Pennsylvania's easing of rules for donation apps should set a precedent
Can software and a business model be deemed the business of transmitting money under state law when the business does not receive any funds?
That question was answered by a Pennsylvania appellate court. The court recently ruled that a company operating a mobile application for charitable donations that transfers data but not funds is not a money transmitter, reversing an order by that state’s Department of Banking and Securities (the “Department”).
The decision brings much needed clarity to the complex world of money transmitter licensing by holding that the transmission of information alone is not engaging in the business of money transmission under Pennsylvania law.
The case involved Givelify, LLC, a company that operates a mobile application that stands between donors and charitable and religious organizations to facilitate donations to those organizations.
Givelify collects information through the app that it sends to the payment processor, Vantiv. Vantiv obtains authorization from the applicable card network, and Fifth Third Bank, the acquiring bank, receives settlement funds for the transactions that it deposits into the settlement account of the charity, net of Givelify’s fees. It is significant that at no time does Givelify receive any funds from donors or hold or send the donated funds to the charities.
Stemming from a 2015 investigation which concluded that Givelify needed a money transmitter license under Pennsylvania’s Money Transfer Act (the “MTA”), in September 2016, the Department issued a cease and desist order and assessed a hefty fine of $176,000 against Givelify. Givelify appealed the order through an administrative process, but a Pennsylvania hearing officer affirmed it, finding that Givelify’s software/business model constituted a “transmittal instrument” under the MTA and thus Givelify was engaged in the “business of transmitting money” without the required license.
Givelify then took the case to a Pennsylvania appellate court. The Department’s position, both in the administrative proceedings and the court appeal that followed, was that the data sent to Vantiv was an indispensable part of the chain that led to the transmission of funds, causing Givelify to be a money transmitter under the MTA. However, in reversing the Department’s order, the court concluded that the Department misconstrued the meaning of the statute. “On a basic and critical level, the Commission erroneously interpreted the terminology 'engage in the business’ in an overly expansive manner and essentially read it as prohibiting any conduct that contributes toward—or has a tangential involvement with—the concrete and real act of ‘transmitting money,’” the court wrote.
The court’s narrower view of the statute was that it applies only to entities that actually transmit money—not to those that cause or request another party to transmit money. That the decision arose in Pennsylvania is particularly noteworthy given the 2015 letter from Pennsylvania’s Secretary of Banking and Securities warning state residents not to make charitable contributions to entities that do not hold money transmitter licenses from the Department.
One can only wonder what would be accomplished by requiring an entity to be licensed if it never touches the funds. The basic requirements of the MTA are designed to protect funds until delivery to the intended recipient, and this expansive view does not appear to further the legislative purpose of protecting state residents.
Historically, the money transmitter licensing process required due diligence to weed out potentially unscrupulous licensees, provide financial backstops in the form of bonds and liquidity requirements to ensure that the funds would be there when delivery to the recipient is required, enable administrative oversight through reporting, audits and enforcement, and grant other powers to the Department to protect senders, recipients and ultimately the state.
However, the requirements of the statute are costly and the obligations burdensome. For example, Pennsylvania requires a minimum bond of $1 million. Extending such a statute to fintech companies and to online and app-based service providers that only provide data and content, but that are not involved in the actual flow of funds, seems unnecessary.
In recent years, regulators in several states have broadened their views of what constitutes transmitting money. Needless to say, due to the cost and uncertainty of litigation, companies facing enforcement actions generally have been reluctant to bring court challenges.
As a result, there is scant case law interpreting the often vague definitions and broad administrative interpretations of these statutes.
The Pennsylvania appellate court’s reversal of an expansive reading of the statute by the Department is a welcome development for a host of e-commerce marketplaces, fintech companies, data processors and others that act as intermediaries in financial transactions, but do not themselves take possession of any funds. This decision provides a well-reasoned view of what it means to transmit money, at least under Pennsylvania law. Hopefully it will provide persuasive authority in other jurisdictions as well.