Late last month, Pennsylvania issued an advisory that its money transmitter regulations are violated when payments companies–payment facilitators and ISOs–collect money from consumers and forward it to nonprofits and religious organizations. And yes, this advisory is as crazy as it sounds.

Whether or not other states follow the Keystone State’s lead, this decision will have devastating consequences for emerging payment companies, especially those who do not have the resources of traditional old line processors. Many may well be faced with the prospect of either banning Pennsylvania consumers or leaving the nonprofit and religious processing space.

On September 29, 2015, the Pennsylvania Department of Banking and Securities issued an advisory that its money transmitter regulations are violated when payment facilitators or ISOs collect money from consumers and forward it to nonprofits and religious organizations. In fact, the advisory, according to its plain language, would ban all traditional payment processing for nonprofits and religious organizations by any company that is not licensed as a money transmitter. (The state also issued a news release defending its decision.)

Although the Department directed the advisory to Pennsylvania’s nonprofit and religious organizations to warn about the risks of using unlicensed electronic payment service providers to collect charitable donations, it is the payment facilitators and ISOs operating within the state that are going to feel its impact. For instance, the advisory does not distinguish between a payment entity that settles the money into its own account and one that transmits funds directly from the acquiring bank to a non-profit/religious institution.

This another example of the continuing technological innovation in the payments sphere leading to uncertainty in the law and conflicting regulatory approaches between federal and state regulators as to the legal status of various money services businesses.

One key issue that is very much in flux is what types of business activities qualify as “money transmission” activities requiring federal registration and/or state licensing as a money transmitter. Depending on how and where a payment facilitator is doing business, it may be subject to federal registration requirements with the Financial Crimes Enforcement Network (“FinCEN”) pursuant to the Bank Secrecy Act (“BSA”), without being subject to state licensure requirements. Or it may be subject to licensure requirements in some states, but not in other states or under federal law.

This presents particular challenges to young emerging payments companies, which often lack experienced legal teams to track the frequent changes in the law. Those businesses may also lack the resources to undertake the costly and time-consuming process of getting licensed as a money transmitter in every state where they operate.

The advisory admonishes that any person selling services to “non-profits, religious organizations, charities and political campaigns (“third-party recipient”) for the movement of money from a donor’s bank account or credit card to the account of a third-party recipient” must be licensed as a money transmitter under Pennsylvania law, regardless of whether the transmission is executed by the service provider through its own banking institution, or forwarded to a payment processor for processing through the ACH system. All persons subject to licensure as a money transmitter in Pennsylvania are also subject to the additional statutory requirements that they carry a $1 million liability bond and have a minimum net worth of at least $500,000. (7 P.S. §6102).

Significantly, the advisory said that payment processors and ISOs must be licensed to perform such money transmission activities. This is in direct contrast to federal law, which expressly excludes payment processors and ISOs from the federal registration requirements for “money transmitter” money services businesses under the BSA, provided they qualify for the “payment processor exemption” by satisfying four mandatory conditions:

• The entity must facilitate the purchase of goods or services, or the payment of bills for goods or services (other than money transmission itself)
• The entity must operate through clearance and settlement systems that admit only BSA-regulated financial institutions (such as the ACH) or are themselves regulated institutions (such as operators of credit cards)
• The entity must provide the service pursuant to a formal agreement
• The entity’s agreement must be at a minimum with the seller or creditor that provided the goods or services and receives the funds. (See FIN-2014-R009, “Application of Money Services Business Regulations to a Company Acting as an Independent Sales Organization and Payment Processor”, August 27, 2014.)

The Department emphasized that “the fact that the federal government may have determined that the activity engaged in by [companies fitting within the payment processor exemption] is not money transmission for purposes of federal law is irrelevant to a determination that one is acting as a money transmitter for purposes of state law and the need to comply with state law” because of the distinctly different purposes behind the federal and state statutes in question. The advisory said that the “purpose of the designation of a money transmission under federal law is to further compliance with the Bank Secrecy Act and to prevent the use of the banking system in furtherance of an illegal or criminal activity.”

In contrast, Pennsylvania’s state licensing requirements for companies selling money transmission services to non-profits and charitable organizations aims to provide protection for the donor’s funds through the net worth and bond requirements of the statute. Under the language of the advisory, any religious organization using any payment processing service would be banned unless the service is licensed in the state.

Of course, electronic payment service companies affected by the advisory may avoid the impact of the Department’s decision by simply not doing any business with Pennsylvania consumers. Yet that is a questionable strategy, especially given the likelihood that at least some states will follow Pennsylvania’s example.

Another option is to implement contractual changes and/or vary the structure of their business activities such as offering a good or service to the consumers, to qualify for other exemptions from such licensing requirements. Potential solutions must be evaluated on a case-by-case basis, however, and may satisfy some regulatory licensure schemes but not others. One thing for certain is that the problem is not going away anytime soon.