As regulations continue to tighten, the term “money transmitter license” is being heard throughout the payroll industry more and more. However, with unclear guidance from the federal government and differing state laws, payroll companies are facing a wave of confusion on whether a money transmitter license is needed to continue serving their clients as normal. To help clear the air, let’s take a deeper look into money transmitter licensing as it relates to the payroll industry.
What Is A Money Transmitter License?
A money transmitter license is required throughout 47 states for any company that’s deemed a money transmitter business. While money transmitter businesses fall under a subset of money services businesses (MSB), not all MSBs are currently recognized as money transmitters. Although the majority of money services business disciplines require a minimum threshold to be considered an MSB, a threshold does not exist for money transmitters. Therefore, any business that transfers funds or provides payment services can be considered a money transmitter regardless of business activity.
Does My Payroll Company Need A Money Transmitter License?
This is the ultimate question. While almost all states require a money transmitter license in some shape or form, do payroll companies actually constitute as a money transmitter business that needs to be licensed? Unfortunately, the answer isn’t always cut and dry. The definition of money transmission as it relates to payroll continues to be vague and inconsistent – it all depends on the interpretation of your specific business situation and current state regulations.
For example, in Massachusetts, a business is only required to have a money transmitter license for foreign money transmissions, but domestic transmissions don’t require a license at all. On the other hand, if your business is in New York, payroll companies that use an intermediary service to transmit funds would not need a money transmitter license, but the intermediary service itself could need one. By far, one of the strictest states is Texas, where payroll processors that hold client funds for any amount of time (including tax impound transactions) are more recently required to be licensed.
It may take some time and research, but a deep dive into your state regulations can help you decide whether a money transmitter license may be required for your company.
What If I Service Clients In Multiple States?
If your payroll company extends its services across state borders, money transmitter licensing becomes all the more complicated. Not only are licensing requirements different, but every state has its own application process and costs associated with the licensing – and it can differ drastically depending on where you’re doing business. Application fees alone can cost anywhere between as low as $100 or as high as $5,000 per state. Beyond these fees, you must also account for the cost of the license itself which depends on the state, annual audits, and a surety bond fee.
Payroll companies doing business across state borders should brace themselves for hefty payments as money transmitter regulations continue to grow. Research shows that if a company were to need a money transmitter license for all 50 states and the District of Columbia, the total estimated costs would be over $2.5 million a year – and that doesn’t include the price of labor, overhead, or potential audits.
What Happens If I’m Not Licensed Correctly?
If money transmitter licensing is required for your business and you don’t have one, you could be hit with severe fines or even forced to temporarily cease operations until you are properly licensed. In 2019, payroll companies across Texas found themselves faced with enforcement orders by the Department of Banking (DOB) to cease and desist until they successfully obtained a money transmitter license, halting all business operations. Likewise, there was a case in Florida where Square, the large payment processing company, was fined $507,000 for operating without a money transmitter license. These instances prove how devastating it could be for a payroll company that doesn’t fully grasp each state’s differing licensing requirements.
Why Am I Just Now Hearing About This?
While money transmitter license requirements became more prevalent after the rise of cryptocurrency, the payroll industry has just now begun to face increased regulations, largely following a $70 million bank fraud ploy from the CEO of a New York-based payroll company. As our industry changes, we will continue to monitor the regulations put in place in order to protect consumers.
What Does This Mean For The Payroll Industry At Large?
The payroll industry is evolving – and while a more advanced world brings a lot of opportunities, there are new hurdles on the horizon. As more government officials call for uniformity in money transmitter regulations, it may also bring about crushing fees. For a smaller, younger payroll bureau, increased regulations will make it harder to expand and grow. For a more established and experienced payroll company, increased regulations will make it harder to adapt to the changing landscape.
This article was written by Paul Altavena, the Co-Founder of Connect Pay, a thought leader in the Payroll Industry, and Facilitator for the CEO Peer Group at Värkrz