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bjbjt+t+ CALIFORNIA STATE ASSEMBLY COMMITTEE ON BANKING AND FINANCE TRANSCRIPT OF OVERSIGHT
HEARING EMERGING TECHNOLOGY AND THE CALIFORNIA MONEY TRANSMISSION ACT MARCH 11, 2013 2:00
P.M. CALIFORNIA STATE CAPITOL, ROOM 444 APPEARANCES: Chair, Assemblyman Roger Dickinson (Dem Vice
Chair, Assemblyman Mike Morrell (Rep 40) Assemblyman Katcho Achadjian (Rep 35) Assemblyman Ed Chau
(Dem 49) Teveia Barnes, Commissioner, California Department of Financial Institutions Thomas
Brown, Lecturer, UC Berkeley Law School and Partner, Paul Hastings, LLP John Muller, Vice
President and General Counsel, PayPal, Inc. Michelle Jun, Senior Attorney, Consumers Union
Rob Barnett, Vice President and Assistant General Counsel, Automatic Data Processing,
Inc. Aaron Greenspan, President & CEO, Think Computer Corporation and CodeX Fellow, Stanford
Law School Ron Garret, Ph.D., Entrepreneur, Investor Manuel Cosme, California Chairperson,
National Federation of Independent Business HEARING CALLED INTO SESSION (2:00 P.M.) CHAIRMAN
DICKINSON: We will call the Banking and Finance Committee to order for our hearing of March
11th, 2013. Welcome to those of you who have joined us this afternoon. As you may know,
we re on a somewhat limited schedule since we re anticipating being back in session on
the floor at about 3:45 to hear from the Chief Justice today for her State of the Judiciary.
So we re going to get started here even in the absence of a few more members. Hopefully
we ll have some come join us during the course of the hearing, but I do want to give a chance
for those we ve asked to come testify to be able to do so without being too too truncated.
So, we ll get started. California is at the center of technological innovation and development.
I think we re all both aware and proud of that fact. Our state is a wealth of knowledge
and innovation, especially in our collective wisdom and our intellectual power that resides
with those who lead tech the technological revolution in our state, in our nation, and
indeed around the world. And in fact the technology that emerges almost on a daily basis is rapidly
changing the world around us as well. Among the developments in the financial services
field, the way in which we send money, either for goods or services, or to family and friends,
is one of those areas that has been rapidly evolving. According to a survey by the Federal
Reserve, 21% of mobile phone owners have used mobile banking in the last twelve months.
11% of those not currently using mobile banking think that they probably will use it within
the next twelve months. The most common use of mobile banking is to check account balances
or recent transactions. And transferring money between accounts is the second-most common
use of mobile banking. 21% of mobile payment users transferred money directly to another
person s bank, credit card, or PayPal account. Interestingly, the underbanked make comparatively
heavy use of both mobile banking and mobile payments, with 29% having used mobile banking
and 17% having used mobile payments in the past twelve months. The U.S. mobile payments
market is predicted to reach $90 billion by 2017. Traditional global remittance payments
are expected to reach $534 billion by 2015, and the percentage of payments made using
mobile technology is expected to increase year-over-year. In California, as in other
states, the regulation of remittances and mobile payments falls under the Money Transmission
Act, or MTA. The MTA regulates the non-bank, foreign and domestic transfer of money and
issuance of stored value. Licensees under the MTA must demonstrate appropriate financial
capacity reserves for safety and soundness. The purpose of our hearing today is to give
us an overview of the interaction between this law, the current MTA, and growing and
changing technology. The ways in which we move money are complex, with an ecosystem
made up of mobile payments, internet applications, point of sale applications, SMS remittances
and traditional face-to-face transactions. I have introduced AB 786 as a bill designed
to be a starting point to bring some common sense reforms to our money transmission laws.
Hopefully so that it will account for the changes in technology and ensure that we do
not inhibit innovation even as we maintain appropriate and sufficient consumer protections.
I look forward to working with the members of of the Committee, of interested parties
and stakeholders, as we move forward with, with considering how best to shape this legislation
to accomplish the objectives that I ve, that I ve just enumerated. With that I ll ask our
Vice Chair if he has any comments he d like to make before we go to our witnesses. VICE
CHAIRMAN MORRELL: No, not a whole lot of comments but it s good to be here. And um, we ve got
a lot on our agenda this year; a lot of complicated issues and I m sure we ll get through them,
and so thank you for everything Mr. Chair. CHAIRMAN DICKINSON: Thank you. With that,
we ll ask our first witness, Commissioner Barnes from the Department of Financial Institutions
if she would come forward and join us for whatever remarks she would like to make. COMMISSIONER
BARNES: Thank you, Chairman Dickinson and Vice-Chairman Morrell and CHAIRMAN DICKINSON:
Good afternoon. COMMISSIONER BARNES: And, uh, given the truncated time that we have
this afternoon I am fine with simply starting with your questions and going from there.
CHAIRMAN DICKINSON: That would be fine. COMMISSIONER BARNES: Any questions? CHAIRMAN DICKINSON:
So, let s start with, how do you see the operations currently, of, of the Department with respect
to regulating money transmissions, how is the implementation of the MTA working in your
view at this point? COMMISSIONER BARNES: Thank you. CHAIRMAN DICKINSON: Maybe, I m sorry,
maybe we should just back up a step and for some we have some new members and others who
may not be so familiar with this, with this area, so perhaps you might take a minute or
two and explain what it is that the Department s doing with respect to the MTA s implemenation
and then and then we can go from there to other questions. COMMISSIONER BARNES: The
Money Transmission Act, what we call the MTA, was actually a combination of three different
Acts: the Traveler s Check Act, the Payment Instrument Law, and the Transmission of Money
Abroad Law were all brought together in 2010 in an effort by actually, this Committee,
to streamline the regulatory requirements that were put upon financial institutions,
financial service providers that were doing money orders, traveler s checks, and money
transmission. At the time in 2010 we were only doing money transmission regulations
on licensees that transmitted funds abroad. And the money transmission; the Transmission
of Money Abroad Law had been in existence from what I can gather well over sixty years.
So it wasn t a new law. What happened in 2010 in bringing these three laws together is that
in the interest of consumer protection, uh, California decided to streamline the regulatory
burden because we had some companies that were required to get three different licenses
all regulated by the DFI; so if they issued money orders, traveler s checks and payments
abroad, it was considered a burden and everyone could understand that they would consider
it a burden to have three separate licenses with three separate types of examination process.
So to bring those three laws together in 2010 with the understanding that while there was
a need to streamline the law, the legislature also, it is my understanding at looking at
the legislative intent wanted to maintain the protection of the consumer, and the DFI
views the MTA as we now as it is now enacted and we re administering it as a consumer protection
act. With that in mind, we saw that in 2010 effected effective as of January 1st, 2011,
the MTA now covers not only transmissions abroad, but also domestic transmission. It
also now covers non-bank open-loop stored value, and by stored value, it s the, it s
the, um, the cards, or any medium where you can have value, money, use your credit card
to um or the internet to set aside value that the consumer can use to redeem products and
services. The MTA made it clear and continued the concept that if the stored value was used
like a Starbucks card, and Starbucks issued a card, a stored value card, and that consumer
used that card only to purchase Starbucks products that that transactions, those, that,
um, activity would not be regulated. However, if the stored value was used to purchase other
products and services from third parties, that would be regulated. And I think the easiest
way to think about it, and the way we think about it as DFI, and recognize that we are
the regulators for other institutions who hold other people s money in trust. We regulate
banks, we regulate credit unions and while it s not a deposit, we view the holding of
other people s money as as a trust. And the Money Transmission Act, we administer it,
in a manner to make sure that the institutions who have a license and who we regulate are
operating in a safe and sound manner because they re holding consumer funds in trust. The
MTA in 2010 expanded the safety and soundness licensing to keep pace with new technologies
while at the same time continuing to protect the consumer. So technology and the internet
was very much top of mind when this law was expanded to include domestic transmissions
as well as internet fund transmissions. The question has been raised as to whether or
not the MTA is working as intended. I strongly believe that the MTA is working as intended.
I actually think that the fact that we re having a hearing today to talk about the MTA
and how it s being applied and administered by DFI is one more indication that it is working
as intended, because the bulk of the comments that we have received in understanding the
MTA have come not from the licensees in the financial sector, but from the licensees in
the technology sector and in the internet sector. And I want to be clear that DFI does
not regulate technology. We don t regulate software; we don t regulate the internet.
That our role and responsibilities as enumerated in the law which as the Commissioner I am
tasked with implementing and enforcing our role is to protect the consumer, ensure that
the financial institutions who hold other funds other people s money in trust, do it
in a safe and sound manner, that they not only have the capital that they need, but
they also to start a business but they also have the wherewithal to continue the business
that they will be in existence beyond the initial three years that, uh, their management
has the skills and the experience to protect these funds and to operate with policies and
procedures that are safe and sound, um, and that they re following the law. That they
re following not only California s laws, but the Bank Secrecy Act laws, the Money Trans
um, the um, money laundering laws, and some other similar laws that have come out of Washington
as well as California to protect the consumer. So yes, is the MTA working as intended? It
is. That being the case, there s still work that can be done. I am almost celebrating
my one-year anniversary with the Department of Financial Institutions as Commissioner.
And in January, in our January monthly bulletin we announced that we will be issuing regulations
to provide some clarity and information because I think the folks who have questions about
the Money Transmission Act are those who come from the technology side and from the internet
side, and we, uh, intend to add some clarity to that process. Thank you. CHAIRMAN DICKINSON:
Thank you. I m glad you answered that the question about, is the MTA working as intended
from your point of view? As you know, in the letter inviting you here this afternoon we
had a number of additional questions. So maybe, maybe we could just go through those, and
then we ll see if the Committee members have other, other questions. So the the next question
is how many entities are currently licensed under the MTA; how many are currently under
consideration; of those that have applied, how many licensed have been denied and what
were the reasons for denial. COMMISSIONER BARNES: Right. We have currently have 23 that
have MTA licensees licenses. There are 20 applications that are, um, under consideration.
Of those who have applied, no one has been denied. Just to also give you some additional
information, we ve had 42 applications that have been filed since January 1, 2011. Um,
we have issued 26 new licenses since January 1, 2011, and we have, uh, advised over 20
entities that they are not, um, they are, do not come under the Money Transmission uh,
Act. And a couple of more statistics that might be helpful. When the MTA was being discussed
in 2010, DFI at that time, had expected, rightly or wrongly, expected about five to seven applications
a year. They did not expect 42 applications in the last uh, two years. And, um, so, I
think, uh, in addition to the 42 applications they have had over 130 Oh. We have 73 licenses.
What did I say? Seventy we have 73 licenses. Yes. I thought I had missed somebody. But
we also have had over 130 inquires in the last two years, which far exceeds any inquiries
in any other licenses that we have. And so that s why it s important to have both regulations
and orders with respect to the Money Transmission Act: to give clarity to, um, how we are, uh,
administering these laws this law. CHAIRMAN DICKINSON: So you you referred to 42 applications
and 26 licenses granted in this. Now, was that in the last COMMISSIONER BARNES: Two
years. CHAIRMAN DICKINSON: In the last two years. COMMISSIONER BARNES: Mm-hmm. CHAIRMAN
DICKINSON: So and no denials. Does that mean that there are 16 still under consideration?
COMMISSIONER BARNES: There s actually 20 if my add if my math isn t adding up. Some companies
have may have withdrawn their application. So in the process uh, the uh, the application
process we actually, um, reach out to companies, or companies that reach out to us we have
pre-filing meetings where we sit down with them, um, to understand their business. We
look at who owns the who has control of the funds basically, flow charts, to follow the
money. Where s the money? Who has who has the money? Whose name s on the money? Um.
And how do they control it? Uh, and there have been applications where we have determined
in sitting down with the applicants that they actually are not in control of the money,
someone else is in control of the money someone who has a license is in control of the money,
and so, uh, we have given them, uh, clarification that if they continue to operate in that manner
then they would not fall under the MTA. I think the other thing that has happened is
there have been, as part of these pre-filing meetings, uh, some companies in the process
of their application may determine that it s better for them to, um, uh, work with another,
uh, entity, like a bank that we regulate in DFI so that they don t require a money transmission
license. And so someone may either put their application, um, um I wanna say pause they
might wanna suspend their application for a period of time to see if they can partner
with another licensed money transmitter, or they might decide to withdraw their application
completely. CHAIRMAN DICKINSON: So, so so is it then correct there s somewhere between
16 and 20 in that neighborhood applications pending? COMMISSIONER BARNES: So, actually
pending Currently, there are 20 under consideration. CHAIRMAN DICKINSON: Okay. Uh And can you describe
for us the average length of time it takes to get an application through the process,
recognizing some instances that, as you just described, people will suspend their application
for one reason or or another. COMMISSIONER BARNES: Right. Our our internal performance
goal is to process applications within 120 days. We actually average around, between
I would say average 95 days to process. And, and But bear in mind that if we are talking
to an applicant and they ask us to if we ask for additional information, or they re in,
uh, merger discussions they ll ask us to suspend their application until they come back to
us. But while it is an active process, and it s not been suspended, it takes an average,
um, I would say 95 days between 92 and 96 days. CHAIRMAN DICKINSON: So except for those
that may be in some state of suspension, at the initiation of the applicant for, for the
applications that are currently under consideration, we could conclude that those were filed some
time within the last four to five months? COMMISSIONER BARNES: N no. There Some have
been filed within the last four to five months and some have been longer CHAIRMAN DICKINSON:
I m just taking you at your 95 days, roughly for processing. COMMISSIONER BARNES: Right.
95 days for processing. And we also, there are times when we ask for additional information.
So, for example, if we re talking to an applicant, and, um, we re trying to determine their source
of capital, their source of strength, and they have a parent company and they ve provided
us with information about their, um, their, the, the money the applicant, but not necessarily
their parent, or there s an additional source of, uh, of, of, um, capital for them we may
ask for additional information from them on that. And during that period they may ask
us to suspend the application while they gather that information for us. CHAIRMAN DICKINSON:
Some have said that they feel the barriers to to, uh, getting approval, are, um, too
steep. The bonding and some of the other requirements especially if they are smaller volume intend
to operate on a smaller volume, dollar volume, in their money transmission work. Have you
seen anything, or made any observations that would allow you to comment on that concern
that s been raised? COMMISSIONER BARNES: Uh Money transmitters who are applying for a
license are asking the State, now that we are regulating them, to be allowed to hold
other people s money. Lots of money. We re talkin hundreds of thousands into the billions
of dollars of other people s money, for some period of time. Some of them hold them for
a couple of days. Some of them hold them for months. Some of them can hold them for much
longer periods of time. I view the holding of other people s monies in the same vein
as I view holding bank deposits and credit union deposits. The criteria that is in the
MTA in terms of fees has been in existence for money transmitter who transmitted monies
abroad since 1989. These are the same fee schedules since 1989. These the capital requirements
are actually less than the capital requirements that we would insist on for a de novo bank
or a de novo credit union. The MTA lists some twenty-odd items that as Commissioner I am
required to consider. And, I believe that the MTA s list of inquire items to be considered,
as well as what I m supposed to determine is again there to protect the consumer. Each
of these provisions is to protect the consumer. I would hope that applicants, even if there
weren t a Money Transmission Act, that they would understand that the business that they
are going into is a very serious business when you re holding other people s money in
trust. And that you should have adequate capital to weather a storm. You should have adequate
reserves to protect your customers if there should be some difficulties in your financial
condition. So, I don t think of it in terms of whether it s a barrier to entry. I think
of it in terms of, are these protections for the consumer appropriate. They were appropriate
since for over sixty years for the money transmitters who were transmitting it abroad. They re similar
to the provisions that protect consumers at banks. And they re similar to the provisions
that the members of a credit union. So I don t think they re barriers to entry. I think
they re consumer protections. CHAIRMAN DICKINSON: Okay, thank you. Um, Mr. Achadjian? ASSEMBLYMAN
ACHADJIAN: Thank you, Mr. Chair. A question on holding onto somebody else s money. I can
see why they shouldn t hold onto somebody else s money for longer than, maybe, the hours
or the few days it requires to clear a check. If you were to deposit a check, large check
with me, or regardless of the amount, and now, if you don t have a working relationship
with a given bank, in other words, they don t know of your background, they probably want
to hold onto that amount until the check clears the other side before they release the, the
cash. I see that good makes good business sense if it s done properly for the duration
that it takes to clear a check. Even if you were to deposit a check in a savings account,
and you were able to collect interest from the moment you deposit which is great but
if you were to take money out, they probably say, not for 24 hours, or 72 hours, just to
be sure that the check is going to clear the other bank that the person did have checks.
Otherwise, anyone can come and deposit a check, then turn around, write a check on that money
knowing that it s gonna bounce, or it s a fraud, so, when you come up with regulations,
what are you taking into consideration, not just to protect the consumer, but also protect
those who are in the business of serving the consumer? COMMISSIONER BARNES: Uh First and
foremost I m going to be thinking about the consumer. I m also going to be thinking about
the safety and soundness of the financial service company. And, so, in looking at the
regulation, um, we ll be looking at whether they re in good funds. I think that s where
your question is going. I m not going to want to put the financial services company, um,
at risk, for, uh, if the funds aren aren t available. But in our regulations of and supervision
of money transmitters that s really not been an issue. More of an issue has been, uh, last
week we received a, uh, complaint from a lawyer whose client, uh, is an employer, who, the
employer company is in California and the employer hired a payroll processing company
outside of the State of California to do their payroll. And the payroll process let s say
non-California payroll processing company was was doing payroll for a California company
and they were supposed to take the funds from the employer and then write checks to their
employer s employees and also do the withholding and pay the federal and state taxes. And this
non-California payroll processing company did not make the payroll for the employer,
did not pay the taxes or do the withholding, and as a consequence, both protecting the
employer who now has to still have that liability to do the taxes, and still has the liability,
uh, to their employees has to make up those funds. And if we were regulating that out-of-state
California and we re looking into whether or not they should have applied for a license
if we were regulating that company, we would be looking at their processes and, and policies
and procedures for how they take monies and how they distribute the monies in accordance
with the instructions in the contracts that they have with their customer, which is the
employer. ASSEMBLYMAN ACHADJIAN: That that s something I m with you, I have no problem
there. The companies are outside California, are they required to be bonded? COMMISSIONER
BARNES: Well they re required required to be licensed. If there was We re still looking
into this, just came in. But let s say, hypothetically, they did take the money from the California,
uh, company, the employer, um, and they did have control of those funds, they, under the
MTA, should have been licensed. They should have We should be looking at them from a safety
and soundness perspective, which would have Are they going to continue to exist, uh, in
California? And operate in a safe and sound manner? Which deals with your question about
making sure they have good funds before they let the funds released? And also are they
in compliance with consumer protection laws in the State of California as well other consumer
protection laws as well as Bank Secrecy and money laundering. ASSEMBLYMAN ACHADJIAN: And
I m all with you that policies should apply for outside, or even inside, California. They
do comply with California laws; that they are licensed and insured. In case they go
bankrupt we don t want people who our payroll depends on that, that they re down the wire
like the company has. COMMISSIONER BARNES: Right. In California there s not insurance
like FDIC insurance, or for credit unions, NCUA insurance, but there s in the MTA, and
had been in the MTA, for, because of our former laws with, uh, Money Transmission Abroad,
the concept of eligible securities. And, money transmitters even before 2011 in California
are required to maintain eligible securities, which is effectively, um, liquidity, and also
protection for the consumer if the money transmitter were to go into bankruptcy that there should
be eligible securities equal to 100% of their money transmissions and stored value, uh,
in the United States. And so that is what I consider the functional equivalent of, um,
uh, the, uh, the FDIC insurance or NCUA insurance. So that s why it s also important to have
money transmitters licensed in California so that we can give assurances and regulate
that they are in compliance with the eligible security requirements as well as the bonding
requirements. CHAIRMAN DICKINSON: Thank you. Mr. Chau? ASSEMBLYMAN CHAU: Thank you. Uh,
uh, yes, I have two questions. First of all, um, this is follow-up to my colleague s question.
So all licensees, whether out-of-state or not, are required to post a surety bond in
short, or no? Or do do they need to have enough assets to cover the amount of the money being
transferred? COMMISSIONER BARNES: Yes, all licensees have an eligibility requirement.
And the question is, if they operate completely outside of California, so they are in another
state, you know ASSEMBLYMAN CHAU: Right. COMMISSIONER BARNES: They re in Hawaii, they uh, only deal
with consumers in Hawaii; they have no transmissions in California, we do not license them. But
all licensees; money transmitter money transmission licensees in California are required to maintain
eligible securities equal to 100% of ASSEMBLYMAN CHAU: Of the money being transferred? COMMISSIONER
BARNES: Right. ASSEMBLYMAN CHAU: So then that, actually, that number fluctuates, uh, depending
on, you know, what the amount of the trans you know, the funds being transferred COMMISSIONER
BARNES: Yes, it yes, it can fluctuate, yes. ASSEMBLYMAN CHAU: Now second question, just
to follow up on your opening remarks, you said that the MTA is operating, uh, as intended,
yet there is room for improvement. Essentially, that s what you said. And I think the chair,
um, posed one question in reference to the application process. Um, so, I think that
that application process could be streamlined probably. But besides that issue, what other
issues, um, do you see that we need to look into. For example, how do we improve the system
a little bit more? COMMISSIONER BARNES: Okay. Well first, I want to be clear that in adding
clarity to the MTA I believe the orders and the regulations that we re going to be issuing
will add clarity and help to improve the process, but I I have to tell you, I think the law
as written today is very important because that app all those items that have been listed
to be considered I think are very, very important for, uh, whoever is regulating money transmitters;
whoever is holding other people s money, whoever is effectively holding a deposit of somebody
else s money. All of those items that are listed, are really, I wouldn t necessarily
streamline that, except to the extent we determine I would keep them on the books, keep them
in the law, and, but clarify in the regulations that, for example, if we were to identify
a, a money transmitter that I would say is low-risk, like they have only one product,
and one geographic, they don t do anything internationally, it s really simple, they
don t take cash In looking at everything, um, listed in the MTA to be considered by
DFI, what already uh, the MTA already allows the Commissioner to take all of those things
into consideration, uh, and look at the quality of the management, the assets, and the sorts
of strength for the applicant. But I would not, um, want to take any of these tools away
to say that you don t have to send financial statements for the last three years. We would
want to look be able to look at the quality of the earnings, you know; are there any iss
balance sheet issues. Those protections I would say need to remain. By the same token,
we can give some clarity from a regulatory perspective as to how we look at all of these
items. ASSEMBLYMAN CHAU: So then COMMISSIONER BARNES: Because we don t treat every applicant
s really an art form in the sense that we don t treat every applicant exactly the same.
So a money transmitter that s been operating in thirty-five states that comes to us, you
know we re going to be able and they re being examined by other states re going to have
the benefit of those prior examinations. We work with other states in developing joint
exams and joint protocols. So we have the flexibility to be able to look at that money
transmitter, go down the list, but how we get comfort on all of these items may be a
different a different way. It may that we re getting comfort from some of their other
examinations. But I think all of these indicia of risk, all of these areas are important
to consider to protect the consumer, and I would ask that if there are amendments to
the Money Transmission Act, which is certainly within your purview to do and you did in 2010
that we don t do anything that s going to harm the consumer. ASSEMBLYMAN CHAU: Sure.
CHAIRMAN DICKINSON: Do you have one any more one more follow-up? ASSEMBLYMAN CHAU: Just
one quick; I m sorry. Um, how do we, the State of California, stack up against other states
in terms of, um, procedures or otherwise, or whether or not Are we more stringent than
other states, or are we just about, uh, on the average, just similar to other states?
COMMISSIONER BARNES: Um, we were so the, my un we were the last state really to come in
2010 to the party of regulating. I think, um, uh, eh, I think we provide greater protection
for our consumers. I know that there are some money transmitters that are startups that
decided to go to other states to start their business. Um, uh, or they ve decided to work
with, um, money transmitters that are already licensed here. I think we may protect our
consumers better than some other states. I haven t done a, uh, a state-by-state comparison.
I did see the 50-state analysis. Um, but I would also caution that California has more
money transmissions than any other state in the Union. In fact, the next three states
under California in terms of money transmission don t add up to how many money transmissions
that we have in this State. And so, I think for, for, for those reasons it is important
to maintain that while we may be different from other from our sister states in how we
regulate money transmissions, um, there s a reason for that difference. And that being,
uh, a State where technology, innovation, is key, and where technology and innovation
is going to be developed in a manner that s going to make it easier and better for consumers
to put funds in the hands of other people, I think that s a good thing. I encourage it.
I want to be able to use those those technologies myself. But I also want to be sure that California
continues to protect, uh, the consumer. CHAIRMAN DICKINSON: One last thing, uh Have you seen
instances where, uh, an application hasn t been pursued or has been stymied by the necessity
of, of obtaining the bonds and the securities that we ve been talking about, and yet it
s difficult to get them because a license hasn t been, um, issued. It s a chicken and
egg issue. Have you seen any of that in the applications? COMMISSIONER BARNES: We have
We have a lawsuit before us so I can t say I haven t seen it. We have a laws we have
been sued by an individual, a company, who have made, um, those and similar assertions.
Um, I m not at liberty to really discuss that. If this Committee would be interested in having
a better understanding of DFI s response to those types of statements and allegations,
we can share with you our briefs. We are being represented by the Attorney General s office,
and um, I think the briefs might be able to give you guidance, better guidance, in that
regard. CHAIRMAN DICKINSON: I think we would be interested in that. Thank you, Commissioner.
COMMISSIONER BARNES: Thank you. CHAIRMAN DICKINSON: I appreciate your, uh, comments this afternoon.
And now we will turn to our, our panel. And if you could please, uh, come forward. First
we have Thomas Brown, who is a lecturer at the UC Berkeley Law School, and a partner
in Paul Hastings LLP; John Muller, Vice-President and General Counsel of PayPal, Inc.; Michelle
Jun, uh, Senior Attorney, Consumers Union, or Yoon, m not sure, is it MS. JUN: It Juhn.
CHAIRMAN DICKINSON: Jun, okay. Um, Rob, Rob Barnett, Vice-President and Assistant General
Counsel at Automatic Data Processing, Inc. And thank you, um, thank you for being with
us this, this afternoon. And in light of our time if you could try to keep your opening
remarks to about five minutes, then that ll give the Committee members time to delve into
the issues with you. And if it s agreeable to you, if we could just go in the order that
I introduced each of you, so Mr. Brown, you d be first. MR. BROWN: Thank you Chairman
Dickinson and members of the Committee, it s an honor to be here to talk about a a subject
that tends not to get the same level of attention, uh, on an annual basis as the business of
moving money from place to place. There there s something about the ability to engage directly
with financial services via um, an iPad or an iPhone or another instrument of mobile
technology that seems to get people excited and I think helps to explain some of the reason
why we re all why we re all here. Um, I ve provided written testimony to the Committee
and, and am open to taking questions on anything that I addressed there. With my oral remarks
I wanted to make, um, a couple of very short points and then save time to take questions.
So the first is that, um, uh, the, the consumer financial services industry both, um, in the
State of California, in the United States, is and is appropriately a highly-regulated
business. Um, uh, and the set of statutes that govern this business include things like
the Truth In Lending Act, uh, the Electronic Funds Transfer Act, uh, in the State of California
we of course have the Money Transmission Act, and, and, the consumers interests in interacting
with financial services are largely met through those traditional, um, consumer protection
statutes. There are a separate set of requirements for indust for industry participants that
are interested in being in this business, and those relate to the primary reason that
we re here, and are reflected in things like the California Money Transmission Act. And
those are the issues that fall under the general heading of safety and soundness. Um, how much
money do you need to have in order to support the activity associated with your program?
So, um, both Assemblymember Achadjian and Assemblymember Chau asked a question about
capitalization requirements with respect to businesses that are interested in moving money
from one consumer to another. And the answer, um, uh, just to embellish a little bit on
what, um, Commissioner Barnes offered is: they re actually threefold in California.
So one is if I receive money, um, to transmit it to another, I am required to hold eligible
securities that back those funds on a dollar-for-dollar basis. So that distinguishes the money transmission
business from the banking business. So, the banking business, we sometimes talk about
fractional deposits? Right, so for each dollar of volume that the bank is holding they need
to hold some fraction of that in eligible securities. So if you were in the money transmission
business, to be clear, right, a business that we theoretically think of as less regulated,
uh, you are required to hold a dollar in eligible securities for every dollar of float volume.
So that s one element of the capital requirement. re also then required to have, to meet a certain
threshold of capitalization. So the statute sets the minimum threshold as $500,000. As
a practical matter in California, uh, that threshold is, um, the minimum is two million,
uh, or, up, up... As a practical matter it s $2,000,000. Um, then the third is that you
re then on top of both the capitalization requirements so the equity on your balance
sheet, in addition of course to having that one-to-one dollar backing of every volume
in the system, you re then required to post a bond. Right. This is an extraordinary amount
of safety and soundness for a business that at the end of the day is not all that complicated.
One. And then two, all of the themes that I sort of laid out in my testimony was that,
that even though I obtain a license in California, to the extent I seek to offer that service
on a nationwide basis, I then have to get a license in each state. And, and some of
you may have seen the survey that I put together of, um; the handy bible of state licensing
requirements. Uh, you re required to obtain a license in each of the states in which you
do business. And I believe that that is an onerous load of regulation on the safety and
soundness side. And, as the Commissioner articulated in her remarks, has suppressed innovation
both here in the State of California, uh, and around the country. It makes it more difficult
to achieve the electronification of payments, which is something that all of us in California
have an interest in facilitating. So those are the points that I wanted to articulate
and I m happy to take any questions. CHAIRMAN DICKINSON: Thank you. We ll turn to Mr. Muller.
MR. MULLER: Thank you. Thank you, Chairman, and thank you to the other members of the
Committee for the opportunity to testify. My name is John Muller, and I m the Vice President
and General Counsel at PayPal, a California company based in, in San Jose, and part of
the eBay family of companies. We ve been in business since 1999 and we ve been regulated
under the Money Transmission Act and its predecessor since 2002, so, more than ten year now. Um,
and that is part of a a decision we made fairly early on in the company s history about the
company s business model. Um, and really our, our attempt to follow customer demand. Um,
the company started, uh, with the, the hot mobile device of its time, which was the Palm
Pilot, and an assumption in 1999 that soon most people would own Palm Pilots and they
would all want to send each other money through the Palm Pilot. We quickly learned from customer
demand that that wasn t the case, um, but that there was an interest in people using
the internet and e-mail, which were much more widely distributed, um, as the method for
sending each other money, and then we quickly learned that in fact, most people wanted to
use this new payment method, not just to send each other money, in a traditional type of
remittance, but to buy things, um to buy goods and services. First, on the eBay marketplace,
which is how we wound up as part of the eBay company, uh, and then eventually, with small
businesses and larger businesses all over the country starting to operate their own
web sites. And as part of that, um, we had to decide, will we follow the traditional,
um, payment processing model at the time (and still to a large extent, today), where the
customer gives their financial information to the merchant, and then the merchant sends
it through the payment processing system, usually, the card networks; or, would we have
the merchant, I m sorry, the consumer, shop without sharing, as we call it. So, shop without
having to share their financial information with the merchant, and only share it with
PayPal as the trusted intermediary. That s what we decided to do. In that context, it
s really the consumer who is pushing the money through the system, um, rather than the merchant
who is pulling the money, and so at that point it starts to look more like a traditional
remittance, and as a result, we did get our license back in, in 2002 as I mentioned. Um,
so the license, uh, has not inhibited our growth overall. We have grown, uh, over those
ten years to a point where last year we, we processed worldwide approximately 165 billion
in transmissions, again, almost all of that for the purchase of goods and services, or
charitable donations, um, and uh, we have overall had a good relationship with the Department
of Financial Institutions under the Act, and its predecessor; we haven t necessarily agreed
on every point of interpretation, um, but we have had an open relationship. And so I
think our perspective is similar to the Commissioner s: there are some opportunities for improvement,
um, in particular there are some elements of the Act that are still based on the traditional
remittance world, of cash-based transactions, or of transactions that, where there is a
delay between the sending of the money and the receipt of the payment by the recipient,
whereas in our case and the case of other recent technology payment entrants, in most
cases the receipt of the money by the recipient, usually a seller, is, is uh, immediate. So
we think there are opportunities for improvement, but it is an Act we have been able to operate
under successfully for these years, and I ll leave it at that in the interest of time.
And thank you. CHAIRMAN DICKINSON: Okay, um, thank you. I m sure we ll come back to you
about what those areas of improvement are that you see. Ms. Jun. MS. JUN: Thank you.
Good afternoon, my name is Michelle Jun, and I am a Senior Attorney with Consumers Union,
the policy and advocacy arm of Consumer Reports, whose mission is to work towards a fair, just
and safe marketplace for all consumers, and to empower consumers to protect themselves.
We thank the Committee and the Commissioner for putting on this hearing today that s focused
on the Money Transmission Act. The MTA provides individual consumers with greater assurance
that the companies who they entrust in to transfer their money are not fly-by-night
operations. There is no federal law which provides for this type of oversight. Thus,
it is important that the focus of this hearing is on protecting consumers in our State, who
use, and often rely on money transmission services. Section 2002 of the California Financial
Code, or the preamble to the MTA, states this purpose of the law, which is to protect the
interests of persons in this State who use money transmission services. It is clear that
the Legislature intended that the MTA is for consumer protection. We stress that this Committee
must continue to maintain its focus as it explores the MTA, particularly in light of
the many consumers who rely on money transmission services, as they either cannot or do not
want to utilize mainstream financial services. A weak money transmission law, of the lack
of a money transmission law, would most certainly have disparative impact on the more financially
vulnerable populations, including communities of color, immigrants, the unbanked and underbanked.
In reference to an FDIC report, underbanked populations include about 43 million adults
and 21 million households. These households use non-bank money orders or non-bank check
cashing services, payday loan institutions, rent-to-own agreements or pawn shops on a
regular basis. Blacks, Hispanics and Native Americans are the most likely Americans to
be underbanked. Additionally, the manner in which consumers have used money transmission
services has changed substantially where they have been made where they may be subject to
losing more money than they had before if they conducted their business with a less-than-stable
or trustworthy company. In the past, money transmission services were single transactions,
such as with a traveler s check, or international money transfers. With the advent of electronic
payments, there is a greater potential for consumers to lose more money as they utilize
payment instruments such as pre-paid and payroll cards. Further, this growth in alternative
financial services is projected to grow enormously with wider, and the expected universal adoption
of, mobile payments. Compliance with the MTA is necessary in shoring up public confidence,
which benefits the larger marketplace. Without public confidence in MT in money transmission
services, consumers who do not need to use a less secure method are less likely to use
an alternative payment method. Why would a consumer decide to use a payment in which
they are unsure about the solvency or the general credibility of the company behind
it, over pulling out an existing credit or debit card? We are not the only skeptics.
An IBM executive quoted in a recent San Francisco Chronicle article stated, You have to offer
them a compelling reason to use mobile payments. At a very, very minimum, it has to be just
as convenient, just as broadly accepted, and just as safe. Consumers Union encourages this
Committee, and others, to make sure that the MTA continues to pro-- to best protect consumers
who make money transmission services. While we certainly want to see the continuation
of payments innovation, we believe that protecting consumers money always takes precedence, particularly
for the most financially vulnerable. For many consumers who use money transmission services,
they do not use them for the novelty of making a new way to pay, but rather, rely on the
money transmission services to send money to loved ones or to pay bills. Technologies
will come and go, but making sure that people s hard-earned money is safe should always
be and remain the focus of the MTA. Thank you. CHAIRMAN DICKINSON: Thank you for those,
those comments, we appreciate that. Uh, Mr. Barnett, hitting clean-up. MR. BARNETT: Thank
you, Chair. CHAIRMAN DICKINSON: Welcome. MR. BARNETT: Thank you, Chairman Dickinson and
other members of the, uh, the Committee for the opportunity to uh, to present, uh, this
afternoon. I m here actually in somewhat of a dual capacity. I m here on behalf of the,
uh, National Payroll Reporting Consortium, who, uh, actually comprises I think probably
eleven or twelve of the top payroll, um, service providers, in the country. So a very large
group, providing, um, payroll type benefits, payroll services and other, um, payroll-related
services to 1.5 million employers across the country. Uh, I m also here in my capacity
as Assistant General Counsel and Vice President for our ADP, Automatic Data Processing, uh,
and obviously ADP, everyone knows, does payroll, but ADP also does a a host of other activities
that include money-type, money transmission-type activities. Uh, and I think one of the points
that I d just like to make as part of the opening remarks is that one of the things
that I ve heard very clearly here, and even Commissioner Barnes pointed out, the purpose
and intent of the statute itself was consumer protection. And, um, whether intentional or
not, the, the impact, uh, and reality is that it goes much beyond just simple consumer protection.
Certainly you can define consumer consumer as very broad, or you can look as it as individuals
or services to individuals, as opposed to services to, um, other corporations or businesses,
which most service providers in the payroll space obviously are providing services to
employers, not to individuals. Uh, and I think from our perspective obviously there are a
lot of payroll laws that regulate, um, wage payments and whatnot, uh, and certainly there
are federal laws that regulate, through the IRS and other, um, uh, laws, the payment of
of tax payments and that type of activity. Um, but one of the issues, or one of the challenges
that we ve faced is, given the very broad nature of the definition of money transmission,
uh, it essentially picks up any and all activity um, basically you take money from one party
on behalf of that party and then with instructions to transmit it to another and you re considered
a money transmitter. And, uh, you know the the effect of that is that you end up regulating,
uh, a vast number of business-to-business transactions, which from the basis of the
statute, the intent expressed in the statute was really more of a consumer protection statute,
not one to regulate business activity. Um, certainly not here necessarily to argue whether
it should apply or not apply to businesses, uh, generally, but I think one of the challenges
that we ve had in dealing with the the Department of Financial Institutions who, in our case
has been outstanding, they ve worked with us very closely, uh, in trying to address
and, uh, deal with some of the challenge that we ve had, so we certainly have no issues
with the DFI and certainly appreciate their partnership but one of the challenges is around
the fact that the statute, as previously mentioned, is, was really drafted with the mechanics
for over-the-counter, cash-based money transmission, which in our case, you know, we don t take
cash. Everything that we do is bank-to-bank essentially, uh, and so the, the mechanics
of the statute are designed such that they really, uh, require things like receipts and
rights to refunds and things that make perfect sense in the context of a consumer transaction,
but do not necessarily make as much sense in the context of business-to-business transactions.
And it s created a significant, um, challenge for us you know, obviously, ADP, we have resources,
that s not the issue, and we certainly are very seriously committed to our compliance
with laws and, and doing the things that we need to do to protect, um, you know, the the
value of, of the services we provide to our clients, and we take our we take our role
as a transmitter of money and a holder of other people s money quite seriously. We ve
been in this business for well over 60 years and have, have, you know, weathered a lot
of storms and been able to get through a lot of things that a lot of people haven t. But
one of the, you know, the issues for us is trying to comply with some of these technical
requirements in the statute that are really designed for over-the-counter money transmission.
It makes it difficult, because obviously, you know, for example, we, you know, we we
do the receipt requirement. We have 600,000 clients across the country that we do all
types of money movement activities for. And delivering a receipt to someone when you re
doing a bank-to-bank transfer that s pre-authorized and in agreement we have agreements with all
of our clients that govern the relationship, and identify how it is and when it is we can
take money uh, having to deliver a receipt, uh, in connection with that is is, is a challenge.
It s not impossible, but it s certainly a challenge and one that most payroll providers
aren t set up to do in an electronic world. Um, once again, we re just not taking cash.
Uh, and you know, some of the other requirements, right to refund language once again, we have
contracts that govern exactly when it is that we are to deliver the money to whom, and under
what circumstances. Um, and so under the statute you re required to essentially tell people
that they have the right to refund within 10 days, and in an over-the-counter transaction
that makes sense, um, but in the context of a business-to-business transaction, it s much
more of a challenge. It makes less sense in that context. And then there s just other
things like consumer notices; you re required to put signs out giving consumers notice of
their, their rights. And once again, we don t even have facilities where individual consumers
can walk in and buy our services. Right? We have salesforces that deal directly with people.
So I I think, you know, one of the challenges and one of the things that we see as an opportunity
to within the statute is is, is potentially looking at the definition of money transmission
and and figuring out and deciding whether or not that was really the intent to have
it be applied so broadly to so many people. Um, you know, certainly on on behalf of the
payroll consortium, um, you know, most of those folks in that group don t feel that,
you know, it was necessarily intended to apply to them, um, but we re here, and you know
ADP, we ve applied for a license and we ve been working through that process. Um, but
essentially, you know, at some point we have to figure out whether or not was that the
intent, or not the intent, and if it was, then maybe there just needs to be some tweaks
to the mechanics to address some of these other issues. Um, I d also offer up that there
are a host of other businesses that I m just not sure were necessarily, uh, intended, uh,
to be covered by this. I mean, you know, accounts payable businesses, um, COBRA tax credit services
these are all things that, although you know sort of are related to payroll, or actually
are provided by a lot of the people that don t even do payroll, they might do these types
of services separate, wholly apart from actual, um, payroll-type-providing services. And so,
I think it brings in a very vast, and a wide group of businesses that are potentially regulated.
You know, in this environment, obviously, more regulation, um, you know, is difficult
in the State given resources, and uh, so it s our feeling it needs to be looked at and
decided whether or not if that s the intent and that s the direction it wants to go then
mechanically it really needs to work in that context. Thank you. CHAIRMAN DICKINSON: Thank
you for comments, all all four of you. And let me, um, let s start where we ended. MR.
BARNETT: Sure. CHAIRMAN DICKINSON: I d like to explore this just a little bit more with
you, Mr. Mr. Barnett. Is it is it your view that that payroll processors in particular
ought not to been seen as money transmitters in the sense of the of the statute, or would
you would you advocate that business-to-business transactions in general be treated differently
than under the Money Transmission Act? Or something else? Or a third MR. BARNETT: Yeah.
I, once again, I m not necessarily here to argue that it should not be regulated necessarily.
I can only look at the actual the law as it s written and the legislative intent, and
what seems to be the intent at the time it was drafted. And the intended purpose, which
was really governing over-the over-the-counter money transmission activities, right? The
traditional Western Union-type activities. Um, I think, you know, obviously there s a
lot of folks here that are, that are being affected by the fact that it s very broad,
but, um, I would think that payroll providers, or certainly companies, in you know, sophisticated
companies in business-to-business-type transactions, they should be soph or, you know, not all
are sufficiently sophisticated enough to necessarily protect themselves, but they are individual
consumers for the most part. And so, the intent of providing consumer protection unless you
take a very broad read of consumer, um, I think the statute the way it s drafted and
the broad nature of it goes well beyond that intent. CHAIRMAN DICKINSON: Uh, I assume you
would grant the point that there are small businesses and maybe even sometimes large
businesses, that aren t necessarily all that sophisticated or or aware of what their exposure
may may be such as, a contracting with a payroll processor, or, or an entity to take care of
paying of taxes, you know those kinds of things, and they may be at risk of of fraud, or misrepresentation
in those transactions. We had a very, very controversial and, and, uh, visible case of
that involving Sacramento County, just a couple of years ago, which is, uh, not an unsophisticated
organization, I can tell you that from first-hand experience, and yet and yet, fell victim to
using a firm in another state that literally robbed the County that s tax money and wasn
t discovered until the IRS found that some things didn t reconcile and brought it to
the attention of the County. So, you wouldn t necessarily exclude businesses from needing
some form of protection, you re just arguing that maybe the notion of the traditional consumer
in that context is is not that broad. Is that is that fair to say? MR. BARNETT: That is
fair. I mean, unfortunately, right, there are bad apples in every industry. CHAIRMAN
DICKINSON: Right. MR. BARNETT: I m not going to say that payroll providers are all great.
And, uh, I d like to think that the eleven or so that are part of the Consortium, we
d like to think that we re above that type of activity. Um, but certainly there are you
know, there there s needs to regulate at different levels across all businesses. Um, so yeah,
I would agree. I think the challenge for us really is the mechanics of the statute, right,
is this you know, if the intent is to regulate all activities, is this the right mechanical
structure for that. Um, and, and as I pointed out earlier, the Commissioner and her staff
uh, in the DFI, have been very cooperative in trying to work with us, but they, you know,
at times have felt at times have felt as though there are some constraints with what they
can and can t do because of what s in the statute. And so I think for us, you know,
the biggest challenge is just sort of conforming to the mechanical natures of the statute.
Um, so, I m not necessarily going to argue that there shouldn t be regulation. I think
there are, as I ve pointed out other areas in the law that do provide protection, as
the Commissioner pointed out, there was an unfortunate circumstance that they re now
aware of, and that does happen from time to time, but that that sort of activity would
also fall under, you know, IRS examination; there would be other places where there could
be protections for businesses like that, maybe apart from the MTA itself. CHAIRMAN DICKINSON:
Okay. Mr. Achadjian, did you want to follow up on this? No? ASSEMBLYMAN ACHADJIAN: I had
a question but it got answered through the conversation, so thank you. CHAIRMAN DICKINSON:
Okay. Thank you. Uh, Mr. Brown, I wanted to come back back to you. Uh, and I neglected
to say this the first time around, but Go Bears. MR. BROWN: [Laughter] Indeed. CHAIRMAN
DICKINSON: You did, you did give us in your written submission some suggestions oh, I
m sorry, Mr. Barnett, I just, one thing that occurred to me. Is ADP, uh, licensed as a
money transmitter in other states? MR. BARNETT: Yes, we are, we currently have 46 applications,
and two that are pending, one with California and one with Rhode Island. CHAIRMAN DICKINSON:
Okay. So there there s not enough deviation from state to state that you haven t sought
a license in essentially all the states that are regulating? MR. BARNETT: That s fair.
I think there was a question earlier to the Commissioner maybe as to whether or not the
the laws are applied. I mean, there are 27 states or so that have laws very similar to
California. And our, our, our sense is that in having had conversations with other states
as part of the licensing process, um, my sense is that a lot of the states, or some portion
of the states, um, do not look at it as broadly as, er, as California does. I think as part
of our conversation with the with the DFI, they ve made it pretty clear that there really
is no concept of unregulated money movement in California. And in other states, even though
the statutes are relatively similar, for whatever reason, some of those states have chosen to
regulate some activities, like, you know, stored value for example, sale of checks,
that type of activity that under a lot of statutes is actually enumerated, but other
types of activities they haven t had an interest in necessarily regulating, so Um, I wouldn
t say that it s necessarily s just I, you know maybe it s the interpretation, maybe
it s resources, I m not sure what it is. But I think California takes a much more, uh,
much broader interpretation of the definition of money transmission. And and it s, based
upon the statute, it s not unfair. It s a fair s a fair reading of the statute cause
it is very broad. CHAIRMAN DICKINSON: Mm-hmm. Okay. I m sorry, Mr. Brown, I wanted to come
back to you back to you. Um, one of your suggestions was some type of reciprocity be granted by
California to, to to other states. I m assuming that, uh, you would apply some standard to
that and I m not quite sure how it s articulated, but to ensure that we re not granting reciprocity
in cases where we thought another state s statute was um, less protective of consumers
than than California MR. BROWN: So, um, I think any proposal on reciprocity is going
to need to recognize California s interest in maintaining, um, uh, some assurance with
respect to safety and soundness criteria. Though, I really do think that it is helpful
to distinguish between consumer protection and safety and soundness. Um, we can make
arguments that safety and soundness requirements, um, ultimately protect consumers, uh, but
those, but that is that is not the primary objective of a safety and soundness requirement.
The safety and soundness requirement does two things: it preserves the institution,
uh, institutional integrity, um, and, and it serves a bit of a barrier to entry. Right,
I mean, so, so, things that go to protecting safety and soundness are by design, designed
to filter out certain institutions. So that s sort of, one. Only secondarily do they protect,
um, consumers interests, and then not always. But we, you know, we can come back to that
issue as well. Uh, I do think, um, echoing the earlier remarks about the definition of
money transmission and how that standard is interpreted in California, there is some cleanup
work that can be done with respect to the MTA. Um, as I pointed out in the written submission,
the definition under the existing Act is circular. Um, if you actually trace through the definitions,
money transmission is ultimately defined as money transmission. CHAIRMAN DICKINSON: [Laughter]
MR. BROWN: Um, uh, I would tell my students that we can hope for better in drafting statutory
text? Um, uh, so, at a high level But then, there s a more particular area of disagreement
between California and other states, and that s with respect to this issue as, of the payee
agent. Um, I mean, at an abstract level, we should all recognize everybody receives money
from some people and gives it to others. Uh, like, that happens a lot at my house. I have
two teenage girls. Um, and there s a lot of receiving money and giving it to others. Um,
uh, but then traditional businesses also receive money and give it to others. Um, you know
I happen to be a partner at a law firm. We receive money from clients and we pay it out
to, you know, associates and staff and then ultimately to ourselves and we don we don
t necessarily think of that act as triggering some sort of special-case regulation, even
though we re sort of holding other people s money at some level. And so I do think that
we can be more precise as to what money transmission actually means, right, so when when money
is in float, or not at rest, maybe that s what money transmission means, but when I
m giving money to somebody who is the agent of has been appointed by the person to whom
that money is ultimately owed, as their agent, that seems like not so much money transmission.
And at least two states have explicitly recognized that. New York, and it s built into a couple
of um, state statutes. So I do think that s another area where the Committee, um, can
look, and to help relieve some of the pressure on on DFI, particularly as we start to see
financial services combine with, with other services through mobile technologies. Um,
uh, um, one of my favorite one of my favorite sort of quasi-payment application is Uber.
I don t know if anybody has ever used it; it s gotten a little of attention for other
reasons. But I don t necessarily think of Uber as a payment app. Right? Um, getting
in a cab, it s helped me locate the cab, and then I get out of the cab, and then there
s money, um, movement associated with that application, but I don t think of Uber as
a payment provider, though there s some ways of looking at the statute that might subject
them CHAIRMAN DICKINSON: So let let s pause on that, cause that MR. BROWN: Mm-hmm. CHAIRMAN
DICKINSON: That maybe that s a fruitful way of illustrating this. I mean, I ve not used
Uber MR. BROWN: Mm-hmm. CHAIRMAN DICKINSON: but what I ve read, it suggests that you contact
Uber and you you let Uber know your location; Uber contacts a taxi or, or MR. BROWN: A towncar,
or whathaveyou CHAIRMAN DICKINSON: a towncar, and, um, directs it to your your location.
But there s no transfer of of money in that. To my knowledge, I mean, but maybe you can,
you can expand? MR. BROWN: Well, so, so what, so what happens with, um, many transactions
of that archetype, and there are many, and it s not just Uber that uses that basic that
same basic structure, is, um, when I get out of the towncar, it will, it will trigger a
charge to the payment credentials that I have on file with that service provider. Uh, and
it will then also trigger another transaction to that service provider; now, I believe in
Uber s case they are the agent of payee for the people who have contracted with Uber to
help them find customers. Um, but, so that gives, gives an example. But there are many,
many, many others. Many electronic downloads are delivered through things that look like
marketplaces. Right? Where I go on, say, iTunes, and download a Taylor Swift song. Right? So,
turns out, Taylor Swift gets paid, and I pay somebody, um, and we m paying one person and
that same person is then paying Taylor Swift, but again, that that doesn t have the feel
of, of a traditional transaction at say Western Union, where I go up to a counter and give
somebody money and I ask them to send it halfway around the world, even though, you know, Taylor
Swift may for all I know be in London right now. You know, um, uh, but so this gets at
the difference between money transmission and other types of transactions. ASSEMBLYMAN
ACHADJIAN: I believe to be part of the organization you have an account established, so when you
call, and they send you a cab or whoever they have a contract with, they are reaching out
your account and withdraw that money and pay the cab company and keep their percentage,
whatever that might be. MR. BROWN: Correct. Um, but, but, for when you get out of the
cab, um ASSEMBLYMAN ACHADJIAN: It s already paid for. MR. BROWN: You are, but your obligation
to the driver this is, I think, the key distinction, right your obligation to the driver is released,
even if that intermediary fails to deliver funds to the driver, you as the consumer are
protected as a matter of contract, in that case, though there are federal overlays that
are important here, too. I mentioned the Electronic Funds Transfer Act and Regulation Z ealier.
Um, your obligation to the driver is satisfied by your successful payment to the intermediary,
in this case, Uber. And for me, that sort of breaks the money transmission chain, even
though funds are ultimately being delivered to the driver. ASSEMBLYMAN ACHADJIAN: Just
to follow up my question to the Commissioner. If you go to a Western Union, and let s say
I want to transfer money to you in another part of the area, and I write a check, if
they don t have a guarantee that that check will clear, don t they have the right to hold
onto it for whatever the new technology allows them to clear that check? MR. BROWN: Um, so
I ASSEMBLYMAN ACHADJIAN: That s where I was MR. BROWN: That s where your question was
going. ASSEMBLYMAN ACHADJIAN: My question was going, as, are we going to regulate both
sides, too, so there s a balance? Or, in support of consumer, then we re penalizing the MR.
BROWN: the business provider. That s an excellent point, and not, not um, not one that I had,
um not one that I had given sort of a lot of thought to. But it does go to one of the
sort of fundamental challenges of operating in these businesses, as, uh, um, Mr. Muller
can attest, right, is that consumers will engage in transactions with you and present
themselves as though they have funds, and then turn out not to. Um, and then, frequently
you have an obligation to pay the recipient of those funds, independent of whether the
consumer actually has the funds, and, and and that, that is the fundamental risk that
you as the intermediary, um, take on. And so your point about receiving a check that
may not be good is, uh, is an excellent one. ASSEMBLYMAN ACHADJIAN: Because if it was to
happen on a weekend when my bank is closed and I don t have the cash to forward it to
you, I want to write a check; Western Union is open around the clock, then there is a
problem. Unless we address it early on. MR. BROWN: Yes. CHAIRMAN DICKINSON: Uh, I thought
if, and I want to make sure I heard you you correctly, uh, I thought you made, uh, a remark,
uh, to the effect of the safeness and soundness evaluation or criteria can operate as a barrier
to to entry and in a way that s not necessarily protective of consumers. Did, did is that
the essence MR. BROWN: That s a, um CHAIRMAN DICKINSON: of what you said MR. BROWN: That
s a that s a fair statement, um, there s also there are also some examples of instances
where things that we think of as, as benefiting consumers via safety and soundness have actually
worked against that interest, and I ll use one example: there s an interesting paper
that s been published on this that when you trace the evolution of deposit insurance in
the United States, it turns out that state-mandated deposit insurance tended to make banks less
safe on on average. Um, uh, controlling for all other factors, because it reduces a dimension
along which banks are then competing for the attention of consumers, which is not an argument
against deposit insurance, it s just a recognition that things that we do, however well intentioned,
can have, um, uh, unintended consequences that work against the benefit that we re trying
to implement. So, this particular study looked at, um, developments in state laws at the
turn of the century around branch banking and deposit insurance, which were two, you
know, progressive innovations designed to help ensure the safety and soundness of the
financial institutions, right, one by allowing some diversification, the other by insuring
deposits. Turned out, branch banking tended to make banks more make them safer, because
they could be in more geographic areas, and deposit insurance, um, tended to make them
less safe. So, um, so that s one, but more generally, safety and soundness criteria do
serve as a barrier to entry. I mean, if I need, as a potential innovator, an entrepreneur,
who wants to offer a new mobile payment application on, um, uh, an iPad, if I need to go to DFI
and spend either 120 days or in some cases several years sort of working with the Commissioner
and staff to have my application approved, right, that, that necessarily slows down the
degree to which people are introducing applications. Now, we might think that that s a tradeoff
worth making. But, it is definitely a tradeoff. Uh, and the higher we make the capitalization
requirements and the more that we assess fees, we can expect that there s going to be less
entry. People will choose to spend their entrepreneurial energies elsewhere. CHAIRMAN DICKINSON: Sometimes
you want to prevent people from entering the market because they shouldn t be in the market.
MR. BROWN: Yes. CHAIRMAN DICKINSON: Uh, other times, uh, barriers to entry can operate as
an economic device that, that advan gives some an advantage to the disadvantage of others.
Do you have a do you have a point of view about how the California statute operates
in that, in that respect? MR. BROWN: Um, I do, and my and my point of view here, is sort
of view informed by a little bit of history in the evolution of the statute. Uh, so, um,
for me PayPal is actually a fascinating case. So for PayPal, a money transmission license
was an alternative to a claim that they were at least this is the story that I have learned
over time, um, uh, again, um, Mr. Muller can embellish was an alternative to being told
that they were a bank, but operating without a bank charter. So, uh, California in its
willingness to provide a license provided an answer to that claim, a claim that had
been raised both by the State of Louisiana and by the State of New York, if memory serves.
Um, so, so, and because it was somewhat a lower bar and you could support other business
operations through a money transmission license that you couldn t support if you had a bank
charter. Um, uh, but this was at a time when California s Money Transmission Act only applied
if you were operating and sending funds overseas, one. Two, at that point in time, California
s Money Transmission Act actually preceded the development of what s known as the um,
what was promulgated by um, uh, the institute for, for state law development, the Uniform
Money Transmission Act. California s actually became an inspiration for the Money the Uniform
Money Transmission Act. And with the development of the Uniform Money Transmission Act and
the application to all businesses involved in receiving money on a domestic basis, you
saw the creation of a barrier to entry where one had not existed before. Um, uh, and, and
I am familiar, um, both anecdotally and more anecdotally than every, anything with, um,
with a degree to which California s now adoption of significant capital requirements has led
people to either go to states, to test their products, that don t have a licensing requirement,
or to find somebody who s already a member of the club and to obtain permission to use
their charter or their license to offer it. So, yeah, uh, and that doesn t strike me as
a positive development. CHAIRMAN DICKINSON: So I want to give Ms. Jun a chance if she
wants to weigh in on on this, because, um, one side of the coin is consumer protection,
um; perhaps the other side of the coin, at least one dimension, barriers to to entry.
On the other hand, unreasonable barriers means less competition, um, less choice for consumers,
and presumably higher prices for for consumers. I mean certainly when we, back in the eighties,
talked about airline deregulation and interstate trucking deregulation and all those they were
driven by much of the same kind of discussion and principle applied to different subjects.
But I m curious if you want to comment on this point. MS. JUN: Sure, I think there are
a number of levels I think I can answer that question, but I think the first thing that
I want to mention, um, has to do with whether or not consumers would benefit from increased
competition. Um, one thing that comes to mind is the Durbin Amendment. Everybody said once
interchange fees went down, merchants would pass on their reaped benefits to consumers.
We have yet to see that happen. It may be too soon, but I highly doubt that will happen.
Um, so it s kind of the same case here. Merchants may be able to arrange for cheaper ways to
process the payment, but it would it probably won t be reflected in terms of what is back
in the consumer s pocket. Um, the second point is what we ve raised again and again, is:
the point of this law is for consumer protection. We re not talking about making an application
to see where your friend is instantaneously. We re talking about people s money, and for
the most part, it s people who are unbanked and underbanked who are using these types
of transmission services and it will increasingly be so as the numbers are been very staggering
as to the number of people who are using mobile devices to conduct every form of business
including payments. So the the first and foremost, um, it would be that consumer protection should
precede any other any other concern. CHAIRMAN DICKINSON: So, so at least from your point
of view you don t see barriers to entry, at least in this endeavor, as, um, adversely
affecting consumers in terms of competition because you don t believe they ll see the
benefit of competition, were there greater competition in this in this marketplace, and
you re concerned about compromising other protections. Is that the gist of how you re
looking at it? MS. JUN: I mean we don t sit nearly as closely as DFI in terms of the different
inquiries and applications that they obtain, but there are companies that are newer that
are more innovative who have been complying with the regulation and have acquired licenses
and succeeded in doing so. Um, so that does not appear to be a barrier of entry. CHAIRMAN
DICKINSON: Okay. MS. JUN: A barrier to entry. CHAIRMAN DICKINSON: Okay. And Mr. Muller,
I promised I d come back and you can certainly talk about this current question on the table
if you want, but I d also like to come back to, uh, your intriguing remark about some
improvements could be made in the statute, not withstanding your as I get it, your general
satisfaction with the way it s operating with respect to PayPal. MR. MULLER: Uh, so just
to start on the competition point, um, you know, we do see, uh, increased competition,
certainly over the last three years, um, and I think certainly the regulations that the
Commissioner mentioned will probably help. Uh, I think there s at least a perceived,
uh, lack of clarity as to what the boundaries of the Act are. Um, and uh, but I think we
do see competitors who both build their business around, um, what I m going to call more pure
payment processing models, and are therefore able to stay outside of the regulation of
the Act, and others who make that choice, um, and have been able to get licensed, some
companies in recent years like Facebook and Google, who have been able to get licensed
and start up their payments business, and smaller ones as well. Um, so uh, so I think
the regulations will help and I think the competitive landscape for payments is certainly
very vibrant. Um, and more, now more than ever. Um, on uh, on the question about improvements
that we see to the Act, again, you know, trying not to get too technical, but Mr. Barnett
mentioned the receipt and the right to refund wording. Um, you know the right to refund,
again, is premised on a delay in the transmission reaching the recipient, among other things,
um and in many cases, both through PayPal and through many of our competitors, uh, the
recipient knows right away that the funds have reached their account. Um, so, the wording,
uh, you know we do deliver a receipt, we don t have any problem with delivering a receipt
to both sides of the transaction, it s simply a question of the specific wording that is
mandated by the statute currently, uh, which can be confusing, um, to the sender and the
receiver both. Um, so that s one example. Um, another one relates to, um, the way the
statute deals with agency relationships. Um, again, based largely on a model of traditional
money remittance, um, where the Western Unions and MoneyGrams of the world work through,
um, stores and agents around the world. Um, in our case, for instance, we re also trying
to deliver, uh, more service, and make on-line and mobile shopping more available now to
the underbanked, working with companies like, like a CoinStar and a MoneyGram. Um, so if
MoneyGram, which is itself a licensed company and has been for a long, long time um, should
they be treated as if they were just an agent, or a corner store with respect to PayPal when
PayPal and MoneyGram are working together. So we think there s, um, opportunity there
to make some changes to the Act that can help clarify, um, these new types of relationships.
CHAIRMAN DICKINSON: Well thank you. I think there s one other aspect of this competition
issue, um, or service issue, that strikes me and that s whether there are certain categories
of consumers that aren t getting service that could, or could get better service, so it
s another aspect of this, but we ll leave that for another day to explore, unless there
are questions from other members ASSEMBLYMAN ACHADJIAN: I m just watching the clock to
see if we can bring it to an end because we have another commitment CHAIRMAN DICKINSON:
Right, that s what we re aiming at, so, uh, so thank you all for I appreciate your comments
very much and certainly as we look at trying to shape something productive out of the legislation
I ve introduced I m sure we ll be continuing this discussion with you and others. MR. BARNETT:
Thank you. MR. BROWN: Thanks. CHAIRMAN DICKINSON: Thank you all again. Uh, and now, uh, we will
take public testimony, uh, briefly, so if there are people here who would like to address
the Committee, we can we can do that now. So if you could tell us who you are, and uh,
I know in at least one case we have a lengthy letter; we re going to need to keep your comments
to a couple minutes, so I ll just let you know when you hit that marker. MR. GREENSPAN:
Good afternoon. CHAIRMAN DICKINSON: Good afternoon. MR. GREENSPAN: My name is Aaron Greenspan.
I am the CEO of Think Computer Corporation, a startup in Palo Alto, and a CodeX Fellow
at Stanford Law School. There s no way that I can fit everything I have to say about the
MTA and AB 786 into a few minutes, but it is my hope that if you come away with anything
from this hearing, it is the following: which is that, with the MTA, we all lose. It is
not difficult to see what I have lost. In 2009, I started working full-time on a mobile
payments project called FaceCash. FaceCash s origins go back to my time at Harvard College,
from which I graduated early with a degree in economics in 2004. As a freshman at Harvard
I enrolled in a seminar about facial recognition, and I later realized that some of the insights
I gained from this course could be used to make payments safer. The patent on this technology
will granted tomorrow as it turns out. So as everyone here surely knows, identity theft
is an extremely serious problem; according to a recent Javelin report, identity thieves
stole $54 billion in 2009. I m sure it s higher now. Much of this can be attributed to the
fact that the plastic payment card networks that we all use daily are fundamentally insecure
and for a number of reasons cannot be upgraded. The only way to make the network more secure
is to build a new one. So that is what I set out to do. After substantial investment of
approximately $1 million of my own money, FaceCash went live in April, 2010. It was
shut down on June 30th, 2011 at the request of the California Department of Financial
Institutions due to the new MTA. I tried to apply for a license, but at my mandatory pre-application
interview, among other self-contradictory, ignorant, confusing and false statements,
Deputy Commissioner Venchiarutti personally threatened to call law enforcement officials
with instructions to throw me in jail because he did not like the kinds of questions I had
been asking him about the MTA so I felt as though I had no choice but to abandon my investment,
my product, and my employees. So that s what I lost. But again, with the MTA, we all lose.
My employees lost their jobs, the state lost tax revenue, and this is all because the MTA
is a protectionist law written solely for the purpose of preserving the monopoly power
of a few financial institutions represented by the law s initial and sole sponsor, The
Money Services Round Table. The Round Table s monopoly allows its members, and banks who
also benef benefit from the law, to keep charging consumers outrageous prices for basic financial
services whose actual marginal cost is near zero. When the MTA was proposed, it was described
in terms of quote consumer protection; the same is now true, as we ve been discussing,
of AB 786. But the truth of the matter is that both the MTA and AB 786 harm consumers,
and especially entrepreneurs. So do the Round Table s members one of them, MoneyGram, recently
settled with the U.S. Department of Justice for $100 million over criminal charges filed
regarding an even larger decade-long fraud. In effect, thanks to the money transmission
laws like the MTA, consumers have been forced into the arms of corporate criminals because
of these pointless barriers to entry based on this totally false premise that rich people
are inherently more trustworthy. Another Round Table member, Sigue Corporation, settled with
the DOJ in 2008 for $15 million for failing to comply with Bank Secrecy Act requirements.
Both still are licensed by the DFI. Perhaps this is why the DFI s own General Counsel
told me that he was personally appalled by the MTA. Today, Assembly Bill 786 only stands
to make the presently bad situation far worse. In particular, the proposed new thought crime
in AB 786 section 2155 is completely outrageous, and broadly interpreted, would allow the DFI
to lock me up in a federal prison just for having asked what the Deputy Commissioner
considered to be the wrong questions a year and a half ago. CHAIRMAN DICKINSON: Mr. Greenspan,
uh, I you re perfectly free to criticize, I don t have a problem with that, just I have
a problem with time, and I have given you, uh, an extra, minute. Because I know you have
a lot to say. We will take your letter into account. But if you, if you could, because
we have an unforgiving time constraint this afternoon, if there s one more thing you would
like to say in summary, why don t you give that to us, and then this conversation will
go on. MR. GREENSPAN: I will give you the laundry list of why I believe the the MTA
should be repealed, and is unconstitutional. And I say it should be repealed not because
I m a libertarian who hates regulation. I think there should be federal regulation of
this; I know that Congress is looking at it. But the states I like your airline analogy
from before uh, the states are not in a position to regulate internet transmissions. The courts
have already said so, but aside from that it doesn t make any sense. It s like having
a different FAA in each state. It s incredibly dangerous. CHAIRMAN DICKINSON: Okay. I know
you ve got more to say, but let s leave it there, it s a good one. MR. GREENSPAN: I understand.
CHAIRMAN DICKINSON: Okay. Next. MR. GARRET: Um, thank you, my ll try to be as quick as
I can. My name is Ron Garret. Um CHAIRMAN DICKINSON: Welcome. MR. GARRET: I Thank you.
Um, I sent a letter into the public comments which was not included in the public comments.
It s two pages long; I ll read as much of it as I can before I run out of time. Um,
I m here mainly in my capacity as a consumer whose interests the MTA is ostensibly designed
to protect, but also as a software engineer, entrepreneur and an investor who has significant
experience in digital security technology and financial systems. Since I m claiming
some domain expertise, let me provide my credentials. I hold a Ph.D. in Computer Science and Applications
from Virginia Tech, I ve had substantial industrial experience designing and implementing secure
financial systems, I wrote the billing system for the original release of Google AdWords
in September of 2000, and I subsequently designed and implemented the billing system for two
other startups. In December of 2008 I launched a an effort to start a company whose goal
was to eliminate credit card fraud. The upshot of the story is that the company never got
off the ground, in large measure measure because of regulatory hurdles. It is because of this
experience that I can definitely say that extant financial regulations in the United
States in general, and the California MTA in particular, are doing more harm than good,
at least when measured according to how well they concept protect consumers from fraud.
To back up this claim, let me tell you my story. The fundamental problem with all non-cash
payment methods currently in used currently in use in the United States, which includes
credit cards, checks, and debit cards, is that they are based on fundamentally insecure
protocols designed in the 1950s. To conduct a transaction the buyer must provide the seller
with information: account number, expiration date, billing zip code, whathaveyou. The exact
nature and quantity of this information is not relevant. What matters is that the information
is bound to a particular transaction. It s reusable. This is the basis for all credit
card fraud and it cannot be fixed, except by making a fundamental change to the protocol.
With the advent of electronic commerce, the risk of a fraudster being caught has been
reduced nearly to zero. The result, unsurprisingly, has been an epidemic of credit card fraud
that we are all familiar with. There is a technological solution to this problem: it
s called Public Key Encryption. I don t want to get into the details of that, you ll just
have to take my word for it for now, but using PKE it is possible to design protocols where
the information provided a buyer to conduct a transaction is strongly bound to that particular
transaction, and so cannot be reused. The adoption of this technology would completely
solve the credit card fraud problem. And in the interest of time, I will just tell you
that after three years I gave up on this effort, and the last straw was exploring the possibility
of getting a money transmitter license. It turned out, that the process turned out to
be so expensive and time-consuming and unpredictable that I decided not to pursue it. CHAIRMAN
DICKINSON: Okay. Thank you. Uh, and I, uh, am informed that we did include your letter
in the materials that were made available to the public. MR. GARRET: Oh, it was? I must
have missed it then. CHAIRMAN DICKINSON: It was included in the it was included in the
materials the Committee members received, and it is on the Committee s web site, so
we have made it part of the record, and thank thank you. MR. GARRET: Good enough. MR. COSME:
Hi, I ll be brief and to the point. My name is Manuel Cosme. I m the co-owner of Professional
Small Business Services. We re one of the payroll providers that was discussed a little
bit earlier. And um, and I m also the California Chairperson for the National Federation of
Independent Businesses. CHAIRMAN DICKINSON: Welcome. MR. COSME: Thank you for this opportunity.
Uh, as I understand it, um, according to the statute, there s a $5,000 non-refundable license
fee, I think, and there s a $500,000 minimum for surety bond, right? We provide payroll
services for small businesses. The average employees is about four. That billing runs
between 72 to 100 dollars a month. And, and to require the, um, payroll service bureaus
to come up with those kinds of funds doesn t make sense. Um, the services we provide,
um, is that in the statute according to what I read, is that we issue executable checks.
These executable checks, when signed, becomes negotiable. But that s only when they are
signed by the owners. So, okay, I would like to see a little clarity on this law, so there
is a distinction between the services we provide, which goes directly from the business owner
to IRS or EDD, or those that, uh, perhaps take funds what happened in, uh, with this,
Sacramento. CHAIRMAN DICKINSON: Mm-hmm. MR. COSME: Where the funds was actually sent to
a trust fund, and then from there they paid the agencies and there was a by the way the
State of New York had a similar problem. CHAIRMAN DICKINSON: Well, the other firm was in New
York that, that was a victim, so, yeah. MR. COSME: That yeah, exactly, so um but there
is a distinction between the the small payroll service bureaus that are throughout the State
of California, as opposed to those. Um, so CHAIRMAN DICKINSON: Right, and I certainly
by my comments didn t mean to suggest that all payroll forms, uh, firms, or anything
like that I mean, that that s the aberration, but, to be sure. MR. COSME: Yeah, um, and
so, quite a few comments were mentioned today and I thought they were excellent. Um, and
I m hoping that um, you take some of those into consideration, especially from the representative
of ADP. CHAIRMAN DICKINSON: Okay. MR. COSME: Alright? CHAIRMAN DICKINSON: Yes. Thank you
for all three very much. Appreciate your testimony. And if there s no one else who wishes to address
the Committee this afternoon, we we are adjourned. (Hearing adjourned at 3:45 P.M.) CERTIFICATION
I, Aaron Greenspan, certify that the foregoing is a correct transcript from the official
digital video recording of the proceedings in the above-entitled matter. PAGE Chairman
Dickinson: We will call the Banking and Finance Committee to order for our hearing of March
11th, 2013 Aaron Greenspan Normal.dot Aaron Greenspan Microsoft Word 8.0 Think Computer
Corporation Chairman Dickinson: We will call the Banking and Finance Committee to order
for our hearing of March 11th, 2013 Title _PID_GUID Microsoft Word Document MSWordDoc
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