All Things FinReg


Payment apps and the legal and regulatory issues they present were front and center at a November 5 meeting of state attorneys general consumer protection leaders.

Attorneys general recognize the value of these apps and noted those available through traditional banking services. Moreover, there is a general recognition that the unbanked and underbanked require digital access in order to perform routine consumer functions and that payment apps can provide this service.

Nonetheless, discussion at the meeting, held in Omaha, Nebraska, reflected the view that many of these apps may function as or at least fit the definition of a money transmitter under the anti-money laundering rules of Treasury’s Financial Crime Enforcement Network (FinCEN) as well as state financial regulatory statutes and rules. To the extent these apps do meet those legal tests, they would then have to be registered with FinCEN and licensed by all states in which the platform does business. Because these apps are necessarily nationwide in focus, the process of obtaining and then maintaining the licenses is time consuming and expensive, and also subjects the platform to examination and supervision by the licensing authorities.

Cooperation and collaboration has only increased since the recent appointment of the former Illinois consumer protection chief to serve as the secretary of her state’s Department of Financial & Professional Regulation.

As noted by several attorneys general, it is typically a violation of federal and state unfair and deceptive acts and practices (state), or unfair, deceptive, and abusive acts and practices (federal), (UDAP or UDAAP) laws to process a transaction without a license. The penalties are steep and calculated per transaction, and they can thus mount quickly.

Further, whether a particular app may entail the “processing” of money payments is very much not just a question of fact, but also a function of local (state) regulatory interpretations (of which there are relatively few) and enforcement attitudes, which are not uniform among the various states. At the same time, these cases can be seen as “low hanging fruit” for federal (CFPB) and state enforcement authorities, because all these authorities need to allege is that the platform does not have a money transmitter or comparable license. These authorities often work together because not only do they have roughly equivalent authorities under the federal Dodd-Frank Act (UDAAP) and state consumer protection statutes (UDAP), but state attorneys general also have concurrent authority with the CFPB to enforce the federal UDAAP provision.

The takeaway from this session is that there is heightened state regulatory and law enforcement interest in enforcement against noncompliant payments-related platforms, and a growing recognition that because licenses are a prerequisite, the simplest enforcement case need not focus on any fact beyond the respondent’s failure to have a license.

When developing an app, compliance and legal review at each stage of development are important and it then becomes important to carefully review for compliance on a regular basis.