least one dimension, barriers
8
to – to entry.
9
means less competition, um, less choice for consumers, and
On the other hand, unreasonable barriers
10
presumably higher prices for – for consumers.
11
certainly when we, back in the eighties, talked about
12
airline deregulation and interstate trucking deregulation
13
and all those they were driven by much of the same kind of
14
discussion and principle applied to different subjects.
15
I’m curious if you want to comment on this point.
16
MS. JUN:
I mean
But
Sure, I think there are a number of
17
levels I think I can answer that question, but I think the
18
first thing that I want to mention, um, has to do with
19
whether or not consumers would benefit from increased
20
competition.
21
Um, one thing that comes to mind is the
22
Durbin Amendment.
23
down, merchants would pass on their reaped benefits to
24
consumers.
25
soon, but I highly doubt that will happen.
Everybody said once interchange fees went
We have yet to see that happen.
It may be too
Um, so it’s kind
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of the same case here.
2
cheaper ways to process the payment, but it would — it
3
probably won’t be reflected in terms of what is back in the
4
consumer’s pocket.
5
Merchants may be able to arrange for
Um, the second point is what we’ve raised
6
again and again, is: the point of this law is for consumer
7
protection.
8
to see where your friend is instantaneously.
9
about people’s money, and for the most part, it’s people who
We’re not talking about making an application
We’re talking
10
are unbanked and underbanked who are using these types of
11
transmission services and it will increasingly be so as the
12
numbers are been very staggering as to the number of people
13
who are using mobile devices to conduct every form of
14
business including payments.
15
foremost, um, it would be that consumer protection should
16
precede any other — any other concern.
17
So the – the first and
CHAIRMAN DICKINSON:
So, so at least from
18
your point of view you don’t see barriers to entry, at least
19
in this endeavor, as, um, adversely affecting consumers in
20
terms of competition because you don’t believe they’ll see
21
the benefit of competition, were there greater competition
22
in this – in this marketplace, and you’re concerned about
23
compromising other protections.
24
you’re looking at it?
25
Is that the gist of how
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MS. JUN:
I mean we don’t sit nearly as
2
closely as DFI in terms of the different inquiries and
3
applications that they obtain, but there are companies that
4
are newer that are more innovative who have been complying
5
with the regulation and have acquired licenses and succeeded
6
in doing so.
7
entry.
Um, so that does not appear to be a barrier of
8
CHAIRMAN DICKINSON:
9
MS. JUN:
10
Okay.
A barrier to entry.
CHAIRMAN DICKINSON:
Okay.
And Mr. Muller, I
11
promised I’d come back and you can certainly talk about this
12
current question on the table if you want, but I’d also like
13
to come back to, uh, your intriguing remark about some
14
improvements could be made in the statute, not withstanding
15
your as I get it, your general satisfaction with the way
16
it’s operating with respect to PayPal.
17
MR. MULLER:
Uh, so just to start on the
18
competition point, um, you know, we do see, uh, increased
19
competition, certainly over the last three years, um, and I
20
think certainly the regulations that the Commissioner
21
mentioned will probably help.
22
a perceived, uh, lack of clarity as to what the boundaries
23
of the Act are.
24
competitors who both build their business around, um, what
25
I’m going to call more “pure” payment processing models, and
Uh, I think there’s at least
Um, and uh, but I think we do see
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are therefore able to stay outside of the regulation of the
2
Act, and others who make that choice, um, and have been able
3
to get licensed, some companies in recent years like
4
Facebook and Google, who have been able to get licensed and
5
start up their payments business, and smaller ones as well.
6
Um, so uh, so I think the regulations will help and I think
7
the competitive landscape for payments is certainly very
8
vibrant.
Um, and more, now more than ever.
9
Um, on uh, on the question about improvements
10
that we see to the Act, again, you know, trying not to get
11
too technical, but Mr. Barnett mentioned the receipt and the
12
right to refund wording.
13
again, is premised on a delay in the transmission reaching
14
the recipient, among other things, um and in many cases,
15
both through PayPal and through many of our competitors, uh,
16
the recipient knows right away that the funds have reached
17
their account.
18
deliver a receipt, we don’t have any problem with delivering
19
a receipt to both sides of the transaction, it’s simply a
20
question of the specific wording that is mandated by the
21
statute currently, uh, which can be confusing, um, to the
22
sender and the receiver both.
23
Um, you know the right to refund,
Um, so, the wording, uh, you know we do
Um, so that’s one example.
Um, another one relates to, um, the way the
24
statute deals with agency relationships.
25
largely on a model of traditional money remittance, um,
Um, again, based
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where the Western Unions and MoneyGrams of the world work
2
through, um, stores and agents around the world.
3
case, for instance, we’re also trying to deliver, uh, more
4
service, and make on-line and mobile shopping more available
5
now to the underbanked, working with companies like, like a
6
CoinStar and a MoneyGram.
7
itself a licensed company and has been for a long, long time
8
— um, should they be treated as if they were just an agent,
9
or a corner store with respect to PayPal when PayPal and
Um, in our
Um, so if MoneyGram, which is
10
MoneyGram are working together.
11
opportunity there to make some changes to the Act that can
12
help clarify, um, these new types of relationships.
13
So we think there’s, um,
CHAIRMAN DICKINSON:
Well thank you.
I think
14
there’s one other aspect of this competition issue, um, or
15
service issue, that strikes me and that’s whether there are
16
certain categories of consumers that aren’t getting service
17
that could, or could get better service, so it’s another
18
aspect of this, but we’ll leave that for another day to
19
explore, unless there are questions from other members…
20
ASSEMBLYMAN ACHADJIAN:
I’m just watching the
21
clock to see if we can bring it to an end because we have
22
another commitment…
23
CHAIRMAN DICKINSON:
Right, that’s what we’re
24
aiming at, so, uh, so thank you all for — I appreciate your
25
comments very much and certainly as we look at trying to
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shape something productive out of the legislation I’ve
2
introduced I’m sure we’ll be continuing this discussion with
3
you and others.
4
MR. BARNETT:
5
MR. BROWN:
6
CHAIRMAN DICKINSON:
Thank you.
Thanks.
Thank you all again.
7
Uh, and now, uh, we will take public testimony, uh, briefly,
8
so if there are people here who would like to address the
9
Committee, we can — we can do that now.
So if you could
10
tell us who you are, and uh, I know in at least one case we
11
have a lengthy letter; we’re going to need to keep your
12
comments to a couple minutes, so I’ll — I’ll just let you
13
know when you hit that marker.
14
MR. GREENSPAN:
15
CHAIRMAN DICKINSON:
16
MR. GREENSPAN:
Good afternoon.
Good afternoon.
My name is Aaron Greenspan.
17
I am the CEO of Think Computer Corporation, a startup in
18
Palo Alto, and a CodeX Fellow at Stanford Law School.
19
There’s no way that I can fit everything I have to say about
20
the MTA and AB 786 into a few minutes, but it is my hope
21
that if you come away with anything from this hearing, it is
22
the following: which is that, with the MTA, we all lose.
23
It is not difficult to see what I have lost.
24
In 2009, I started working full-time on a mobile payments
25
project called FaceCash.
FaceCash’s origins go back to my
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time at Harvard College, from which I graduated early with a
2
degree in economics in 2004.
3
enrolled in a seminar about facial recognition, and I later
4
realized that some of the insights I gained from this course
5
could be used to make payments safer.
6
technology will granted tomorrow as it turns out.
7
As a freshman at Harvard I
The patent on this
So as everyone here surely knows, identity
8
theft is an extremely serious problem; according to a recent
9
Javelin report, identity thieves stole $54 billion in 2009.
10
I’m sure it’s higher now.
11
the fact that the plastic payment card networks that we all
12
use daily are fundamentally insecure and for a number of
13
reasons cannot be upgraded.
14
network more secure is to build a new one.
15
I set out to do.
16
Much of this can be attributed to
The only way to make the
So that is what
After substantial investment of approximately
17
$1 million of my own money, FaceCash went live in April,
18
2010.
19
the California Department of Financial Institutions due to
20
the new MTA.
21
mandatory pre-application interview, among other self-
22
contradictory, ignorant, confusing and false statements,
23
Deputy Commissioner Venchiarutti personally threatened to
24
call law enforcement officials with instructions to throw me
25
in jail because he did not like the kinds of questions I had
It was shut down on June 30th, 2011 at the request of
I tried to apply for a license, but at my
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been asking him about the MTA — so I felt as though I had no
2
choice but to abandon my investment, my product, and my
3
employees.
4
So that’s what I lost.
But again, with the
5
MTA, we all lose.
6
lost tax revenue, and this is all because the MTA is a
7
protectionist law written solely for the purpose of
8
preserving the monopoly power of a few financial
9
institutions represented by the law’s initial and sole
My employees lost their jobs, the state
10
sponsor, The Money Services Round Table.
11
monopoly allows its members, and banks who also benef —
12
benefit from the law, to keep charging consumers outrageous
13
prices for basic financial services whose actual marginal
14
cost is near zero.
15
The Round Table’s
When the MTA was proposed, it was described
16
in terms of quote “consumer protection;” the same is now
17
true, as we’ve been discussing, of AB 786.
18
the matter is that both the MTA and AB 786 harm consumers,
19
and especially entrepreneurs.
20
members — one of them, MoneyGram, recently settled with the
21
U.S. Department of Justice for $100 million over criminal
22
charges filed regarding an even larger decade-long fraud.
23
In effect, thanks to the money transmission laws like the
24
MTA, consumers have been forced into the arms of corporate
25
criminals because of these pointless barriers to entry based
But the truth of
So do the Round Table’s
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on this totally false premise that rich people are
2
inherently more trustworthy.
3
Another Round Table member, Sigue
4
Corporation, settled with the DOJ in 2008 for $15 million
5
for failing to comply with Bank Secrecy Act requirements.
6
Both still are licensed by the DFI.
7
DFI’s own General Counsel told me that he was personally
8
“appalled” by the MTA.
9
Perhaps this is why the
Today, Assembly Bill 786 only stands to make
10
the presently bad situation far worse.
11
proposed new thought crime in AB 786 section 2155 is
12
completely outrageous, and broadly interpreted, would allow
13
the DFI to lock me up in a federal prison just for having
14
asked what the Deputy Commissioner considered to be the
15
“wrong” questions a year and a half ago.
16
CHAIRMAN DICKINSON:
In particular, the
Mr. Greenspan, uh, I —
17
you’re perfectly free to criticize, I don’t have a problem
18
with that, just I have a problem with time, and I have given
19
you, uh, an extra, minute.
20
say.
21
you could, because we have an unforgiving time constraint
22
this afternoon, if there’s one more thing you would like to
23
say in summary, why don’t you give that to us, and then this
24
conversation will go on.
25
Because I know you have a lot to
We will take your letter into account.
But if you, if
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MR. GREENSPAN:
I will give you the laundry
2
list of why I believe the — the MTA should be repealed, and
3
is unconstitutional.
4
because I’m a libertarian who hates regulation.
5
there should be federal regulation of this; I know that
6
Congress is looking at it.
7
airline analogy from before – uh, the states are not in a
8
position to regulate internet transmissions.
9
have already said so, but aside from that it doesn’t make
And I say it should be repealed not
10
any sense.
11
It’s incredibly dangerous.
12
13
But the states – I like your
The courts
It’s like having a different FAA in each state.
CHAIRMAN DICKINSON:
Okay.
I know you’ve got
more to say, but let’s leave it there, it’s a good one.
14
MR. GREENSPAN:
15
CHAIRMAN DICKINSON:
16
MR. GARRET:
17
I think
be as quick as I can.
I understand.
Okay.
Next.
Um, thank you, my – I’ll try to
My name is Ron Garret.
18
CHAIRMAN DICKINSON:
19
MR. GARRET:
I…
Um…
Welcome.
Thank you.
Um, I sent a
20
letter into the public comments which was not included in
21
the public comments.
22
of it as I can before I run out of time.
23
It’s two pages long; I’ll read as much
Um, I’m here mainly in my capacity as a
24
consumer whose interests the MTA is ostensibly designed to
25
protect, but also as a software engineer, entrepreneur and
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an investor who has significant experience in digital
2
security technology and financial systems.
3
claiming some domain expertise, let me provide my
4
credentials.
Since I’m
5
I hold a Ph.D. in Computer Science and
6
Applications from Virginia Tech, I’ve had substantial
7
industrial experience designing and implementing secure
8
financial systems, I wrote the billing system for the
9
original release of Google AdWords in September of 2000, and
10
I subsequently designed and implemented the billing system
11
for two other startups.
12
In December of 2008 I launched a – an effort
13
to start a company whose goal was to eliminate credit card
14
fraud.
15
got off the ground, in large measure – measure because of
16
regulatory hurdles.
17
can definitely say that extant financial regulations in the
18
United States in general, and the California MTA in
19
particular, are doing more harm than good, at least when
20
measured according to how well they concept – protect
21
consumers from fraud.
22
you my story.
23
The upshot of the story is that the company never
It is because of this experience that I
To back up this claim, let me tell
The fundamental problem with all non-cash
24
payment methods currently in used – currently in use in the
25
United States, which includes credit cards, checks, and
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debit cards, is that they are based on fundamentally
2
insecure protocols designed in the 1950s.
3
transaction the buyer must provide the seller with
4
information: account number, expiration date, billing zip
5
code, whathaveyou.
6
information is not relevant.
7
information is bound to a particular transaction.
8
reusable.
9
it cannot be fixed, except by making a fundamental change to
10
To conduct a
The exact nature and quantity of this
What matters is that the
It’s
This is the basis for all credit card fraud and
the protocol.
11
With the advent of electronic commerce, the
12
risk of a fraudster being caught has been reduced nearly to
13
zero.
14
credit card fraud that we are all familiar with.
The result, unsurprisingly, has been an epidemic of
15
There is a technological solution to this
16
problem: it’s called Public Key Encryption.
17
get into the details of that, you’ll just have to take my
18
word for it for now, but using PKE it is possible to design
19
protocols where the information provided a buyer to conduct
20
a transaction is strongly bound to that particular
21
transaction, and so cannot be reused.
22
technology would completely solve the credit card fraud
23
problem.
I don’t want to
The adoption of this
24
And in the interest of time, I will just tell
25
you that after three years I gave up on this effort, and the
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last straw was exploring the possibility of getting a money
2
transmitter license.
3
out to be so expensive and time-consuming and unpredictable
4
that I decided not to pursue it.
5
It turned out, that the process turned
CHAIRMAN DICKINSON:
Okay.
Thank you.
Uh,
6
and I, uh, am informed that we did include your letter in
7
the materials that were made available to the public.
8
9
MR. GARRET:
Oh, it was?
I must have missed
it then.
10
CHAIRMAN DICKINSON:
It was included in the –
11
it was included in the materials the Committee members
12
received, and it is on the Committee’s web site, so we have
13
made it part of the record, and thank — thank you.
14
MR. GARRET:
15
MR. COSME:
Good enough.
Hi, I’ll be brief and to the
16
point.
17
Professional Small Business Services.
18
payroll providers that was discussed a little bit earlier.
19
And um, and I’m also the California Chairperson for the
20
National Federation of Independent Businesses.
My name is Manuel Cosme.
I’m the co-owner of
21
CHAIRMAN DICKINSON:
22
MR. COSME:
We’re one of the
Welcome.
Thank you for this opportunity.
23
Uh, as I understand it, um, according to the statute,
24
there’s a $5,000 non-refundable license fee, I think, and
25
there’s a $500,000 minimum for surety bond, right?
We
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provide payroll services for small businesses.
2
employees is about four.
3
100 dollars a month.
4
service bureaus to come up with those kinds of funds doesn’t
5
make sense.
6
statute according to what I read, is that we issue
7
executable checks.
8
becomes negotiable.
9
the owners.
10
The average
That billing runs between 72 to
And, and to require the, um, payroll
Um, the services we provide, um, is that in the
These executable checks, when signed,
But that’s only when they are signed by
So, okay, I would like to see a little
11
clarity on this law, so there is a distinction between the
12
services we provide, which goes directly from the business
13
owner to IRS or EDD, or those that, uh, perhaps take funds –
14
what happened in, uh, with this, Sacramento.
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CHAIRMAN DICKINSON:
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MR. COSME:
Mm-hmm.
Where the funds was actually sent
17
to a trust fund, and then from there they paid the agencies
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and there was a — by the way the State of New York had a
19
similar problem.
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21
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CHAIRMAN DICKINSON:
Well, the other firm was
in New York that, that was a victim, so, yeah.
MR. COSME:
That’s – yeah, exactly, so um but
23
there is a distinction between the — the small payroll
24
service bureaus that are throughout the State of California,
25
as opposed to those.
Um, so…
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CHAIRMAN DICKINSON:
Right, and I certainly
2
by my comments didn’t mean to suggest that all payroll
3
forms, uh, firms, or anything like that — I mean, that’s –
4
that’s the aberration, but, to be sure.
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MR. COSME:
Yeah, um, and so, quite a few
6
comments were mentioned today and I thought they were
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excellent.
8
those into consideration, especially from the representative
9
of ADP.
Um, and I’m hoping that um, you take some of
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CHAIRMAN DICKINSON:
11
MR. COSME:
12
CHAIRMAN DICKINSON:
Okay.
Alright?
Yes.
Thank you for all
13
three very much.
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no one else who wishes to address the Committee this
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afternoon, we — we are adjourned.
Appreciate your testimony.
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(Hearing adjourned at 3:45 P.M.)
And if there’s
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CERTIFICATION
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I, Aaron Greenspan, certify that the foregoing is a
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correct transcript from the official digital video recording
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of the proceedings in the above-entitled matter.
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March 13, 2013
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EXHIBIT D
March 11, 2013 California State Assembly Banking and Finance Committee Hearing
Testimony and Public Comment Materials
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TESTIMONY
AND
PUBLIC COMMENT
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Statement of
_ Thomas P. Brown
Lecturer, Berkeley Law School, University of California
and
Partner, Paul Hastings LLP
before the
Banking and Finance Committee
California State Assembly
State Capitol, Room 444
Sacramento, California
March 11, 2013
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Chairman Dickinson, members of the Committee, thank you for inviting me to appear
before you today to discuss the California Money Transmission Act-and its effect on innovation
in the payments industry.! With this written submission, I intend to (1) provide the Committee
with some background on the role that California has played in incubating new technologies for
value exchange, (2) sketch the regulatory framework that governs the payment industry; (3)
discuss some of the issues that have arisen since the California Money Transmission Act was last
amended; and (4) offer some thoughts about possible modifications to the California Monéy
Transmission Act that would address some of these issues. . |
INTRODUCTION
California is widely regarded as the nation’s innovation and technology capital. Many of
the technologies that shape the modern economy were conceived, developed and perfected in
California. The smart phone, integrated circuit, and, of course, the World Wide Web have
changed how people work and live. Bach was brought to life by people and businesses resident
in California.
California has also served as an incubator for innovation in industries not generally
associated with technology. In particular, California has been home to companies that have
_ shaped the consumer financial services industry. Since A.P. Giannini founded the Bank of Italy
in San Francisco in 1904, California businesses and entrepreneurs have played key roles in the
development of consumer credit, credit cards, debit cards and electronic payments.” These
‘Tam appearing today in my capacity as an adjunct professor at Berkeley Law School. In my
private practice, ] have represented and currently represent a number of clients that participate in
the payments industry. The opinions expressed in today’s testimony are my own and may not
represent those of my firm or my clients.
? The Money Transmission Act itself recognizes California’s status as a hub of innovation. See _
Cal. Fin. Code § 2001(a) (“Money transmission businesses conduct a significant amount of
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