Saturday, May 14, 2011

In Fifty Days, Payments Innovation Will Stop In Silicon Valley

By Aaron Greenspan
Wednesday, May 11, 2011

Most people don't regularly check the California Senate Committee on Banking, Finance and Insurance for the latest news about potential legislation, and so it's no surprise that most people have never heard of California Assembly Bill 2789. That's too bad, because California AB 2789, passed into law in September, 2010 and effective January 1, 2011 as the Money Transmission Act (see, is a ticking time bomb, and the big red numbers are glowing "50" as of midnight tonight.

What the law accomplishes sounds mundane enough: it requires money transmitters--companies that act like banks, but aren't, such as PayPal--to get licenses. As usual, however, the devil is in the details. Previously, California corporations were only required to get money transmitter licenses for international funds transfers, and domestic transfers were unregulated. Now both kinds of transfers are regulated. Also, the price of each license is a little bit steep: half a million dollars and change.

Oh, and if you want to do business nationwide, you'll need 43 more of those licenses from almost every state. The forms and requirements are different everywhere, most states want your fingerprints to do a criminal background check (the exact same criminal background check, it turns out), and the price varies wildly from a measly $10,000 to $1,000,000+ per state. Want the forms? Good luck finding them; some states don't post them on-line.

Why does California's law matter at all when the regulatory framework for money transmitters is already such a mess? Well, Silicon Valley is located in California, and if Valley startup founders risk going to jail (which, under the updated PATRIOT Act, they do; see for transmitting money illegally without a license, then there aren't going to be very many new companies working on ways to handle payments that don't involve the same old banks touting the same old plastic cards. Not to mention that there aren't a lot of investors who like the idea of putting half a million dollars into a company's bank account so that it can be immediately locked up and used for licenses.

In other words, the Money Transmission Act is designed to kill innovation.

The only silver lining is that the very last clause, section 1872, allows companies that had already been operating under the old law to continue doing so without repurcussion until July 1, 2011, which is when the music stops. On that date, every affected company needs a license application on file, or else the founders, employees and even investors will be committing state and federal crimes by merely continuing to operate.

Who would sponsor such a draconian law? According to legislative analysis of AB 2789 (see, we can blame The Money Services Round Table. If The Money Services Round Table sounds like a shady political group that doesn't want to reveal its true identity, that is because it is a shady political group that doesn't want to reveal its true identity! Thanks to the Freedom of Information Act, however, we know that its lobbyists had some very important things to tell the Federal Reserve in 2006 (see, including its member list (which may have grown since then). At the time, it included such names as:
  • Western Union
  • MoneyGram
  • Travelex
  • American Express

While it's no surprise that these companies might want to keep out the competition, that doesn't make anti-competitive behavior something we should accept. The big four payment card companies (Visa, MasterCard, Discover and American Express) have managed to raise interchange fees for years and years thanks to legislative tricks, and only now is Congress trying to solve the problem by regulating debit (but thanks to lobbyists, not credit) card interchange rates via the Durbin Amendment to the Dodd-Frank Act, which has severe problems of its own.

You might argue that innovation in the financial industry is alive and well, but you'd only be right if you mean that in the most cynical terms. Case in point: Square, a payments company that is a media darling frequently cited as a leading innovator, does not disrupt the financial infrastructure in any way. In fact, Visa just invested in Square directly because it does such a good job of propagating the status quo. PayPal similarly exists to promote existing financial infrastructures, not replace them with something better.

Aaron Greenspan is the creator of Comments to the post can be found here. Reprinted with permission from Quora.


  1. Fee grab by the states. I'm starting to see why you are so strong in supporting alternative forms of money, particularly bitcoin.

  2. democracy and innovation are disasters for the status quo. the US government, through its "checks and balances" is designed to keep these things from overthrowing the established monopolies. All a big company has to do to be innovative is stop stifling it for a brief moment, but they cant do that until they rig the playing field so they control the benefit.. but upstarts still slip through anyway... later, a method is devised to criminalize them

    james madison explains how it works here:

  3. @Bron: The fee grab you point to is largely irrelevant here. The real issue is regulatory capture and cartelization of the industry.

    I had a friend the other night telling me in excited terms about the small consortium of wealthy people he's started planning business with. He said that together they had enough money to start their own bank. I asked how much that was, and his answer was about €30 million. I nearly split my sides laughing.