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Illinois Cites Square and NetSpend for Not Having Money-Transmitter Licenses
March 4, 2013

A spate of cease-and-desist orders by the state of Illinois against unlicensed money transmitters has ensnared eight payments companies, including such prominent ones as Square Inc. and NetSpending Holdings Inc. An agency quietly issued orders against both firms in January that seemingly would prevent them from doing business in the state. Both companies, however, tell Digital Transactions news that they continue to operate in Illinois.

A spokesperson for the Illinois Department of Financial and Professional Regulation (DFPR) would not discuss the Square or NetSpend cases, including how they came to the attention of the DFPR’s Division of Financial Institutions or why they continue to operate in the state. Neither Square, a fast-growing mobile-payments processor, nor NetSpend, a major prepaid card program manager that recently struck a deal to be acquired by processor Total System Services Inc. (TSYS), would not comment in detail. But brief statements from both imply they’ve resolved or are in the process of resolving their differences with the DFPR.

“We've been in close contact with the Illinois Division of Financial Institutions for several months and are addressing their concerns,” a spokesperson for San Francisco-based Square says by e-mail.

Says a spokesperson for Austin, Texas-based NetSpend, also by e-mail: “We are subject to a confidentiality agreement with Illinois, and yes, we are still selling our prepaid cards in this state.”

Illinois also issued six other cease-and-desist orders in January, the latest month for which data are available, for alleged failure to get money-transmitter licenses under the state’s Transmitters of Money Act. Violators can be fined $1,000 per day or per violation, and also are subject to a fine of four times the amount of unlicensed money transfers.

The DFPR spokesperson says regulation of money transmitters is “a consumer-protection issue” that is becoming more important with the growth of online payments that by nature are more anonymous than face-to-face transactions, which provide an element of assurance for the consumer.

“We periodically get complaints about money transmitters,” the spokesperson says. “It’s become a bigger issue than if you walk into a store and need to use cash or a credit card or a check, when it’s a face-to-face transaction. There have always been transmitters of money, but the use of companies that focus their energies on online transactions—it makes it even more important that these people be licensed.”

The issue of money-transmitter licenses can be a thorny one for payments companies, especially non-bank firms offering consumer-to-consumer payments on a national scale. At best, it’s a long and expensive process to get licenses in all 50 states. One company, Think Computer Corp. with its stalled FaceCash service, filed suit against a California agency to challenge the constitutionality of a 2010 California money-transmitter law.

Square offers a growing range of services to merchants and smart-phone-using consumers, including merchant processing to small merchants. The Illinois money-transmitter law does not regulate conventional merchant acquiring, according to payments attorney Anita Boomstein, a partner at Hughes Hubbard & Reed LLP in New York. But the law contains a provision governing how companies handle stored value, and that’s apparently why Square, which has a wallet service for consumers, would need a money-transmitter license.

“If the stored value involves the transmission of money, the transmission of proceeds from one person to another, that looks more and more like money transmission [under the law] whereas merely processing of merchant payments is not,” Boomstein says. “It’s as if they’re taking a deposit and holding the money, but they’re not a regulated entity.”

A page on the DFPR’s Web site that lists licensed money transmitters in Illinois names 21 firms, but not some that claim they are licensed in the state, such as PayPal Inc. and Amazon.com Inc. Digital Transactions News could not immediately determine how current the list is.


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