Regulation of electronic stored value payment products issued by non-banks under state “money transmitter” licensing laws

INTRODUCTION

While the burgeoning of electronic payment products has not yet occurred as some predicted, (1) in the last five years a small number of successful electronic payment products have surfaced–especially in the stored value area. (2)

A stored value product is basically one which is pre-loaded with funds or value, and thereafter such value is decremented as it is used to make purchases. (3) Beyond that, there are many variations on the kinds of stored value products that are available. Some stored value products are sold directly to the public. (4) In those instances, when consumers buy a stored value product, they generally pay up front an amount that is “loaded” onto the payment device or “card.” (35) Sometimes, in addition to the load amounts, consumers are required to pay other fees, such as enrollment fees, customer service fees, and overdraft fees. (6) Other common stored value products are not sold to the public, but are loaded by entities such as advertisers, retailers, or employers and are given as gifts, rewards, or incentives. (7) Many cards are for one-time use only, while others can be reloaded. (8) Most plastic stored value cards rely on a magnetic stripe to store data. However, there has been a range of other kinds of stored value products–such as “smart cards” utilizing microchips, cards using bar codes, and other data storage mechanisms. Finally, it should be noted that not all stored value products are loaded with money. Some offer points, miles, or other accrued value, which can later be redeemed by the owner or holder. (9)

Probably the most common electronic stored value payment products are “gift certificate cards” sold by retailers for use by their customers solely within their own stores. These are essentially plastic equivalents to paper gift certificates, and have been widely embraced by major retailers for a number of reasons, including better data tracking, monitoring of card use, and ease in allowing for multiple use of one card without having to pay change back to the holder.

Other stored value products, useable more broadly than at a single retailer, have also appeared in the marketplace. Some of these include: “mall cards”–useable at all stores within a given mall

However, at the core of all of these products is the notion that the value is paid in up front, and then, as the product is used to make purchases at one or more merchants or locations, the value is debited or decremented from the prepaid balance accessible with the card.

BACKGROUND

In 1996, when the signs of a new electronic payments industry first became apparent, there was a significant amount of regulatory activity in this area accompanied by considerable academic analysis and industry pronouncements. (13) Other authors have chronicled these early attempts at regulation. For purposes of this Article, suffice it to say that efforts at federal regulation of electronic payments did not succeed, and as of mid-1997, the electronic payment industry–especially with respect to non-bank issuers of such products–was generally considered unregulated. (14)

The vacuum of regulation in the area of stored value was duly noted (15) and as nature abhors a vacuum, so do regulators. The mantle of oversight and regulation of the non-bank stored value industry was picked up by the states, primarily through two mechanisms.

* First, an industry group known as the Non-Bank Funds Transmitter Group (16) in 1994 promulgated a model-licensing act (Model Act) focused primarily on providing uniform regulation of paper-based stored value products, such as money orders and travelers checks. (17) In 1998 the Model Act was amended with the inclusion of electronic stored value payment instruments. (18)

* Second, in 2000, the National Conference of Commissioners on Uniform State Laws (NCCUSL) approved and recommended for enactment the Uniform Money Services Act, which would set forth proposed regulation over the licensing of non-bank money transmissions, check cashers, and currency exchanges. (19) The money transmission provisions specifically include both paper payment instruments (such as money orders and travelers checks) as well as electronic stored value products. (20)

Both of these legislative efforts required that non-bank issuers of certain electronic stored value payment products be licensed in the same way that non-bank issuers of money orders and travelers checks are licensed, under state licensing laws known as “money transmitter laws.” (21)

As of the time this Article was prepared, eleven states had amended their existing money transmitter laws to include specific reference to electronic payment products. (22) The purpose of this Article is to summarize those state money transmitter laws that apply to electronic stored value products, explain how they apply to stored value products, and discuss the impact of such laws on the growth and development of this new industry.

STATE MONEY TRANSMITTER LAWS

State money transmitter laws now exist in forty-five states. (23) These laws are intended to regulate non-bank businesses which perform financial payment services that involve the receipt of public funds, such as the issuance of money orders and travelers checks, and the provision of wire transfer services. These financial service businesses tend to share certain similarities: they involve the taking of funds from the public, the holding of such funds securely for a period of time, and then the repayment of the funds back to either the owner of the product or to a recipient/beneficiary indicated by the owner. Some similarities between these products and depository products have been noted. (24) Since many of these products are issued by non-banks, the need for regulation has been particularly apparent when a non-bank issuer fails, and consumers find themselves holding worthless instruments. (25)

State money transmitter laws are not uniform, but generally work in the same way. They are usually issued under the auspices of the state banking or financial institutions department and hold that specified payment instruments may only be issued or sold in that state by either a bank or other depository institution, (26) by a licensed money transmitter, and/or such licensed money transmitter’s authorized distributors. (27)

The focus of these money transmitter licensing laws is the safety and soundness of entities that issue payment products and therefore hold public funds. (28) Thus, in order to obtain a license as a money transmitter, the entity must file an application providing a range of detailed information about its business, its owners, and its financial stability. Many licensing regulations require bonding and minimal capitalization. (29) Some states require criminal checks for all directors or beneficial owners of the entity. (30)

Once licensed, the entity must regularly file reports and annual renewal forms. (31) Again, these are not uniform requirements. Each state uses a different form

Most state transmitter laws have two key provisions specifically focused on ensuring the safety of consumer funds. (33) First, there are strict rules governing how the proceeds from the sale of such licensed instruments must be held by the licensed issuer from the time the issuer receives the funds from the consumer, until the time the consumer uses the funds. Most laws require that one hundred percent of these proceeds of sale, often referred to as the “outstandings,” must be invested by the issuer in a specified list of highly secure investments. (34) The purpose of these provisions is to ensure that the issuer does not misuse the funds received from the public and that such funds will still be available when the consumer encashes or uses the payment product.

Second, a money transmitter statute often contains provisions concerning the relationship between a licensee and the authorized distributors of the licensee’s products. The purpose of these provisions is to ensure that the non-bank entities (35) that hold themselves out as sellers or distributors of the payment products do not misuse the funds they receive from the public. For example, many laws require that there be a written contract between the licensee and the authorized distributor, and that under such contract, the authorized distributor must remit the proceeds of sale to the licensee within prescribed time limits. (36)

The importance of complying with state money transmitter laws is underscored by the fact that 18 U.S.C. [section] 1960 has made it a federal criminal offense to issue payment products as an unlicensed entity, whether or not the entity is aware that it is obligated to obtain a license. (37) The increased attention to non-bank payment systems as potential sources of money laundering has brought even greater scrutiny to this area. (38)

Some electronic payment product issuers and their authorized distributors have ignored state money transmitter licensing laws, and with few exceptions, state efforts at enforcing these laws have been generally lax. (39) But with the increased scrutiny by regulators in this area, issuers of electronic stored value payment products cannot afford to ignore these laws in the future.

SURVEY OF MONEY TRANSMITTER LAWS AS THEY APPLY TO ELECTRONIC STORED VALUE PRODUCTS

The move to incorporate electronic payment products into state money transmitter laws began in 1998 and has slowly accelerated. In our post-September 11th world, many states are taking a closer look at their money transmitter laws with an eye to increasing enforcement and oversight. Reports that unlicensed money transmitters were used to fund terrorist activities have led states to review and strengthen their existing money transmitter licensing laws. States with little or no licensing regimes are now considering adopting new licensing provisions. (40) Expect more new laws governing this area in the future.

What follows is a state-by-state summary indicating the laws passed in this area to date, together with a brief analysis of what products are likely to require licensing under such laws. Virtually none of these statutes have been interpreted in case law or administrative law. What follows is an analysis simply of the plain language of the statutes indicated. The specific questions addressed for each state’s statute are:

(a) What provisions of the state law address electronic payment products? In particular, given that the statute requires issuers of electronic payment products to be licensed, how exactly is “electronic payment product” (or other similar terms) defined?

(b) Does the statute require licensing for gift certificate cards, that is, cards branded with a single entity’s name/logo and issued by such entity soley to allow for the purchase of goods and/or services from that entity? Summary: All of the states generally appear to exclude such gift certificate cards from their licensing laws, with the possible exception of Virginia and Louisiana.

(c) Does the statute require licensing for mall cards and other “closed system” cards useable only at a defined group of merchants and retailers within a limited geographic area? Summary: All of the states generally appear to require licensing for mall or other closed system programs although there is some basis to argue a different interpretation in a few jurisdictions.

(d) Does the statute require licensing for cards loaded with points, miles, or other kinds of value other than money? Summary: All states, except for perhaps North Carolina, Vermont, Virginia, and Louisiana, appear to exclude point-based products from the licensing requirements.

(e) Does the statute require licensing for virtual payment products such as Internet payment mechanisms, which do not rely on a card or other tangible device? Summary: All states, except for Vermont, Virginia, Texas (with respect to certain electronic products), and perhaps Louisiana, appear to exclude virtual payment products from the licensing requirements.

(f) Does the statute require licensing for electronic payment products that are not sold to the public but are distributed as rewards or incentives from retailers, corporations, or employers? Summary: All states seem to require licensing even for reward products that are not sold to the public except Connecticut, perhaps Virginia, and, apparently, Texas, although such licensing might not be intended.

CONNECTICUT (41)

(a) What provisions of the state law address electronic payment products?

License required

No person shall engage in the business of issuing Connecticut payment instruments, or engage in the business of money transmission, without first obtaining a license from the commissioner as provided in section 36a-600. No person shall engage in such business or in the business of selling Connecticut payment instruments as an agent or subagent, except as an agent or subagent of a licensee as provided in section 36a-607. (42)

Definitions

(1) “Electronic payment instrument” means a card or other tangible object for the transmission or payment of money which contains a microprocessor chip, magnetic stripe, or other means for the storage of information, that is prefunded and for which the value is decremented upon each use, but does not include a card or other tangible object that is redeemable by the issuer in the issuer’s goods or services.

(6) “Money transmission” means engaging in the business of receiving money for transmission or the business of transmitting money within the United States or to locations outside the United States by any and all means including, but not limited to, payment instrument, wire, facsimile or electronic transfer.

(9) “Payment instrument” means a money order, travelers check or electronic payment instrument that evidences either an obligation for the transmission or payment of money, or the purchase or the deposit of funds for the purchase of such money order, travelers checks, or electronic payment instruments. A payment instrument is a “Connecticut payment instrument” if it is sold in this state. (43)

(b) Does the Connecticut statute require licensing for issuers of gift certificate cards? No. The definition of electronic payment instrument excludes cards used solely to purchase goods/services from the issuer. That would appear to encompass store card programs, whether useable at a single retailer, service provider, or chain.

NOTE: Under the definition of electronic payment instrument, the term “issuer’s goods and services” might be ambiguous because many retailers do not sell their own goods but those of others. Also, if an issuer has franchises, it could be argued that cards useable at independently owned franchises would require a license. This does not appear to be the intent of the drafters and issuers of gift certificate cards, whether useable at one or more outlets in a chain or franchise network, should be excluded from the licensing requirements of this statute.

(c) Does the Connecticut statute require licensing for issuers of mall cards and other closed system cards? Probably yes. It appears likely that these would require licensing. Mall cards or other closed system cards that can be used at a number, albeit a limited number, of differently owned and operated locations do not appear to fit into the gift certificate card exception because that exception only applies to cards redeemable by the issuer to purchase the issuer’s goods and/or services, presumably from the issuer. Mall cards are useable at multiple locations, to purchase goods/service from multiple outlets. The outlets themselves are not the issuer

NOTE: There might be an argument that goods and services found within a mall could be deemed that mall’s goods and services, and that therefore, if the mall issuer reimburses the retailer that honors the card, then the mall has redeemed the card for the issuer’s goods or services. That would appear to be a rather strained interpretation of the statutory language.

(d) Does the Connecticut statute require licensing for cards loaded with points, miles, or other kinds of value other than money? Probably not. The definition of an electronic payment instrument only includes instruments for the transmission or payment of money.

(e) Does the Connecticut statute require licensing for virtual payment products? (44) Probably not. The definition of an electronic payment instrument only includes a card or other tangible object. Virtual payment systems useable solely on the Internet are arguably outside the scope of this definition.

NOTE: It could be asked whether virtual Internet payment products might be encompassed by the term “other means for the storage of information,” because even in a virtual context the issuer does store the data in a tangible object–usually in the computer itself. The stronger argument would be that computers are not objects for the transmission or payment of money. Instead, it appears that virtual products were intentionally excluded by the drafters by their choice of the term “tangible” in the definition.

(f) Does the Connecticut statute require licensing for electronic payment products that are not sold to the public but are distributed as rewards or incentives? Probably not. The statute requires licensing for issuers of Connecticut payment instruments. The definition of payment instruments indicates that “[a] payment instrument is a `Connecticut payment instrument’ if it is sold in this state.” (45) Payment instruments that are not sold in the state would appear to be outside the scope of the statute.

NOTE: This result makes sense because these statutes are intended to protect the public and are focused on products that are loaded with public funds. Electronic payment products that are loaded with value from a merchant are analogous to paper coupons, which are not regulated as money transmission products.

DISTRICT OF COLUMBIA (46)

(a) What provisions of the District of Columbia law address electronic payment products?

License required

After the effective date of this chapter [October 2, 2001,] no person shall engage in the business of money transmission without obtaining a license issued by the Superintendent under [section] 26-1009, except as provided in subsection (d) of this section and in [section] 26-1003. (47)

Definitions

(5) “Electronic instrument” means a card or other tangible object for the transmission or payment of money (A) which contains a microprocessor chip, magnetic stripe, or other means for the storage of information

(10) “Money transmission” means the sale or issuance of payment instruments or engaging in the business of receiving money for transmission or transmitting money within the United States, or to locations abroad, by any and all means, including but not limited to payment instrument, wire, facsimile, or electronic transfer.

(12) “Payment instrument” means any written or electronic check, draft, money order, travelers check, or other electronic or written instrument or order for the transmission or payment of money which is sold or issued to one or more persons, whether or not such instrument is negotiable. The term “payment instrument” does not include any credit card voucher, any letter of credit, or any instrument, which is redeemable by the issuer in goods or services. (48)

(b) Does the District of Columbia statute require licensing for issuers of gift certificate cards? No. The definition of a payment instrument excludes cards used solely to purchase goods/services from the issuer. This definition would appear to encompass store card programs whether useable at a single retailer, service provider, or chain.

NOTE: Under the definition of an electronic instrument, the term “issuer’s goods or services” might appear ambiguous because many retailers do not sell their own goods but those of others. Also, if an issuer has franchises, it could be argued that cards useable at independently owned franchises would require a license. That does not appear to be the intent of the drafters

(c) Does the District of Columbia statute require licensing for issuers of mall cards and other closed system cards? Probably yes. It appears likely that issuers of these closed system products would require licensing. Mall cards or other closed system cards that can be used at a number, albeit a limited number, of differently owned and operated locations do not appear to fit into the gift certificate card exception because that exception only applies to cards redeemable by the issuer to purchase the issuer’s goods and/or services, presumably from the issuer. Mall cards are useable at multiple locations to purchase goods or service from multiple outlets. The outlets themselves are not the issuer

NOTE: There might be an argument that goods and services found within a mall could be deemed that mall’s goods and services and that therefore if the mall issuer reimburses the retailer that honors the card, the mall has redeemed the card for the issuer’s goods or services. This would appear to be a rather strained interpretation of the statutory language.

(d) Does the District of Columbia statute require licensing for cards loaded with points, miles, or other kinds of value other than money? Probably not. The definition of an electronic instrument only includes instruments for the transmission or payment of money

(e) Does the District of Columbia statute require licensing for virtual payment products? (49) Probably not. This statute only requires licensing for an issuer of a card or other tangible object. Virtual payment systems useable solely on the Internet are arguably outside the scope of this statute.

NOTE: It could be asked whether virtual Internet payment products might be encompassed by the term “other means for the storage of information,” because even in a virtual context, the issuer does store the data in a tangible object–usually in the computer itself. The stronger argument would be that computers are not objects for the payment or transmission of money. Instead it clearly appears that virtual products were intentionally excluded by the drafters with their choice of the term “tangible” in the definition.

(f) Does the District of Columbia statute require licensing for electronic payment products that are not sold to the public but are distributed as rewards or incentives? Probably yes. The statute requires licensing for anyone in the business of selling or issuing payment products, and is not limited to those products that are sold in the jurisdiction.

NOTE: Because these laws are intended to protect publicly paid funds, this result may not have been the drafters’ intent.

LOUISIANA (50)

(a) What provisions of the Louisiana state law address electronic payment products?

License required

A. No person, except those specified in R.S. 6:1034, shall engage in the business of money transmission or selling checks as a service or for a fee or other consideration without having first obtained a license pursuant to this Chapter. (51)

Definitions

(1) “Check” means any check, draft, money order, personal money order, or other instrument for the transmission or payment of money.

(5) “Money transmission” means to engage in the business of selling or issuing payment instruments, selling or issuing stored value, or receiving money or monetary value for transmission, including electronic transmission, to a location within or outside of the United States. (52)

(b) Does the Louisiana statute require licensing for issuers of gift certificate cards? From the plain language of the statute, it is unclear. The Louisiana statute does not follow the same framework as statutes in other states. The term “stored value” is not defined, and there is no clear exception for stored value cards redeemable solely to purchase goods and services from the issuer. The licensing requirement, however, seems to apply to businesses that engage in the business of money transmission as a service. For retailers or service providers that issue gift cards, such conduct is only ancillary to their primary businesses. Given the consistent approach in other jurisdictions and the fact that there is no case law indicating intent to enforce the licensing requirement with respect to retailers that issue gift certificate cards, it is more likely than not that the issuance of gift certificate cards alone, ancillary to a retailer’s or service provider’s business, would not require licensing. This is certainly true for a product that can only be used to purchase goods or services and cannot be used to transfer funds or obtain cash. But the issue is not crystal clear. Indeed, this is one of only two states in which it appears possible that the issuers of gift certificate cards may be required to obtain licenses, the other being Virginia.

(c) Does the Louisiana statute require licensing for issuers of mall cards and other closed system cards? Again, the plain language of the statute may be interpreted fairly broadly. On the one hand, given the consistent approach in other jurisdictions it is probably prudent to obtain a license. On the other hand, mall card issuers and other closed system providers that offer stored value programs ancillary to their primary business may have a basis to argue that they are not in the business of money transmission. There has been no case law interpreting the language on this point.

(d) Does the Louisiana statute require licensing for cards loaded with points, miles, or other kinds of value other than money? Probably not, but this is also unclear. The statutory language refers to instruments for the payment of money

(e) Does the Louisiana statute require licensing for virtual payment products? Probably yes, but only for virtual funds transfer products, although once again, the issue is not clear. The definition of a check certainly seems to indicate a physical instrument and there is nothing that would indicate a contrary intent to require licensing for virtual stored value products. In the area of wire transfer services, however, the definition of money transmission appears to include electronic transmissions of both money and monetary value. Coupled with the fact that Louisiana required PayPal to obtain a license, (53) it does appear that Louisiana intends to license Internet service providers, at least when the service involves the receipt of money or monetary value for the purposes of transmitting to another location.

(f) Does the Louisiana statute require licensing for electronic payment products that are not sold to the public but are distributed as rewards or incentives? Probably yes. The definition of money transmission encompasses both selling and issuing payment instruments and stored value.

NOTE: Because these laws are intended to protect publicly paid funds, this result may not have been the drafters’ intent.

MARYLAND (54)

(a) What provisions of the Maryland state law address electronic payment products?

License required

A person may not engage in the business of money transmission if that person, or the person with whom that person engages in the business of money transmission, is located in the state unless that person:

(1) Is licensed by the Commissioner

(2) Is an authorized delegate of a licensee under whose name the business of money transmission occurs

(3) Is a person exempted from licensing under this subtitle. (55)

Exceptions

Any person who is exempted by this section nevertheless may apply for and, if qualified, receive a license. (56)

Definitions

(a) In this subtitle the following words have the meanings indicated:

(k) “Monetary value” means a medium of exchange whether or not redeemable in money.

(l) (1) “Money transmission” means the business of selling or issuing payment instruments or stored value devices, or receiving money or monetary value, for transmission to a location within or outside the United States by any means, including electronically or through the Internet.

(2) “Money transmission” includes:

(i) a bill payer service

(ii) an accelerated mortgage payment service

(iii) any informal money transfer system engaged in as a business for, or network of persons who engage as a business in, facilitating the transfer of money outside the conventional financial institutions system to a location within or outside the United States.

(n)(1) “Payment instrument” means any electronic or written check, draft, money order, traveler’s check, or other electronic or written instrument or order for the transmission or payment of money, sold or issued to one or more persons, whether or not the instrument is negotiable.

(2) “Payment instrument” does not include any credit card voucher, letter of credit, or tangible object redeemable by the issuer in goods or services.

(p)(1) “Stored value device” means a card or other tangible object used for the transmission or payment of money:

(i) that contains a microprocessor chip, magnetic stripe, or other means for the storage of information

(ii) that is prefunded

(iii) the value of which is reduced after each use.

(2) “Stored value device” does not include any tangible object the value of which is redeemable only in the issuer’s goods or services. (57)

(b) Does the Maryland statute require licensing for issuers of gift certificate cards? Probably not. The definition of a payment instrument excludes a “tangible object redeemable by the issuer in goods or services.” (58) The definition of a stored value device has a similar, although arguably narrower, exclusion for a “tangible object the value of which is redeemable only in the issuer’s goods or services” (59) Both of these definitions reflect the intent not to require licensing for gift certificate cards, whether useable at a single retailer, service provider, or chain.

(c) Does the Maryland statute require licensing for issuers of mall cards and other closed system cards? Probably yes. Because the issuers of mall cards and other closed system cards are generally not the same entities that accept the cards for the purchase of goods and services, mall cards would appear to fall outside the exclusion.

NOTE: An argument could be made under the definition of a payment instrument that if the mall issuer or closed system issuer reimburses the stores or other retailers for purchases of goods or services made with the mall cards, then the mall cards are in fact redeemable by the issuer in goods and services. Such an interpretation might appear to be strained.

(d) Does the Maryland statute require licensing for cards loaded with points, miles, or other kinds of value other than money? No. The definitions of stored value and payment instrument include only those products used for the transmission or payment of money.

NOTE: If, however, a stored value product is offered for the purposes of transmitting funds to another location, then licensing would be required, because the description of such funds transfer services would include the transmission of monetary value, defined as “a medium of exchange whether or not redeemable in money.” (60)

(e) Does the Maryland statute require licensing for virtual payment products? Probably not. A stored value device is “a card or other tangible object used for the transmission or payment of money,” (61) which would appear to exclude virtual products.

NOTE: There could be some uncertainty if a product is considered an electronic payment instrument because the definition of payment instrument (unlike stored value) does not appear to be limited to tangible objects. (62)

(f) Does the Maryland statute require licensing for electronic payment products that are not sold to the public but are distributed as rewards or incentives? Probably yes. The statute requires licensing for those in “the business of selling or issuing payment instruments or stored value devices.” (63)

NOTE: Because these laws are intended to protect publicly paid funds, this result may not have been the drafters’ intent.

MINNESOTA (64)

(a) What provisions of the Minnesota state law address electronic payment products?

License required

On or after January 1, 2002, no person except those exempt pursuant to section 53B.04 shall engage in the business of money transmission without a license as provided in this chapter. A licensee may conduct business in this state at one or more locations, directly or indirectly owned, or through one or more authorized delegates, or both, under a single license granted to the licensee. (65)

Definitions

Subd. 7…. “Electronic instrument” means a card or other tangible object for the transmission or payment of money that contains a microprocessor chip, magnetic stripe, or other means for the storage of information, that is prefunded and for which the value is decreased upon each use. The term does not include a prepaid telephone card, electronic benefits transfer card, or any other card or other tangible object that is redeemable by the issuer in the issuer’s goods or services.

Subd. 13…. “Money transmission” means selling or issuing payment instruments or engaging in the business of receiving money for transmission or transmitting money within the United States or to locations abroad by any and all means, including but not limited to payment instrument, wire, facsimile, or electronic transfer.

Subd. 15…. “Payment instrument” means any electronic or written check, draft, money order, travelers check, or other electronic or written instrument or order for the transmission or payment of money, sold or issued to one or more persons, whether or not the instrument is negotiable. The term does not include any credit card voucher, letter of credit, or instrument that is redeemable by the issuer in goods or services. (66)

(b) Does the Minnesota statute require licensing for issuers of gift certificate cards? No. The definition of an electronic instrument excludes cards used solely to purchase goods or services from the issuer. This exclusion would appear to encompass store card programs, whether useable at a single retailer, service provider, or chain.

NOTE: Under the definition of an electronic instrument, the term “issuer’s goods or services” might seem a bit ambiguous because many retailers do not sell their own goods, but sell those of others. Also, if an issuer has franchises, it could be argued that cards useable at independently owned franchises would require a license. That does not, however, appear to be the intent of the drafters

(c) Does the Minnesota statute require licensing for issuers of mall cards and other dosed system cards? Probably yes. Because the issuers of mall cards and other closed system cards are generally not the same entities that accept the cards for the purchase of goods and services, such cards would appear to fall outside the gift certificate card exclusion. In addition, it is unlikely that the goods/services purchased at a mall or closed system network would be deemed to be the issuer’s goods or services.

NOTE: A weak argument could be made that, if the mall issuer or closed system issuer reimburses the stores/retailers for purchases made with the cards, then the cards might be considered redeemable by the issuer. Such an interpretation might appear to be very strained, however, especially in light of the requirement that the cards be redeemable in the issuer’s goods or services.

(d) Does the Minnesota statute require licensing for cards loaded with points, miles, or other kinds of value other than money? No. The definition of an electronic instrument includes only those products used for the transmission or payment of money.

(e) Does the Minnesota statute require licensing for virtual payment products? Probably not. This statute only requires licensing for an issuer of an electronic instrument, defined as a “card or other tangible object”(67) Virtual payment systems useable solely on the Internet are arguably outside the scope of this statute.

NOTE: It could be asked whether virtual Internet payment products might be encompassed by the term “other means for the storage of information” (68) because even in a virtual context, the issuer does store the data in a tangible object–usually in the computer itself. The stronger argument would be that computers are not objects for the transmission or payment of money. It clearly appears that virtual products were intentionally excluded by the drafters with their choice of the term “tangible” in the definition. (69)

(f) Does the Minnesota statute require licensing for electronic payment products that are not sold to the public but are distributed as rewards or incentives? Probably yes. The statute requires licensing for those in the business of “selling or issuing payment instruments.” (70)

NOTE: Because these laws are intended to protect publicly paid funds, this result may not have been the drafters’ intent.

NORTH CAROLINA (71)

(a) What provisions of the state law address electronic payment products?

License required

(a) On or after October 1,2001, no person except those exempt pursuant to G.S.53-208.4 shall engage in the business of money transmission in this State without a license as provided in this article.

(b) A licensee may conduct its business in this State at one or more locations, directly or indirectly owned, or through one or more authorized delegates, or both, pursuant to the single license granted to the licensee.

(c) For the purposes of this article, a person is considered to be engaged in the business of money transmission in this State if that person makes available, from a location inside or outside of this State, an Internet website North Carolina citizens may access in order to enter into those transactions by electronic means. (72)

Definitions

(6) Electronic instrument [means] a card or other tangible object for the transmission or payment of money or monetary value which contains a microprocessor chip, magnetic strip, or other means for the storage of information that is prefunded and for which the value is decremented upon each use. The term does not include a card or other tangible object that is redeemable by the issuer in goods or services.

(11) Monetary transmission [means] … either of the following:

a. The sale or issuance of payment instruments or stored value.

b. The act of engaging in the business of receiving money or monetary value for transmission within the United States or to locations abroad by any and all means, including payment instrument, wire, facsimile, or electronic transfer.

(12) Monetary value [means a] medium of exchange, whether or not redeemable in money.

(14) Payment instrument [means] any electronic or written check, draft, money order, traveler’s check, or other electronic or written instrument or order for the transmission or payment of money or monetary value, whether or not the instrument is negotiable. The term does not include a credit card voucher, letter of credit, or any other instrument that is redeemable by the issuer in goods or services. (73)

(b) Does the North Carolina statute require licensing for issuers of gift certificate cards? No. The definition of an electronic instrument clearly appears to exclude cards used solely to purchase goods or services from the issuer, whether the issuer is a single retailer or service provider, or a chain.

(c) Does the North Carolina statute require licensing for issuers of mall cards and other closed system cards? Probably yes. It appears likely that issuers of these closed system products would require licensing. Mall cards or other closed system cards that can be used at a number, albeit a limited number, of differently owned and operated locations, do not appear to fit into the gift certificate card exception, because that exception only applies to cards redeemable by the issuer to purchase goods and/or services. The stores or outlets that accept mall cards themselves are not the issuer

NOTE: An argument could be made that, if the mall issuer or closed system issuer reimburses the stores/retailers for purchases made with the mall cards, then the mall cards might be considered redeemable by the issuer–especially because the exception language in this statute is not limited to the issuer’s goods or services. Such an interpretation might appear to be strained.

(d) Does the North Carolina statute require licensing for cards loaded with points, miles, or other kinds of value other than money? Probably yes. Issuers of these products would likely require licensing because this statute specifically covers instruments for the payment of money or monetary value and because monetary value is a “medium of exchange, whether or not redeemable in money.” (74)

NOTE: It may be subject to question whether points that cannot be transferred and can only be redeemed once would in fact constitute a medium of exchange, because such points cannot be transferred, exchanged, or reused.

(e) Does the North Carolina statute require licensing for virtual payment products? Probably not. This statute only requires licensing for an issuer of a card or other tangible object. Virtual payment systems useable solely on the Internet are arguably outside the scope of this statute.

NOTE: It could be asked whether virtual Internet payment products might be encompassed by the term “other means for the storage of information,” because even in a virtual context, the issuer does store the data in a tangible object–usually in the computer itself. The stronger argument would be that computers are not objects for the transmission or payment of money. It clearly appears that virtual products were intentionally excluded by the drafters with their choice of the term “tangible” in the definition. (75)

(f) Does the North Carolina statute require licensing for electronic payment products that are not sold to the public but are distributed as rewards or incentives? Probably yes. The statute requires licensing for anyone in the business of money transmission in the state. Money transmission is defined as “the sale or issuance of payment instruments or stored value,” (76) and is not limited to those products that are sold in the jurisdiction. The statute also clarifies that entities that sell payment instruments to North Carolina citizens through a Web site are considered to be engaging in the money transmission business in the state.

NOTE: Because these laws are intended to protect publicly paid funds, this result may not have been the drafters’ intent.

OREGON (77)

(a) What provisions of the state law address electronic payment products?

License required

(1) A person, other than a person that is exempt under ORS 717.210, may not conduct a money transmission business without a license as provided in ORS 717.200 to 717.320, 717.900 and 717.905.

(2) A licensee may conduct business in this state at one or more locations that are directly or indirectly owned by the licensee, or through one or more authorized delegates, or both. A licensee is required to obtain only one license under ORS 717.200 to 717.320, 717.900 and 717.905. (78)

Definitions

(7) “Electronic instrument” means a card or other tangible object for the transmission or payment of money that contains a microprocessor chip, magnetic stripe or other means for the storage of information, that is prefunded and for which the value is decremented upon each use. “Electronic instrument” does not include a card or other tangible object that is redeemable by the issuer in the issuer’s goods or services.

(11) “Money transmission” means the sale or issuance of payment instruments or engaging in the business of receiving money for transmission or transmitting money within the United States or to locations abroad by any and all means, including but not limited to payment instrument, wire, facsimile or electronic transfer.

(12) “Payment instrument” means any electronic or written check, draft, money order, traveler’s check or other electronic or written instrument or order for the transmission or payment of money, sold or issued to one or more persons, whether or not the instrument is negotiable. “Payment instrument” does not include any credit card voucher, any letter of credit or any instrument that is redeemable by the issuer in goods or services. (79)

(b) Does the Oregon statute require licensing for issuers of gift certificate cards? No. The definition of an electronic instrument excludes tangible objects redeemable by the issuer in the issuer’s goods or services. In addition, an exclusion exists for issuers of payment instruments that are “redeemable by the issuer in goods or services.” (80) These exclusions would appear to encompass store card programs, whether useable at a single retailer, service provider, or chain.

(c) Does the Oregon statute require licensing for issuers of mall cards and other closed system cards? It depends. If the product is an electronic instrument then it would likely require licensing, because a mall generally does not issue cards redeemable in its own goods and services. If the cards are deemed to be instruments, however, and can only be used to purchase goods or services, and not to obtain cash, then they might fall under the exclusion contained in the definition of payment instruments. Given that this interpretation differs markedly from that in other states, issuers in Oregon might wish to contact local regulators for clarification. Until local courts interpret this statute it is unclear what the legislative intent underlying the statute is.

(d) Does the Oregon statute require licensing for cards loaded with points, miles, or other kinds of value other than money? No. The definition of an electronic instrument includes only those products used for the transmission or payment of money.

(e) Does the Oregon statute require licensing for virtual payment products? Probably not. This statute only requires licensing for an issuer of a card or other tangible object. Virtual payment systems useable solely on the Internet are arguably outside the scope of this statute.

NOTE: It could be asked whether virtual Internet payment products might be encompassed by the term “other means for the storage of information,” because even in a virtual context the issuer does store the data in a tangible object–usually in the computer itself. The stronger argument would be that computers are not objects for the transmission or payment of money. It clearly appears that virtual products were intentionally excluded by the drafters with their choice of the term “tangible” in the definition. (81)

(f) Does the Oregon statute require licensing for electronic payment products that are not sold to the public but are distributed as rewards or incentives? Probably yes. The statute requires licensing for anyone in the money transmission business, which is defined as the “sale or issuance of payment instruments” (82) and is not limited to those products that are sold in the jurisdiction.

NOTE: Because these laws are intended to protect publicly paid funds, this result may not have been the drafters’ intent.

TEXAS (83)

(a) What provisions of the state law address electronic payment products?

License required

(a) Except as provided by section 152.202, a person must hold a license issued under this chapter to engage in the business of selling checks to purchasers:

(1) located in this state

(2) wherever located if the seller is located in this state.

(b) For purposes of this section, a seller is located in this state if the seller:

(1) employs or otherwise uses an agent that is located in this state

(2) maintains, uses, or otherwise controls an account at a financial institution office located in this state for the purpose of engaging in the business of selling checks. (84)

Exemptions from Licensing

(a) Section 152.201 does not apply to:

(1) a federally insured financial institution

(2) an agent of a license holder unless the agent receives or at any time has access to a record of the license holder that contains information pertaining to payment of the license holder’s obligations under checks sold by the agent for purposes of verification, reconciliation, or accounting

(6) with the commissioner’s prior written determination that the exemption is in the public interest, a person that:

(A) incidentally engages in the sale of checks ‘only to the extent reasonable and necessary to accomplish a primary business objective that is unrelated to the sale of checks

(B) does not advertise or offer to sell checks to the public except to the extent reasonable and necessary to fairly advertise or offer its primary business services

(C) either:

(i) sells checks exclusively in connection with commercial contracts in interstate commerce

(ii) does not charge a fee for the sale of checks or sell checks without fee as an inducement for customer participation in its primary business

(7) any other person exempted by rule. (85)

Definitions

(1) “Business of selling checks” means the activity of receiving money by any means from a purchaser for the purpose of subsequently transferring the money in the form of a check payable by the seller to a person designated by the purchaser, for direct or indirect compensation, including earnings from money received from the purchaser or the purchaser’s agent and held pending disbursement on a check sold to the purchaser, whether or not the activity is conducted on a regular basis or as an organized business concern.

(2) “Check” means an instrument, service, or device for the transmission or payment of money, including a draft, traveler’s check, or money order, or an electronic equivalent to a draft, traveler’s check, or money order, including an automated clearinghouse transfer. The term does not include an instrument, service, or device that:

(A) transfers money directly from the purchaser to a creditor of the purchaser or to an agent of the creditor

(B) is redeemed by the issuer in goods or services under circumstances not designed to evade the obligations and responsibilities imposed by this chapter

(C) transfers money in the form of currency to another person in a transmission or transportation transaction subject to chapter 153.

(9) “Money” means a medium of exchange authorized or adopted by a domestic or foreign government and includes a monetary unit of account established by an intergovernmental organization or by agreement between two or more nations. The term also includes money represented in digital electronic format, whether or not specially encrypted, and stored or capable of storage on electronic media in a manner that is retrievable and transferable electronically.

(12) “Sell” includes issue, transmit, or deliver. (86)

(b) Does the Texas statute require licensing for issuers of gift certificate cards? No, probably not. The Texas statute does not follow the same framework as many other money transmitter statutes, but it does carve out an exemption for instruments and devices that are “redeemed by the issuer in goods or services.” (87) This would seem to be intended to exclude gift certificate cards issued by and used at a single retailer or a chain.

NOTE: The exclusion does have a qualification–the exemption would not apply to gift certificate card programs “designed to evade the obligations and responsibilities imposed by this chapter.” (88)

(c) Does the Texas statute require licensing for issuers of mall cards and other closed system cards? Probably yes. Because the issuers of mall cards and other closed system cards are generally not the same entities that accept the cards for the purchase of goods and services, mall cards would appear to fall outside the exclusion for gift certificate cards. (89) The same is true for paper mall gift certificates. (90)

NOTE: Because the Texas Department of Banking has issued an opinion in the analogous area of paper gift certificate products, (91) there appears to be little uncertainty on how this statute would be interpreted.

(d) Does the Texas statute require licensing for cards loaded with points, miles, or other kinds of value other than money? Probably not. The definition of check includes “an instrument, service or device used for the transmission or payment of money.” (92) The definition of money has been expanded to include money in digital electronic format, but does not include any other kind of monetary value.

(e) Does the statute require licensing for virtual payment products? Probably yes, depending on how the virtual product is configured. The statute requires licensing for issuers of “an electronic equivalent to a draft, traveler’s check, or money order,” (93) and to the extent a virtual product fits that definition, licensing would be required.

NOTE: This still leaves a range of other virtual electronic payment products that may not come under the licensing statute. Issuers may wish to contact Texas regulators for clarification.

(f) Does the Texas statute require licensing for electronic payment products that are not sold to the public but are distributed as rewards or incentives? Probably not. The activity that requires licensing is the receipt of “money by any means from a purchaser for the purpose of subsequently transferring the money in the form of a check payable by the seller to a person designated by the purchaser, for direct or indirect compensation.” (94) This description can cover a wide range of stored value products but in essence, involves the receipt of funds from purchaser and the subsequent payment of such funds to another designated person. Most reward or incentive products distributed by businesses do not involve either a purchaser or payment to another designated person.

NOTE: Because this language does not follow the more standard formats used in other states, the actual interpretation of the language is still unclear.

VERMONT (95)

(a) What provisions of the Vermont state law address electronic payment products?

License required

(a) A person shall not engage in money transmission without:

(1) obtaining a license under subchapter 2 of this chapter

(2) being an authorized delegate of a person licensed under subchapter 2 of this chapter. (96)

Definitions

(8) “Monetary value” means a medium of exchange, whether or not redeemable in money.

(9) “Money” means a medium of exchange that is authorized or adopted by the United States or a foreign government. The term includes a monetary unit of account established by an intergovernmental organization or by agreement between two or more governments.

(11) “Money transmission” means to engage in the business of selling or issuing payment instruments, selling or issuing stored value, or receiving money or monetary value for transmission to a location within or outside the United States.

(13) “Payment instrument” means 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 instrument that is redeemable by the issuer in goods or services.

(19) “Stored value” means monetary value that is evidenced by an electronic record. (97)

(b) Does the Vermont statute require licensing for issuers of gift certificate cards? No. The definition of a payment instrument excludes cards that are redeemable by the issuer in goods or services. That would appear to encompass store card programs whether useable at a single retailer, service provider, or chain.

NOTE: This language is broader than the language in some of the other state statutes because it is not limited to the issuer’s goods or services.

(c) Does the Vermont statute require licensing for issuers of mall cards and other closed system cards? Probably yes. Because the issuers of mall cards and other closed system cards are generally not the same entities that accept the cards for the purchase of goods and services, mall cards and other closed system programs would appear to fall outside the exclusion.

NOTE: An argument could be made that if the mall issuer or closed system issuer reimburses the stores and retailers for purchases with the cards, then the cards in fact are redeemable by the issuer, especially because the language in this statute is not limited to the issuer’s goods or services. Such an interpretation, however, might appear to be strained.

(d) Does the Vermont statute require licensing for cards loaded with points, miles, or other kinds of value other than money? Probably yes. The definitions of both payment instrument and stored value include products used for the payment of monetary value and are not limited to money. Given that this interpretation differs from other states’ statutes, issuers in Vermont might wish to contact local regulators for clarification. Until this statute is interpreted by local courts, it is unclear what the legislative intent underlying the statute is.

NOTE: Because monetary value is defined as a medium of exchange, it may be subject to question whether points, which cannot be transferred and can only be redeemed once, would in fact constitute a medium of exchange because such points cannot be transferred, exchanged, or reused.

(e) Does the Vermont statute require licensing for virtual payment products? Probably yes. The statute requires licensing for issuers of stored value. Stored value is defined as “monetary value that is evidenced by an electronic record.” (98) This would appear to encompass virtual Internet products. Unlike other state statutes, the definition is not limited to a card or other tangible object.

(f) Does the Vermont statute require licensing for electronic payment products that are not sold to the public but are distributed as rewards or incentives? Probably yes. The statute requires licensing for those in the business of selling or issuing payment instruments or stored value.

NOTE: Because these laws are intended to protect publicly paid funds, this result may not have been the drafters’ intent.

VIRGINIA (99)

(a) What provisions of the Virginia state law address electronic payment products?

License required

No person shall engage in the business of selling money orders or, on or after January 1, 1995, engage in the business of money transmission, whether or not the person has a location in the Commonwealth, unless such person obtains from the State Corporation Commission a license issued pursuant to this chapter….

This chapter shall be construed by the Commission for the purpose of protecting, against financial loss, citizens of the Commonwealth who purchase money orders or who give money or control of their funds or credit into the custody of another person for transmission, regardless of whether the transmitter has any office, facility, agent or other physical presence in the Commonwealth. (100)

Definitions

“Monetary value” means a medium of exchange, whether or not redeemable in money.

“Money transmission” means receiving money or monetary value for transmission by wire, facsimile, electronic means or other means or selling or issuing stored value.

“Money transmitter” or “licensee” means a person who is authorized pursuant to this chapter to engage in the business of selling money orders or the business of money transmission, or both.

“Stored value” means monetary value that is evidenced by an electronic record. (101)

(b) Does the Virginia statute require licensing for issuers of gift certificate cards? Apparently yes. Unlike virtually all other states, the definitions of stored value and money transmission do not appear to exclude cards that are redeemable by the issuer in goods and services.

Note: This result may be unintended. There is no indication that Virginia has enforced this provision against local retailers who issue gift certificate cards. The stated purpose of the law, to protect citizens who give control of their funds to another person for transmission does suggest that a card useable solely to buy goods/services from that same merchant might not be covered. It would nevertheless be advisable to contact a local regulator for clarification if you or your client conducts a gift certificate card business in this state.

(c) Does the Virginia statute require licensing for issuers of mall cards and other closed system cards? Again, apparently yes. There are few limitations on the definitions of stored value or money transmission in this state.

NOTE: Again, given the stated purpose of this statute, this may not be the regulator’s intent. It would be advisable to seek clarification.

(d) Does the Virginia statute require licensing for cards loaded with points, miles, or other kinds of value other than money? Probably yes. The definition of stored value includes monetary value which is evidenced by an electronic record “whether or not it is redeemable in money.” (102)

Note: Since monetary value is defined as a medium of exchange, it may be subject to question whether points which cannot be transferred and can only be redeemed once, would in fact constitute a medium of exchange since such points cannot be transferred, exchanged or reused.

(e) Does the Virginia statute require licensing for virtual payment products? Probably yes. The statute requires licensing for issuers and sellers of stored value and stored value is defined as “monetary value that is evidenced by an electronic record.” (103) This would appear to encompass virtual, Internet products. Unlike other state statutes, the definition is not limited to a card or other tangible object.

(f) Does the Virginia statute require licensing for electronic payment products that are not sold to the public but are distributed as rewards or incentives?

This is also unclear. On one hand, the definition of money transmission includes issuing stored value. On the other hand, the stated purpose of the statute is to protect citizens “who give money or control of their funds.” (104) Again, it might be advisable to seek clarification from the state regulators.

WEST VIRGINIA (105)

(a) What provisions of the state law address electronic payment products?

License required

(a) Except as provided by section three [[section] 32A-2-31 of this article, a person may not engage in the business of currency exchange, transportation or transmission in this state without a license issued under this article. For purposes of this article, a person is considered to be engaging in those businesses in this state if he or she makes available, from a location inside or outside this state, an Internet website West Virginia citizens may access in order to enter into those transactions by electronic means. (106)

Definitions

(1) “Commissioner” means the commissioner of banking of this state.

(2) “Check” or “payment instrument” means any check, traveler’s check, draft, money order or other instrument for the transmission or payment of money whether or not the instrument is negotiable. The term does not include a credit card voucher, a letter of credit or any instrument that is redeemable by the issuer in goods or services.

(6) “Currency transmission” or “money transmission” means engaging in the business of selling or issuing checks or the business of receiving currency or the payment of money by any means for the purpose of transmitting that currency, payment of money or its equivalent by wire, facsimile or other electronic means, or through the use of a financial institution, financial intermediary, the federal reserve system or other funds transfer network. It includes the transmission of funds through the issuance and sale of stored value cards which are intended for general acceptance and used in commercial or consumer transactions.

(8) “Licensee” means a person licensed by the commissioner under this article.

(9) “Money order” means any instrument for the transmission or payment of money in relation to which the purchaser or remitter appoints or purports to appoint the seller thereof as his agent for the receipt, transmission or handling of money, whether the instrument is signed by the seller, the purchaser or remitter, or some other person. (107)

Exemptions

(c) The issuance and sale of stored value cards which are intended to purchase items only from the issuer or seller of the stored value card is exempt from the provisions of this article. (108)

(b) Does the West Virginia statute require licensing for issuers of gift certificate cards? No. The definition of check excludes instruments redeemable by the issuer in goods or services. Similarly, there is an exclusion from licensure for stored value cards intended solely to purchase items from the issuer or seller. These provisions would appear to encompass gift certificate card programs, whether useable at a single retailer, service provider, or chain.

(c) Does the West Virginia statute require licensing for issuers of mall cards and other closed system cards? Probably yes. Because the issuers of mall cards and other closed system cards are generally not the same entities that accept the cards for the purchase of goods and services, mall cards and other closed system programs would appear to fall outside the exclusions that apply to gift certificate cards.

NOTE: Language qualifying which stored value cards are encompassed by the statute suggests that some special use products may fall outside the licensing regime. The statute applies to “stored value cards which are intended for general acceptance and used in commercial or consumer transactions.” (109) There may be a basis for the position that mall cards and other closed system cards are not for general acceptance.

(d) Does the West Virginia statute require licensing for cards loaded with points, miles, or other kinds of value other than money? No. The definitions of money order and payment instrument include only those products used for the transmission or payment of money.

(e) Does the West Virginia statute require licensing for virtual payment products? Probably not. While the language does not include the references to tangible devices that are sometimes found in other state statutes, the language generally refers to such tangible items. For example, stored value products are referred to as stored value cards and not simply as stored value. The definition of check also notes the existence of a money order or instrument, and not to electronic equivalents of such items.

NOTE: The statute does, however, make clear that the sale of such items from an Internet Web site accessible to West Virginia citizens is considered a sale in West Virginia.

(f) Does the West Virginia statute require licensing for electronic payment products that are not sold to the public but are distributed as rewards or incentives? Probably yes. Licensing is required for entities that “engage in the business of currency exchange, transportation or transmission.” (110) In addition, the issuance and sale of stored value cards is within the scope of the licensing statute.

NOTE: Language qualifying which stored value cards are encompassed by the statute suggests that some special use products may fall outside the licensing regime, even if they are issued in the state

CONCLUSION

In its April 1998 report, (112) the Consumer Electronic Payments Task Force established by the U.S. Treasury Department noted that the “e-money marketplace is still in a very early phase and it may be premature to establish broad substantive requirements regarding consumer disclosures and other protections.” (113) In that same year, however, West Virginia became the first state to modify its money transmitter laws in order to specifically require issuers of electronic payment products to obtain money transmitter license in that state. Now another ten jurisdictions have followed suit, with more, no doubt, to come.

Perhaps because they were mindful of the risks noted by the Task Force regarding the regulation of the emerging electronic payments industry, (114) states have with rare exception been hesitant to pursue vigorous enforcement measures of state money transmitter licensing laws over the last four years. In retrospect, this more circumspect approach on the part of the states appears to have been appropriate, because the marketplace has seen a spate of e-money and stored value products come and go, (115) with little negative impact on consumers.

The events of September 11th have ushered in a new era, where all payment products that could potentially be used to transmit funds for illegal purposes are now under scrutiny. Any business that issues or sells electronic payment products in the eleven jurisdictions noted above should be aware of the serious consequences, under both state and federal law, for the failure to obtain requisite money transmitter licenses. And for those electronic payment businesses located in the remaining unregulated jurisdictions–be prepared to see new legislation in this area in the coming years.

(1.) See, e.g., Task Force on Stored-Value Cards, A Commercial Lawyer’s Take on the Electronic Purse: An Analysis of Commercial Law Issues Associated with Stored-Value Cards and Electronic Money, 52 BUS. LAW. 653, 654 (1997) (noting that “[f]or a whole host of social and economic reasons, there is an expectation that demand will soon dramatically increase for new retail electronic payment media”).

(2.) See Walter A. Effross, Putting the Cards Before the Purse?: Distinctions, Differences, and Dilemmas in the Regulation of Stored Value Card Systems, 65 UMKC L. REV. 319, 324 (1997). “Stored value” is a term used to describe prepaid payment products. Travelers checks, money orders, and gift certificates are all examples of paper-based stored value payment products. In the world of electronic payments, stored value products include primarily prepaid plastic cards and prepaid Internet payment products, although a few radio frequency identification (RFID) products, such as the E-Z Pass highway toll system, are also available. See id. at 323-32.

(3.) Id. at 323-24.

(4.) Id.

(5.) For purposes of this Article, I will refer to stored value products as “card(s)”–recognizing of course that stored value devices come in a range of sizes and designs.

(6.) For example, the “VisaBuxx” stored value cards for teenagers list a variety of associated fees, including set up fees, account funding fees, ATM fees, fees for customer service calls after the first two calls per month, replacement card fees, renewal card fees, paper statement fees, inactive account fees, overdraft fees, and account closure fees. Visa USA, Inc., VisaBuxx Processing Services, at http://www.visadps.com/html/prod/visabuxx.html (last visited Sept. 19, 2002).

(7.) For example, American Express Incentive Services offers a range of point-based cards to businesses. American Express Incentive Services L.L.C., Product Descriptions, at http://www.aeis.com/Product_Descriptions.html (last visited Sept. 22, 2002).

(8.) For example, the CitiCash Card and the AAA Everyday Funds Card may both be reloaded. See Citicorp, Introducing CitiCash Card for Students, at https://www.cashcard.citicards.com/index.cfm (last visited Sept. 22, 2002)

(9.) For example, “Flooz,” and “Beenz” were point-based products once available on the Internet

(10.) Metavante, an electronic funds transfer service provider, develops and administers mall cards to individual malls and management companies. Metavante Corporation, Mall Cards, at http://www.metavante.com/solutions/eftcard/ mallcards.jsp (last visited Sept. 22, 2002).

(11.) See, e.g., The Best Present Company, The Best Present GiftCard, at http://www.thegiftcard.com (last visited Sept. 22, 2002)

(12.) See Visa USA, Inc., supra note 6.

(13.) See, e.g., Effross, supra note 2

(14.) Guidance on the treatment of electronic stored value products for regulated depository institutions had generally been provided. See OCC Guidance on Stored Valued Card Systems, OCC Bulletin No. 96-48, Fed. Banking L. Rep. (CCH) [para] 49-971, at 54,915 (Sep. 10, 1996). This guidance, however, did not cover non-bank issuers. See generally Mark E. Budnitz, Stored Value Cards and the Consumer: The Need for Regulation, 46 AM. U. L. REV. 1028 (1997).

(15.) See Budnitz, supra note 14, at 1061-72.

(16.) The Non-Bank Funds Transmitters Group is composed of the leading providers of non-bank payment instruments and money transmission services in the United States. These companies include Thomas Cook, Inc., Travelers Express/MoneyGram Payment Systems, Inc., Western Union Financial Services, Inc., American Express Travel Related Services Company, Inc., Citicorp Services, Inc., Comdata Network Inc., and RIA Financial Services–all licensees under state money transmitter laws. Ezra Levine, a partner at Howrey Simon Arnold & White, is counsel to the Group.

(17.) UNIF. MONEY TRANSMITTERS ACT (1994) (Non-Bank Funds Transmitter Group) (on file with The Business Lawyer, University of Maryland School of Law).

(18.) UNIF. MONEY TRANSMITTERS ACT (1998) (Non-Bank Funds Transmitter Group) (on file with The Business Lawyer, University of Maryland School of Law).

(19.) UNIV. MONEY SERVS. ACT, Prefatory Note, 7A U.L.A. 100 (Supp. 2002).

(20.) Id. [section] 102(16).

(21.) See id. [section] 201

(22.) These are Connecticut, District of Columbia, Louisiana, Maryland, Minnesota, North Carolina, Oregon, Texas, Vermont, Virginia, and West Virginia.

(23.) These are Alabama, Arizona, Arkansas, California, Colorado, Connecticut, Delaware, Florida, Georgia, Idaho, Illinois, Indiana, Iowa, Kansas, Kentucky, Louisiana, Maine, Maryland, Massachusetts, Michigan, Minnesota, Mississippi, Missouri, Nebraska, Nevada, New Jersey, New Mexico, New York, North Carolina, North Dakota, Ohio, Oklahoma, Oregon, Pennsylvania, Rhode Island, South Dakota, Tennessee, Texas, Utah, Vermont, Virginia, Washington, West Virginia, Wisconsin, and the District of Columbia.

(24.) See Task Force on Stored Value Cards, supra note 1, at 675-76.

(25.) For example, the bankruptcy of the Universal Money Order Company affected consumers in California and other states. See In re Universal Money Order Co., 470 F. Supp. 869 (S.D.N.Y. 1977), aff’d 661 F.2d 912 (2d Cir. 1981).

(26.) These generally include banks, credit unions, savings and loans, or similar regulated depository institutions.

(27.) The terms used for authorized distributors also vary by state. For example, authorized distributors are referred to as “authorized delegates” under Oregon law, but are “agents” in the California Code. Compare OR. REV. STAT. [section] 717.200(2) (2001), with CAL. FIN. CODE [section] 33043 (West Supp. 2002). While the term “agent” has been used is some money transmitter statutes, it is generally agreed that the term itself does not impose a formal “principal-agency” relationship between the issuer and the selling outlet but the relationship is contractual in nature. See, e.g., MODEL MONEY SERVICES ACT [section] 102 cmt, 1, 7 U.L.A. 110 (Supp. 2002) (“The term `authorized delegate’ has been used rather than `agent’ to avoid confusion as to the nature of the legal relationship between a money transmitter and the sales outlets through which it transacts business. Sales outlets provide money transmission on behalf of a money transmitter on a contractual basis.”).

(28.) While in some instances the term “to issue” may mean the same as “to sell,” money transmitter laws distinguish between the two terms. The “issuer” is the entity that holds the public funds. The seller, or authorized distributor, does not retain the funds it receives for the sale of these items but remits the funds promptly to the issuer. For example, American Express Travel Related Services Company, Inc. (AETRS) is the issuer of American Express Travelers Cheques, which are sold by a range of outlets including banks and travel agencies. As the issuer, it is AETRS’ obligation to hold the funds received from the public, and safeguard such funds.

(29.) See, e.g., MINN. STAT. ANN. [section] 53B.08 (West Supp. 2002).

(30.) See, e.g., TEX. FIN. CODE ANN. [subsection] 152.203, 152.208 (Vernon 2002).

(31.) See, e.g., MINN. STAT. ANN. [section] 53B.11 (West Supp. 2002).

(32.) See, e.g., id.

(33.) It should be noted that these are not consumer protection laws

(34.) A typical money transmitter statute would list the following as permissible investments:

(a) Cash

financial institution, either domestic or foreign

time drafts drawn on and accepted by a commercial bank, otherwise known as

bankers’ acceptances, that are eligible for purchase by member banks of the

Federal Reserve System

of the three highest grades as defined by a nationally recognized

organization that rates such securities

obligations of the United States Government, its agencies or

instrumentalities, or obligations that are guaranteed fully as to principal

and interest by the United States, or any obligations of any state,

municipality or any political subdivision thereof

market mutual fund, interest-bearing bills, notes or bonds, debentures or

stock traded on any national securities exchange or national market system,

mutual funds primarily composed of such securities or a fund composed of

one or more permissible investments as set forth herein

borrowing agreement or agreements made to a corporation or a subsidiary of

a corporation whose capital stock is listed on a national securities

exchange

authorized delegates under a contract described in [the licensing statute]

and that are not past due or doubtful of collection

investments or security device approved by the [Superintendent].

OR. REV. STAT. [section] 717.200(14) (2001).

(35.) Banks and other federally insured depository institutions are not considered “authorized delegates.” Such institutions do not need the authority of a licensed money transmitter in order to sell payment instruments, and indeed, are exempted from coverage under these statutes.

(36.) See, e.g., CAL. FIN. CODE [subsection] 33700, 33742 (West 2001).

(37.) 18 U.S.C. [section] 1960 states in relevant part:

Prohibition of unlicensed money transmitting businesses

(a) Whoever knowingly conducts, controls, manages, supervises, directs, or owns all or part of an unlicensed money transmitting business, shall be fined in accordance with this title or imprisoned not more than 5 years, or both.

(b) As used in this section–

(1) the term “unlicensed money transmitting business” means a money transmitting business which affects interstate or foreign commerce in any manner or degree and–

(A) is operated without an appropriate money transmitting license in a State where such operation is punishable as a misdemeanor or a felony under State law, whether or not the defendant knew that the operation was required to be licensed or that the operation was so punishable

(B) fails to comply with the money transmitting business registration requirements under section 5330 of title 31, United States Code, or regulations prescribed under such section

(C) otherwise involves the transportation or transmission of funds that are known to the defendant to have been derived from a criminal offense or are intended to be used to promote or support unlawful activity

(2) the term “money transmitting” includes transferring funds on behalf of the public by any and all means including but not limited to transfers within this country or to locations abroad by wire, check, draft, facsimile, or courier

(3) the term “State” means any State of the United States, the District of Columbia, the Northern Mariana Islands, and any commonwealth, territory, or possession of the United States.

Prohibition of Unlicensed Money Transmitting Businesses, 18 U.S.C. [section] 1960 (2000 & Supp. 2002).

(38.) See Uniting and Strengthening America by Providing Appropriate Tools Required to Intercept and Obstruct Terrorism (USA PATRIOT ACT) of 2001, Pub. k. 107-56, 115 Stat. 272 (2001)

(39.) One notable exception was the action taken by the State of Louisiana to require PayPal to obtain a license or else close down its operations in Louisiana. See Matt Richtel, Technology Briefing, Internet, Another Problem for Paypal, N.Y. TIMES, Feb. 12, 2002, at C9. In addition, New York State has “also encouraged PayPal to apply for a license to act as a money transfer agent in the state.” Keith Regan, PayPal Clears Legal Hurdle, Raises Outlook, E- COMMERCE TIMES (June 13, 2002), at http://story.news.yahoo.com/news? tmpl=story&u=/nf/20020613/tc_nf/18211.

(40.) It is interesting to note that, of the eleven states that have amended or implemented money transmitter laws to include electronic stored value products, three have become effective in the last twelve months: Washington D.C., North Carolina, and Maryland.

(41.) CONN. GEN. STAT. ANN. [subsection] 36a-595 to -609 (West Supp. 2002).

(42.) Id. [section] 36a-597.

(43.) Id. [section] 36a-596.

(44.) This analysis focuses on whether virtual payment products are included within the scope of the term “electronic payment instrument.” There is another possibility that should be noted, that is, whether such virtual payment products might be included under the definition of money transmission in section 36a-596(6). This would depend on whether the issuer of virtual payment products is “engaging in the business of receiving money for transmission or the business of transmitting money within the United States or to locations outside the United States by any and all means ….” Id. While worth noting, this possibility would not seem to be the optimal interpretation of the statute. First, the term “money transmission” normally refers to the wire transfer of funds. See, e.g., OR. REV. STAT. [section] 717.200(11)

(45.) CONN. GEN. STAT. ANN. [section] 36a-596(9).

(46.) D.C. CODE ANN, [subsection] 26-1001 to -1026 (2001).

(47.) Id. [section] 26-1002(a).

(48.) Id. [section] 26-1001.

(49.) This analysis focuses on whether virtual payment products come within the definition of payment instrument. It should be noted that there is another possibility–that is, that the definition of money transmission could be construed broadly so as to encompass such virtual payment products even if they do not fall under the definition of payment products. For the reasons stated previously, that would not appear to be the optimal interpretation, but it should be noted. See supra note 44.

(50.) LA. REV. STAT. ANN. [section] 6, ch. 13 (West Supp. 2002).

(51.) Id. [section] 1033(a).

(52.) Id. [section] 1032.

(53.) See Richtel, supra note 39.

(54.) MD. CODE ANN., FIN. INST. [section] 12-401 to -405 (Supp. 2002).

(55.) Id. [section] 12-405.

(56.) Id. [section] 12-402(b).

(57.) Id. [section] 12-401.

(58.) Id. [section] 12-401(n)(2).

(59.) Id. [section] 12-401(p)(2) (emphasis added).

(60.) Id. [section] 12-401(k).

(61.) Id. [section] 12-401(p)(1) (emphasis added).

(62.) See also, supra note 44 (discussing whether virtual payment products might be deemed to come under the ambit of the definition of money transmission).

(63.) MD. CODE ANN., FIN. INST. [section] 12-401(l)(1) (emphasis added).

(64.) MINN. STAT. ANN. [section] 53B (West Supp. 2002).

(65.) Id. [section] 53B.02.

(66.) Id. [section] 53B.03.

(67.) Id. [section] 53B.03, Subd. 7.

(68.) Id.

(69.) Id.

(70.) Id. [section] 53B.03, Subd. 13 (emphasis added).

(71.) N.C. GEN. STAT [section] 53-208 (2001).

(72.) Id. [section] 53-208.3.

(73.) Id. [section] 53-208.2.

(74.) Id. [section] 53-208.2(12).

(75.) Id. [section] 53-208.2(6).

(76.) Id. [section] 53-208.2(11) (emphasis added).

(77.) OR. REV. STAT. [section] 717 (2001).

(78.) Id. [section] 717.205.

(79.) Id. [section] 717.200.

(80.) Id. [section] 717.200(12).

(81.) Id. [section] 717.200(7).

(82.) Id. [section] 717.200(11) (emphasis added).

(83.) TEX. FIN. CODE ANN. [section] 152 (Vernon 2002).

(84.) Id. [section] 152.201.

(85.) Id. [section] 152.202.

(86.) Id. [section] 152.002.

(87.) Id. [section] 152.002(2)(B).

(88.) Id.

(89.) There is some uncertainty, however, because unlike other state statutes, the exclusion for gift certificate cards is not limited to the issuer’s goods and services. It might be argued that a mall that issues gift cards that can be redeemed solely for gifts and services may fall under the exclusion. The issue depends on whether such cards can be said to be redeemed from the issuer or from the individual merchants. Given the ruling on paper gift certificates, it appears clear that the Texas regulators would require licensing of all card issuers. See Texas Department of Banking, infra note 90.

(90.) See Texas Department of Banking, Op. No. 98-11, Feb. 19, 1998, available at http://www.banking.state.tx.us/LEGAL/OPINIONS/98_11.htm.

The mall certificate differs from a gift certificate issued directly by a

merchant. Once the gift certificate is redeemed for merchandise, the

transaction is complete. A mall certificate, on the other hand, requires

two exchanges: one between the customer and merchant for goods or services,

and one between the merchant and vendor for cash. This second exchange is

significant. Because the merchant must exchange the certificate for cash

with a third-party vendor, mall certificates constitute an instrument for

the transmission or payment of money to another, and fall within the scope

of the Act.

Id.

(91.) Id.

(92.) TEX. FIN. CODE ANN. [section] 152.002(2).

(93.) Id.

(94.) Id. [section] 152.002(1).

(95.) VT. STAT. ANN. tit. 8, ch. 79 (Supp. 2001).

(96.) Id. [section] 2502.

(97.) Id. [section] 2500.

(98.) Id. [section] 2500(19).

(99.) VA. CODE ANN. [subsection] 6.1-370 to -378.4 (Michie 1950 & Supp. 2002).

(100.) Id. [section] 6.1-371.

(101.) Id. [section] 6.1-370.

(102.) Id.

(103.) Id.

(104.) Id. [section] 6.1-371.

(105.) W. VA. CODE [section] 32A-2-2 (2001).

(106.) Id.

(107.) Id. [section] 32A-2-1.

(108.) Id. [section] 32A-2-3.

(109.) Id. [section] 32A-2-1(6).

(110.) Id. [section] 32A-2-2.

(111.) Id. [section] 32A-2-1(6).

(112.) ELECTRONIC PAYMENTS TASK FORCE, THE REPORT OF THE CONSUMER ELECTRONIC PAYMENTS TASK FORCE 1998, available at http://www.occ.treas.gov/netbank /ceptfrpt.pdf. The Task Force, chaired by Eugene A. Ludwig, Comptroller of the Currency, established as its mission “to identify, in partnership with the industry and the public, consumer issues raised by emerging electronic money technologies and to explore the extent to which innovative responses are being developed that are consistent with the needs of this developing market.” Id, at 1.

(113.) Id. at 56.

(114.) Such efforts, while premised on the best of intentions, could result in an inefficient scheme of rules with little relevance to the market that actually develops. Moreover, regulation at this stage risks quashing competition and innovation that could produce more effective operational rules. At worst, regulation could retard the development of a promising new industry that could introduce efficiencies to the nation’s retail payments system. The Task Force also notes that regulation based on inadequate understanding of the relevant factors could increase the cost of new products unnecessarily.

Id. at 59.

(115.) Note, for example, the closure of both Beenz.com and Flooz.com. Mark Vigoroso, Beenz.com Closes Internet Currency Business, E-COMMERCE TIMES (Aug. 17, 2001), at http://www.ecommercetimes.com/perl/story/12892.html.

Judie Rinearson is Group Counsel to the American Express Global Travelers Cheque and Prepaid Services Group, a business unit of American Express Travel Related Services Company, Inc. The views reflected in this Article are those of the author and do not necessarily reflect the views or positions taken by her employer. The author would like to acknowledge the assistance of Anne Schepp, Chris Wrynn, and Charlene Bryant in the preparation of this Article.