Lawmakers are looking into removing the roadblock that currently exists in California for mobile-pay startups that either can't afford the compliance costs for state licensing or define themselves as Web-based marketplaces, rather than true money transmitters.

Those that do not obtain the proper license in California could receive a state order to stop doing business. California's Committee on Banking and Financing conducted a March 11 hearing in Sacramento related to the introduction of a bill that would reform the California Money Transmission Act.

Assembly member Roger Dickinson, a Democrat from Sacramento, introduced the bill in an attempt to clarify the definitions and requirements for existing licenses for money transmitters and potentially assist in "removing barriers to market entry to startup payment technology companies," a press release from Dickinson's office states.

PayPal Inc. general counsel John Muller attended the hearing to represent the mobile payments industry and provide input as to why the state's law needs revamping, says PayPal spokesperson Anuj Nayar.

"We basically created the online payment category and we have licenses in every state and country we do business with, so we understand that regulations don't keep up with the speed of technology," Nayar says.

The bill, AB 786, would clarify the net worth requirements for new licensees as a way to lower barriers to entry, and provide the state with greater regulatory enforcement over unlicensed activity, the press release states. Dickinson's office did not reply to inquiries for this story by deadline.

State licensing requirements are an issue for the many mobile-payment companies that initiate or arrange transactions but don't hold funds.

San Francisco-based Square Inc., for example, received an order in January from the state of Illinois to stop handling payments until it had obtained the proper license. In California, Square encountered similar friction before obtaining the required license.

The California law was signed by then-governor Arnold Schwarzenegger in late 2010 and took effect during the summer of 2011.

During the March 11 hearing, Nayar says, state officials noted they were expecting about five to seven companies per year to apply for money transmitter licenses after the law took effect. "Instead, they have had 42 applications the past two years," he says.

Previously, California required only businesses engaged in international money transmission to register for a license. The new law covers domestic money transmission conducted by any non-financial institution that "receives money for transmission."

The law's detractors say regulatory costs can put small companies out of business.

"Many of these companies, such as Uber or Airbnb, operate as marketplaces, not as true payments companies that are money transmitters," Nayar says. Uber Inc. operates as a taxi reservation company, while Airbnb Inc. is a housing marketplace, matching up people seeking housing with those who have housing available.

The hearing was a starting point for getting key issues identified and getting a sense of "what's regulated and what reality is," Nayar says. Assigned state committees will study the findings from the hearing in more detail in the coming weeks, he adds.

The mobile-pay innovators and technology startups have a strong ally in Dickinson, Nayar says.

"Representative Dickinson is really leading the way on this and he has a good understanding of what the problems are and how technology has changed since the law took hold," Nayar says.

The California Money Transmission Act regulates the transmission of international and domestic transfers of money as well as the use of non-bank issued stored value. The California Department of Financial Institutions regulates money transmission licensees. 

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