Most people don't reguarly check the California Senate Committee on Banking, Finance and Insurance for the latest news about potential legislation, and so it's no surprise that most people have never heard of California Assembly Bill 2789. That's too bad, because California AB 2789, passed into law in September, 2010 and effective January 1, 2011 as the Money Transmission Act (see http://www.dfi.ca.gov/licensees/moneytransmitters/), is a ticking time bomb, and the big red numbers are glowing "50" as of midnight tonight.
What the law accomplishes sounds mundane enough: it requires money transmitters—companies that act like banks, but aren't, such as PayPal—to get licenses. As usual, however, the devil is in the details. Previously, California corporations were only required to get money transmitter licenses for international funds transfers, and domestic transfers were unregulated. Now both kinds of transfers are regulated. Also, the price of each license is a little bit steep: half a million dollars and change.
Oh, and if you want to do business nationwide, you'll need 43 more of those licenses from almost every state. The forms and requirements are different everywhere, most states want your fingerprints to do a criminal background check (the exact same criminal background check, it turns out), and the price varies wildly from a measly $10,000 to $1,000,000+ per state. Want the forms? Good luck finding them; some states don't post them on-line.
Why does California's law matter at all when the regulatory framework for money transmitters is already such a mess? Well, Silicon Valley is located in California, and if Valley startup founders risk going to jail (which, under the updated PATRIOT Act, they do; see http://www.law.cornell.edu/uscode/html/uscode18/usc_sec_18_00001960——000-.html) for transmitting money illegally without a license, then there aren't going to be very many new companies working on ways to handle payments that don't involve the same old banks touting the same old plastic cards. Not to mention that there aren't a lot of investors who like the idea of putting half a million dollars into a company's bank account so that it can be immediately locked up and used for licenses.
In other words, the Money Transmission Act is designed to kill innovation.
The only silver lining is that the very last clause, section 1872, allows companies that had already been operating under the old law to continue doing so without repurcussion until July 1, 2011, which is when the music stops. On that date, every affected company needs a license application on file, or else the founders, employees and even investors will be committing state and federal crimes by merely continuing to operate.
Who would sponsor such a draconian law? According to legislative analysis of AB 2789 (see ftp://leginfo.public.ca.gov/pub/09-10/bill/asm/ab_2751-2800/ab_2789_cfa_20100628_154447_sen_comm.html), we can blame The Money Services Round Table. If The Money Services Round Table sounds like a shady political group that doesn't want to reveal its true identity, that is because it is a shady political group that doesn't want to reveal its true identity! Thanks to the Freedom of Information Act, however, we know that its lobbyists had some very important things to tell the Federal Reserve in 2006 (see http://www.federalreserve.gov/SECRS/2006/August/20060829/R-1258/R-1258_11_1.pdf), including its member list (which may have grown since then). At the time, it included such names as:
- Western Union
- American Express
While it's no surprise that these companies might want to keep out the competition, that doesn't make anti-competitive behavior something we should accept. The big four payment card companies (Visa, MasterCard, Discover and American Express) have managed to raise interchange fees for years and years thanks to legislative tricks, and only now is Congress trying to solve the problem by regulating debit (but thanks to lobbyists, not credit) card interchange rates via the Durbin Amendment to the Dodd-Frank Act, which has severe problems of its own.
You might argue that innovation in the financial industry is alive and well, but you'd only be right if you mean that in the most cynical terms. Case in point: Square, a payments company that is a media darling frequently cited as a leading innovator, does not disrupt the financial infrastructure in any way. In fact, Visa just invested in Square directly because it does such a good job of propagating the status quo. PayPal similarly exists to promote existing financial infrastructures, not replace them with something better.
My company, Think Computer Corporation, will be forced to shut down FaceCash—the only payment system built from the ground up to replace the plastic card network—if we cannot meet California's requirements to apply for a license by July 1. (We're pretty confident we'll be okay, but it's still a considerable risk.) Another one of our competitors won't admit it, but even after raising $20 million in venture capital funding, they just stopped operating entirely in April, 2011, likely because of the regulatory uncertainty posed by AB 2789. Today, a former American Express executive who worked on the company's Serve mobile payment system confided that the license issue had even become an internal issue for the one of the very same companies that sponsored the legislation in the first place.
Simply put, in a capitalist society, this system is insane. It does not protect consumers. It prevents market competition. It keeps interchange prices so high that Congress can't even hold enough hearings about the issue.
Fortunately, this is one problem that is easy to solve. Tell your representatives in Congress to override California AB 2789 with a federal money transmission framework that makes sense, and allow competition to lower prices on its own.