Money service businesses (MSBs) face the high hurdle of getting licensed in each U.S. state where they operate.
That licensing can be expensive and time-consuming. According to one estimate, it can cost at least $1 million and take about two years to get a state license.
Fintechs, crypto companies and other money movers can either get their own license or partner with an organization that already has one.
State examiners want to ensure businesses are financially solvent, can prove good legal standing and can safely handle monetary transactions.
The licensing steps vary from state to state but often include submitting a business plan, audited financial statements, and detailed management and organizational charts to establish operational expertise. Examiners also often require credit reports, background checks and business registration information. Some states, such as New York, provide a license checklist.
Many states are trying to better coordinate licensing through the Multistate MSB Licensing Agreement Program, which allows members to share general license application information. The program applies to:
- Money transmitters
- Issuers of traveler’s checks, money orders or stored value
- Sellers or redeemers of traveler’s checks, money orders or stored value
- Currency dealers or exchangers
Using For Benefit Of accounts
MSBs can set up For Benefit Of (FBO) accounts with licensed, nationwide, chartered U.S. banks as an alternative to state-by-state licensing.
The MSB establishes a master account with a financial institution that already has the necessary licenses, and then each MSB client receives a virtual account. The MSB has no legal ownership of the accounts, and the bank controls the money and complies with regulations.
The MSB, in turn, must meet the bank’s requirements because it’s taking on the risk. The requirements are similar to those for state licensing, particularly in terms of an MSB having established risk and compliance protocols.
Anit-Money Laundering, Know Your Customer and data security
Licensing is just the start of an MSB’s compliance requirements. Know Your Customer, Anti-Money Laundering and data security are fundamental to ongoing compliance. Money transmitters need to understand who their customers are, assess the risks they pose and establish screening processes to help prevent illegal financial activities. MSBs also need secure data practices around customer transactions and information.
Success in the U.S. MSB market begins with licensing. It continues with an ongoing commitment to compliance.