People often come to me with questions about the payments industry, but there is a relatively short list of questions and answers, so in the interest of time, I have compiled this list.
I’m putting together this FAQ as a way to share some things I’ve learned about over the years at Venmo. If you have a payments question, submit it to this Google Form and if I know the answer I’ll add it to this page.
NB: Nothing here is a formal legal or corporate opinion. These answers are merely to the best of my own knowledge / memory. You should double check everything you read here. Instead of paying lawyers to do background research and brief you, investigate primary sources yourself.
Also, don’t get discouraged–this stuff is painful, slow, and expensive, but not impossible. If we figured it out at Venmo, so can you.
- Public Resources
- How is my payments business regulated?
- Am I a Bank?
- Am I an MSB?
- Am I a Money Transmitter?
- How are bitcoin companies regulated?
- Are there other regulations I should be aware of?
- What payment platform should I use for ___?
- What bank should I work with to build my consumer payments service?
- What did Venmo do in the early days to make the legal process fast and cheap?
- How does Venmo make money? What is the Venmo business plan?
- How did Venmo start?
- How did Venmo trust work?
- Other Useful Links / Reading
- Can’t find an answer?
- Origins of Venmo
- Venmo Vignettes
- The Emperor Has No Clothes, There is No Santa Claus, and Nothing is Rocket Science
- Keynote Address: Iqram Magdon-Ismail Co-founder of Venmo
- Founder of Venmo discusses his early beginnings + how he built the multi-million dollar business
- Iqram Magdon-Ismail Penn Engineering Commencement Address 2017
- Northside Innovation: Is Pay-on-the-Go the New Norm?
How is my payments business regulated?
To know how your business is regulated, you first need to understand how your business is classified. This Quora post gives a pretty good overview of a few different types of payments businesses like ISOs, MSPs, Merchant Acquiring PSPs, Prepaid Program Managers, etc. Some other questions you should ask are:
Am I a Bank?
Hopefully not, because this is expensive and involves tons of regulation. The Wikipedia page about PayPal explains Peter Thiel’s reasoning for why PayPal should not be regulated as a bank in the US. Even if you know you’re not a bank, because this is the type of concise, plain-English summary you want to be able to give of how your business is classified and regulated. “We don’t do engage in X so we are not classified as Y. Because we do A on behalf of our customers, we are subject to regulations B and C….”
Am I an MSB?
Money services businesses “transmit or convert money. The definition was created to encompass more than just banks which normally provide these services to include non-bank financial institutions.” This is one of the broadest government classifications, so there’s a good chance your payments business is an MSB. MSBs are federally regulated by FinCEN. Checkout their Am I an MSB guide to see if you are one.
Am I a Money Transmitter?
If your users are sending each other money (eg, p2p transfers), you are a money transmitter: a money transmitter “is a business entity that provides money transfer services or payment instruments.” Money transmitters are a subset of MSBs.
Money transmitters are regulated at the state level. If you are classified as a money transmitter, you’ll need to get licenses in each state that requires it, probably need money in escrow and/or surety bonds, and do a bunch of reporting work to show the govt you’re compliant with anti money laundering, OFAC, and other laws. This is a ton of work, but not as arduous as getting a banking license.
Money Transmitter Licensing is expensive and slow–can I avoid it?
One thing you can look into is trying to become an agent of another organization that already has a money transmitter license (although I’m not sure if this strategy works in all states). We explored this option by finding the list of licensed transmitters in every state (eg) and literally going down each list one by one and calling them to if there was a way to become an agent of theirs. Also, this Quora post talks about how Dwolla works with a partner to avoid money transmitter licensing requirements themselves.
There are complicated state by state laws and compliance requirements for agents of money transmitters just like there are for money transmitters, so partnering/agency isn’t exactly a silver bullet solution, but you might want to look into it.
Is a marketplace business where some users pay others for a good/service a money transmitter?
I would have thought, “no,” but looks like Airbnb is a registered money transmitter in the State of California, at least. It’s possible the DFI in CA has issued an opinion that a marketplace for housing rentals is a money transmitter business, and it’s also possible Airbnb got this license to enable some other business outside of their core. If you’re a marketplace business, it’s worth digging into, because money transmitter licensing is very expensive.
What other kinds of companies are regulated as money transmitters?
You should talk directly to the DFI about whether or not your co is subject to money transmitter regulation, but a good place to get a sense would be the CA list of licensed money transmitters is the CA list of licensed money transmitters. Some interesting ones you may recognize are (as of Oct 2014):
- ADP - Payroll Co
- Airbnb - Marketplace for Temporary Lodging
- Amazon Payments, Inc.
- Blackhawk Network - Prepaid Card Network
- Facebook Payments Inc.
- Google Payment Corp.
- Intuit Payments - Various Payments Services for Small Businesses
- PayPal, Inc.
- Square, Inc.
- Venmo Inc.
How are bitcoin companies regulated?
I actually don’t know a ton about this, but my guess is that simply triggering a bitcoin exchange between 2 wallets would not be regulated, but converted bitcoin to/from USD would be regulated, probably as money transmission. That said, at the time of this writing, Coinbase, who seems IMO to be the most buttoned up bitcoin co (in terms of compliance), appears (as of Oct 2014) to be registered as an MSB (search for Coinbase in the Legal Name field here) but not listed as a licensed money transmitter in CA here (and CA is one of the most strict states about licensing, so if they were registered anywhere, I would expect it to be here).
Are there other regulations I should be aware of?
A few other areas of regulations you’ll definitely want to ensure you’re aware of and compliant with are:
- KYC - Know Your Customer
- CIP - Customer Identification Program
- OFAC - Office of Foreign Assets Control
- AML - Anti Money Laundering
What payment platform should I use for ___?
Here are some ideas–for all of these, if you search around on Quora you can probably find a comparison of alternatives.
ECommerce / Selling Goods and Services
Try Stripe, Braintree, PayPal.
Try Stripe or Braintree Recurring Billing.
Marketplace Business (like Airbnb)
Try Stripe Connect or Braintree Marketplace.
Bricks and Mortar Retail
What bank should I work with to build my consumer payments service?
You can probably find 99% of what you need either with Wells Fargo or Bancorp Bank.
What did Venmo do in the early days to make the legal process fast and cheap?
Compliance with financial regulation insanely expensive: beyond legal counseling fees, licensing, and application fees, there are things like reporting / auditing which will consume engineering and operational resources, and escrow, cash reserve, and / or surety bond requirements, which often you must satisfy with cash (and it can’t be debt backed cash, so this eats into your equity cash proceeds). This stuff can literally tie up millions of dollars in operating cash.
One thing we did to save money was that we did a lot of the legal work and research ourselves, read all the statutes, and tried to go to lawyers with a lot of background knowledge, so we could spend our time with them focusing on more strategic things. Often, we brought lists of potential loopholes and exemption arguments that we came up with to our lawyers, so that we only had to pay for them to vet/revise the arguments, not construct them.
How does Venmo make money? What is the Venmo business plan?
Venmo is free for person to person payments. Venmo makes money by charging a fee when businesses accept Venmo as a payment method.
The business plan was pretty simple. Say the avg person spends $100 with friends per mo, but $500 at small and online businesses using venmo. If you assume there’s say a 1% servicing cost on getting money in via bank / ACH transfer, you lose $1 by subsidizing p2p transactions but make (3% - 1%) * $500 = $10 / mo by charging merchants a 3% processing fee. You need to get a lot of scale before the business becomes profitable.
How did Venmo start?
How did Venmo trust work?
- Venmo Wants Its Users to Trust Each Other
Andrew Kortina, a co-founder of Venmo, explained in an interview that the the company enabled an optional feature called “trust” that makes it simple to pluck money or settle a bill from a “trusted” friend’s account without having to ask them for permission.
“We can be friends on Venmo or I can upgrade you to trust me and anytime we charge each other it gets approved automatically,” Mr. Kortina explained, noting that this isn’t a feature for strangers to use, but is intended for friends who trust each other.
- Patent Application: Trust based transaction system
Other Useful Links / Reading
- Federal Govt Anti-money laundering programs for MSBs
- FinCEN Information for MSBs
- Finra AML Information
- Federal Govt OFAC Information
- State of California Money Transmitter FAQ
- CA State Application for Approval to Acquire Control of Money Transmitter - if you operate a venture backed co that may raise money or merge with a larger company at some point in the future, this is a good thing to be aware of ;)
- Reddit Thread discussing Coinbase
- USA Patriot Act on Wikipedia
- 31 CFR 103.121 Federal regulations requiring the CIP
- FDIC Guidance Letter on AML Policies
- Guidance information for banks provided by the FFIEC
- Basics of Money Laundering from Breaking Bad - one of our compliance people used this in a preso once; it was great
Can’t find an answer?
Submit a new question.