Exploring the Legal Landscape: Money Transmitter Licensing with Bridget Escobar

Brigitte, some have called you the queen of MTL. Why? Why are you the one leading the charge for all of us for MTL?

I've been called the queen of maybe not worse things.

Yeah, it's pretty bad.

Um, well, I got involved, um, sometime last year, uh, 2022. I guess it was spring of 2022. Was on the board of the IPPA, Independent Payroll Providers Association, and, uh, there was a request as to where you could lend your expertise in the areas where the IPPA was focused. And one particular area was money transmitter licensing, which fell under our Government Affairs Committee. I have a background. I'm a, I'm an attorney by trade. And when I got tired of billing hours every day and decided to venture into the entrepreneurial world, I left that past, but I do have the background. And so I felt that maybe I could lend some help there, reading a lot of legislation and, and helping IPPA navigate the complexities of this ever-changing landscape with money transmitter licensing.

So money transmitter licensing, what is it? What brought it to be and why does it impact our industry?

Well, money transmitter licensing has been around for decades and decades, and the way it came about really is it's a way to regulate anybody that is moving money that is not a bank because the banks are already regulated. And so this is done at the state level, the money transmitter licensing. And so it's been around for, for eons, but it really hasn't been in practice enforced against payroll processors. And we don't really know why. We'd like to think it's because we're good at what we do and there's not a lot of fraud in our industry. We're not quite sure, but in practice it hasn't.

Yeah, and it's funny because I posed the question to the group this morning, our private Facebook group for payroll bureau owners and leaders of, hey, are there any questions you'd like me to ask Bridget? And the one that came up was like, hey, can you talk a little bit about Cachet? Can you talk a little bit about the MyPayroll HR stuff? So we'll, We'll come back to that if that's related to any of this at all. And it, it, I guess let's just plant a flag right there. I mean, was that part of what started making our industry impacted by this?

Well, it's anybody's best guess, but it is definitely coincidental that the time that the model law, which we'll talk about here in a minute, when that was written, was right around the same time of the MyPayrollHR incident. Uh, so they, uh, finalized the model law around 2019. Don't quote me on that, but I think based on my research, that was when it was pretty, you know, close to— I don't know the exact date of my payroll chart, but I think it was right within that time frame or vicinity. Um, so really, you know, to kind of carry on, what is MTL? So you have this landscape of money transmitter licensing was regulated on a state-by-state basis. And, you know, while the states' laws are similar, there were a lot of differences. The one consistency was, like I mentioned, payroll processors really weren't in practice regulated. And the other consistency was that these various statutes didn't call out payroll processors as money transmitters. Now, you could, based on the prior statutes, read that we could be considered a money transmitter. And if you sent it to your attorney, which some payroll companies probably did, they would recommend that you should comply out of an abundance of caution because it can be read that, you know, you're moving money and therefore you're receiving funds for transmission, and therefore you need to be regulated. And a lot of the larger national processors who have a staff of in-house counsel who is looking to make sure that, that they're protected have gone out and unilaterally, you know, voluntarily registered under money transmitter licensing. About the time I mentioned 2019, there was the model law that was created. And the reason that this law was created was because there was an explosion in fintech payment apps and non-traditional banks moving money. We also have crypto. And so, you know, there's all this money movement. And it's across state lines on a national level. And there are incidents of fraud as well within those industries. And there was a lot of pressure on states to think of a way where they can come together and with a model law. And then also NMLS is the National Money Licensing System and a system where they could uniformly apply these policies and more efficiently license all of these non-banks. So that was the creation of the model law. Unfortunately, the model law has a provision that says very clearly in black and white, it's kind of an oh, and by the way, it's funny, payroll processors are money transmitters. It just says it. So the challenge now is that this model law has a lot of bipartisan support because who doesn't? What state doesn't want to protect consumers from all of these, you know, money, new money transmitters? We don't know who they are. The fintech payments, crypto. So there's bipartisan support and a lot of the states don't really understand that now payroll processing was thrown in there and it's called out in black and white. So that's where we are today.

Yeah, you mentioned crypto. I know I could send you down that rabbit hole for a few minutes, but I won't. So let's talk about— so you talked about the IPPA earlier, the Independent Payroll Providers Association. I've mentioned it 100 times on this podcast before. If you're not a member, you should be, because that's where I've learned everything I know about MTL up to this point. We were at the spring conference. It was a hot topic. We spent more time than I cared to talking about the MTL just because it's so scary. And so we saw some of those penalties that some of the larger bureaus, the ADPs, the Gustos, whomever were paying. What were those penalties for? Talk to me a little bit about sort of the context of what an organization would get penalized for as it relates to MTL and where some risk may exist for independent bureaus that are listening to this.

So individual states, they all have their own at this juncture because the model law hasn't been adopted across the board, but they each have their own various penalties. And I mean, it can range from fines of all different amounts that could be applied retroactively. We've heard of them applying it, you know, several years back, all the way up to a crime and a mis— as a misdemeanor or even a felony. So, and with the model law as well, states will have the ability to set their own penalties and fines. So it's— I wish I could say, you know, there's one answer, but it's kind of a plethora of things across the board.

Well, I remember a few that particularly jumped out at me. I remember New Hampshire, Maine, Texas all had, if I'm not mistaken, all had pretty substantial either registration and/or penalties if you didn't register in time. All those still intact today?

Yes, those are, they're still intact today. And Maine, Maine has their own statute and they've had for many, many years that's specific to payroll companies, they have, they have been pretty, pretty good to work with. I, I do have a Payroll Service Bureau. We did get an enforcement notice when we had a client that we signed on in Maine and they were very reasonable and allowed us just to register and kind of on a go-forward basis. So they've been pretty reasonable. There are states, specifically Texas, you mentioned that, you know, don't have the reputation of being as reasonable. And they have gone back to some companies and sent enforcement notices and with retroactive penalties. And, you know, I haven't been involved with any of these, thankfully, incidents firsthand. But from our— some of our attorneys, you know, we've heard that that, that they can be significant. And there is the ability sometimes to negotiate those fines, but they can apply them retroactively.

Hmm. So what classifies you as able to be penalized? The way I understood it, the net was if an employer's payroll taxes and/or direct deposits— is it one or the other— touch your bank accounts before being distributed to the employees and/or entities, then you are considered subject to the MTL. Is that accurate?

And I hate, I hate saying this because I feel like every attorney says it depends, right? That's always the classic.

That's it. As an HR professional, sales, marketing, or whatever it is, it always depends, right? There's no easy answer.

So it does depend. And I'm not familiar with Texas, for example, what the specific language is in the state of Texas. But typically it is receiving money for transmission. Those are the buzzwords that they're using. And they, in the language, for example, in the model law, which is being pushed across the US, is that you're receiving money for transmission. And they don't differentiate between tax funds, direct deposit, et cetera. The challenge that we're facing right now is getting some clarity from the creators of the model law, CSBS, and the states that are in the process of attempting to adopt this. What does that mean? Does that mean receiving money from an employer that you contracted with that is in a particular state? Does it mean receiving money from an employer in the state where you're headquartered, but then you pay an employee that happens to be in another state? Would that qualify? And the language is vague, and I state some states as well as some folks connected to CSBS have admitted as such. So at this point, I wouldn't be able to confidently tell you what to prepare for. But our goal with our lobbyists and the folks on the Government Affairs Committee is to get some clarity around that and hopefully get something in place if it has to be in place. I mean, we'd hope that we could be exempted. But if it has to be in place, it would be something that would be narrow enough of a scope that it would be, you know, something that any service bureau could comply with, both large and small.

Yeah, I think the key for me, because we're— I learned while I was out there in Vegas that we're pretty unique in our setup in that we never actually touch any of our clients' money. It goes from their account to employee or tax or whatever. So it never hits our bank accounts. We don't have any holding accounts. Um, and so what was the gentleman's name, the attorney that spoke out there?

Duncan.

Duncan. And we'll have to give him a plug here. What's it, what's his full name and firm so we can give him a plug? 'Cause I'm sure we're gonna talk about a call to action here in a moment.

Yes. Um, Duncan Douglas and you caught me off guard. I'm hitting a blank on the first.

That's okay. This is not a very like, I'll get it for you.

Podcast.

So, hey, no, hang on.

Going on here.

You can search cat pics or whatever.

We're just kind of Austin Bird.

Perfect. So yeah, my conversation with him, he was like, look, money never touches your account. You guys aren't subject to this. You're not transmitting any money. And so some of the people listening fit into that same bucket. Very few, as I've learned, but I know people that use our platform don't touch money. So that's awesome. That was the best news I got while I was out in Vegas. After I got appropriately scared and shaken down for 2 days, I learned I was not subject to it. But let's say I'm listening to this and I go, man, I, do touch money of my clients. It hits my bank accounts and I don't know what the heck you're talking about, Bridget and Matt. This is the first I'm hearing about MTL. What should I be doing from here?

And that's, you know, that it really, that depends on, you know, your philosophy and what approach you want to take. So there are, um, there are some There are some payroll companies that are larger, that are, you know, very risk adverse for many reasons. They're highly regulated and they would take the approach that under, even before the model law, under the prior laws, because we take possession of funds, We should license in every state as a money transmitter. And, and some of them, like I said, have gone out and proactively registered. There are other firms that are small to midsize that if they went out and they interpreted this at the strictest level, that they have to register in every state where they potentially pay an employee. The cost of that would be so insurmountable and to get bonding in every one of those states that it wouldn't even be feasible. So, you know, they're more, well, I'm going to take a wait-and-see approach because the landscape is changing. And we do have a practice of not applying it across the board and not enforcing it against payroll processors. Let's see what happens with the new model law that the intent is to be adopted across the US and see how we're defined there and see where this goes. And then, you know, we will comply based on what we know at that time.

All right. So choose your own adventure.

Yeah. I mean, and I just caution that You know, if you choose not to, you are taking the risk. And we've heard of midsize processors, I know one in PA, that there was an enforcement action against them in Texas. So I mean, you are taking that risk every day, but it, I guess it's a calculated risk. I would recommend that you just listen to things like this, go to the IPPA, at least if you're making a calculated risk and you understand what the impact can be, you can plan ahead for it. Some payroll companies have set aside reserve funds in case maybe they did have a penalty, especially in a state like Texas. So that's, that's another route that some are taking.

Well, and if I recall, I mean, there was one state where Gusto had over a half a million dollar penalty. And, you know, even just the penalties we were highlighting on them alone, racked up to a million plus, if I'm not mistaken, as I was just kind of mentally tallying in my mind watching the presentation. And so yeah, obviously they're processing a lot more payroll than most of us, but still, that's a lot to swallow as we look at that. So you— we've been fighting this thing on a state-by-state basis. I know that it was kind of spreading like wildfire back in March, and, and since we've started to be able to look at more, uh, lobbying and ways of preventing this from continuing to spread into individual states? Has that slowed the spread?

Um, yeah, so, uh, as this session— there's this legislative session sort of comes to a close, um, there has been sort of a pause. We're seeing most of the activity in, in the heart of the country Minnesota, Iowa, Illinois, Missouri, Indiana, Tennessee, Arkansas. Those are the states where we've seen bills out there. And we have been successful in some states. Hawaii would be one, for example, where they removed us. So to maintain the status quo, they removed that language that says Payroll processing services is money transmission. There are some states that said, you know, that they would not remove us and they believe that we should already be licensed. And that's the challenge because the prior statutes, they could be interpreted as such, even though in practice they have not been out there enforcing it against payroll processors. One thing that we're trying to get all of these legislators and regulators to understand is, is the scope of our industry. There seems to be a lack of knowledge just how many payroll processors there are out there. There's 28,000 licensed agents with the IRS. So, you know, and some of those could be, and they could be taking possession of funds, some may not. For payroll processors, there's 4,800 across the country that are listed under payroll processing services as their, I guess that's their NCIS.

Right. NAICS.

I forget the acronym, but there's a lot. And, um, with remote work and, uh, you know, just a lot of our— we— well, you know, most of us are pretty regional, the small to mid-sized processors. Um, because of remote workers, most of us, many of us are processing in over half of the states across the U.S. were moving money. And so the states, I don't think they realize how many payroll processors, when you factor in all of us, could be in their particular state. I mean, the state of New York looked at it and they decided not to regulate payroll processors, and they cited there may be as many as 5,000 to 6,000 payroll processors in their state.

Which is, that is insane. And, and I, when we were originally doing research for some of our kind of partner-oriented stuff, I, I found 16,000 payroll processors in America, which is, you know, you talk to people, all right, how many states do we have? Now divide 16,000 by those states. Like you got a lot of competitors right now. Again, it could be Betty Sue who's in her basement using QuickBooks and, you know, processes payroll for 2 companies, but that's still a lot. And I think the thing that's interesting to me is because I can see the argument going back to the Cachet, MyPayroll, HR thing, like that is the easy thing for people to get behind and glom onto and go, well, we have to regulate these individuals if they're, you know, this can occur right under somebody's nose. But at the same time, you know, that's one in a million, right? And so it's such a unique thing to occur, But we do have to also overcome that as small local, regional, and even national kind of independent bureaus is that that is the number one seed ADP Paychex plant when they're trying to, you know, beat us in a competitive deal is say, hey, look at these. It happens once a year. Somebody does that, they take the money, they run off. How do we find that balance of like protecting the clients, protecting the funds, and also making sure that we aren't, you know, making it so hard for payroll bureaus to do business?

I think finding the balance is solving the real problem. And I think that, you know, and this happens so often with onerous legislation is, you know, there's a whole lot. I mean, having us licensed in every state, getting bonding— is bonding really— would bonding have really solved the MyPayroll HR incident is the number one question. And I think we all know the answer is no. And would licensing have changed that? We know that the answer is no. I believe that they may have even been licensed in the state of Maine. Don't quote me on that. But, you know, would licensing have solved it? No. And it's getting to the crux of the issue and solving it because I don't think any of us want to see those issues happen. We don't, we don't like to see the MyPayrollHR scandals happen because it makes it tougher for us to compete because we know that that's what ADP is out there using against us. So it's getting in with these states and coming up with a solution that solves the issue at hand. And what we're trying to get them to understand is it is very rare. And the MyPayrollHR incident was an exception to the exception of the rule where there is— there has been fraud. Employees, the consumers, right? Because this is a Consumer Protection Act. Consumers, they tend to get paid because they're— the difference between us and Western Union and, you know, other money transmitters is there is an employer between us and that, that employee that's getting paid. So if there's an issue, and God forbid, we don't want issues to happen, but if there is, that employer has not only a legal obligation to make sure that employee is paid, they also have a very strong interest in this because, you know, if they don't pay their employees next week, they're not coming to work and they got bigger problems. So if there's an issue, you know, it's on that employer to, you know, they were in month-to-month contracts, most of us. So they can immediately find another payroll processor. They're going to make their next payroll and then it's their job to come back, right, to that fraudulent entity or whomever and seek damages to make that employer whole. But typically the employee gets paid. Now, the MyPayrollHR incident was an anomaly, right, where those direct deposits were pulled back and they were directly impacted. But the typical fraud incidents, you know, which again, it's terrible, but those incidents typically involved tax funds being misappropriated. Employers get notices, they find out, and you know, it doesn't really impact that employee directly. Does that make sense?

Oh, absolutely. And I think that's the interesting thing as I think about it. When you talk about that bipartisan support, when you put it as consumer protection, it gets so easy for us all to link hands across the aisle and go, yep, this is an easy one to push across. Let's just move on to the next thing that's, you know, we're going to actually battle about. Everybody wants to protect the consumer. Easy, right? And so, but in reality, that's not the mechanism that's occurring here. So the legislation doesn't really apply to the situation. So that's the most troubling part of it. And I appreciate you taking the time because I know it's— you've done a lot, you and Michael, Michael Young. Shout out Michael if you're listening. Um, have just done so much to push this forward for all the rest of us who are just sitting here going, all right, what's next?

Yeah, yeah. Thank you. It's been, it's been a lot, but I do think that we've got some great team members and we have finally some regulators and legislatures that are ready to listen. And I do think that there are reasonable people across the board and we will get to a workable solution. I don't feel that there's really any, any state that truly wants to see small to mid-sized payroll processors go out of business because a piece of legislation that they push across. And we have heard this across the board. It's just doing the hard work to figure out what the solution is that, that will work for all.

Well, like you said, that's so just so disruptive to all the small businesses they serve. That's going to be hundreds, if not thousands of small businesses that are going to be disrupted the more challenges that they put in front of the payroll bureau. So it doesn't really help anyone at the end of the day.

Nope. But that's the world we live in.

Um, well, so is there anything— and I know we, we kind of talked about this a little bit out in Vegas— like, is there anything, if I'm listening to this right now and I'm an independent provider that's in either— I'm in one of these states we've mentioned, or I'm a concerned citizen, I want to help— like, is— are there things that we can do to help push things forward, or do we want to just put our support behind the lobbyists?

I think the best thing that you can do is if you're not an IPPA member, you should definitely join the IPPA. This is, it's not an inexpensive endeavor, number one. So the more members that we have, the better ability we have to hire the best people and to continue to stay in front of this as long as it will take. And number 2, it's important because I will say that one thing that plagues the payroll industry is that we are not a well-organized industry. And we've talked about PEO, Matt, before, and PEOs have come under fire. They've had incidents of fraud. They have had pushes to regulate them, and they have made an effort to control their own destiny by having a very, very strong membership group. And they have their own lobbying team, and they have their team is constantly staying in front of anything that should pop up. And as an industry, we do not have that one group, right? That's focused and well-funded and fighting. And that has hurt us, quite frankly. We were late to the table in engaging with the creators of the model law. And we've been late in some states because of that, because we just don't have, you know, a consolidated group. Focus. And the more members that we can get to join IPPA, the, the more focused we can be in, in representing small to mid-sized processors. And that's really, really important, not just now, but, um, I mean, this isn't the first, this isn't our first rodeo in, in attempts to heavily regulate us, and I don't think it will be the last. So we need to keep that in the back of our minds and continue to grow our membership. So that we can continue to justify our existence.

Well, and I think the interesting thing for me, I'm very blessed and fortunate to serve on the board of the IPPA. So take everything I say with a grain of salt because obviously I'm bullish. But, but as I kind of been in these meetings and learn more about the prior operations of the organization, future operations, how we're planning things, doing everything we can not to assess the member base, even though this is a tremendous expense that the IPPA has taken on to lobby be this and to continue to try to, you know, serve the member base in the best way humanly possible. It's been really exciting to watch people like yourself just step up and do what we're not doing, right? Like I'm not helpful at all. So the, you know, hopefully spreading some good word here will help a little bit. But yeah, if there's no other reason, again, if you've been listening to this and you didn't even know what MTL was, like where do you get this information from? Well, you get it from IPPA. There's no other great place to get it from. And quite frankly, where else would you want it from? You want somebody in your industry that represents you and that understands you. And I really just think the philosophy of the organization as a whole, the sort of rising tide lifts all boats where, you know, I wouldn't know you and I can just pick up the phone and go, hey Bridget, are you willing to talk about MTL and record? And I'm sure this is not how you want to spend your time today, but you've done it because you're amazing. Well, and that's, and that's why I recorded so you don't have to do 50 other people after this, right? You can just go, hey, here's the recording if you want to talk about MTL. This is as of June 2nd. And so that's a big thing though, because that's been the constant with IPPA is that whenever I'm have a question about something, oh, I use Zoho CRM, I know I can call Mike Ritzema because he's using this, you know, it's just all these different people where you meet them, have conversations and nobody's worried about competition. Nobody's worried about, you know, whether or not we're gonna bump into each other at a deal and we can't share our secret sauce and can't help each other. It's just not the mentality. So it's refreshing. It's awesome. It's been tremendous for our business. So commercial over.

Yeah. What is, what did someone, how did someone put it? It's, uh, joining IPPA is like research and Development: rip off and duplicate.

That's right. Good artists copy, great artists steal. Awesome. Well, how can we help you, Bridget? What can we do for you?

Uh, just, uh, continue to stay engaged. And, um, if there are people out there, which I'm sure there are, that are smarter than me and they feel like they can lend any help to this cause, by all means, reach out. We're always looking for more people to carry the torch. I do not think that this is going to be a quick thing. I think that we're in it for the long haul. So just get involved if you can and join the IPPA.

Yeah. And a couple more add-ons to that. So We started the private Facebook group for payroll bureau leaders and owners, and I want to emphasize that private, right? Because I'm denying the vendors that want to get in right now. I'm denying the people that are not working at independent bureaus so that we can have open conversation about things like this. How are you handling this? How are you handling that? The, the stuff that's happening in there already, it's been amazing. It's only been a week. There's our there's already over 50 people in there and they're asking, hey, I'm going up against Paylocity, I'm going up against Paycom. What do they say about this? What do they do about that? It's the type of conversation that you get at IPPA and that we can keep going throughout the year. So highly suggest if you're interested in that, I'm sure there'll be a link in the show notes to, to apply to join the group. And I will pose the gentleman's agreement that I've started doing at the end here. Bridget, this is the gentleman's agreement. We've had a ladies' understanding is, you know, we're giving you all this content for free. All we ask is that you subscribe to the YouTube channel. I'll keep cranking out these episodes. Bridget said, how often do you do these? When you start? I said, it's a great question. I try to do them once a week, but once a month will sometimes happen. And we've been way better at doing them every week lately. But hey, ask for one simple thing, subscribe to the damn YouTube channel. It's a gentleman's agreement. The ladies understanding. And make sure you hook up with Bridget and help her in any way you can to help to push all this great stuff forward. We appreciate you a ton.

All right, subscribe.

That's Bridget. And show over.

That's how we do it.

Bye, bud.

Appreciate you. All right, bye-bye.