New regulations and an increasingly crowded marketplace make it tougher for new players to prosper in the prepaid card sector. But mobile money transfer specialist Obopay is leveraging its expertise in money transmitter licensing to ease new participants' entrance into prepaid. Obopay set up a new division, Obopay Licensed Payment Services, to enable its partners to utilize Obopay's licenses throughout the United States.
Chris Martin, Executive Vice President of Global Operations, Chief Compliance Officer and General Manager for North America at Obopay, said more businesses seek to offer person-to-person (P2P) money transfers.
Martin said, "If you think about where networks are going and semi-closed is going and interchange, the whole dynamic is that there are large holders of customers, whether it's large retail folks, call it large distribution networks or check cashers, that would love to have a way to move money back and forth electronically and avoid the face to face."
But to offer P2P payments, companies must jump through many complicated, time consuming and expensive hoops in order to provide the service, often as a mobile offering tied to prepaid accounts.
Martin said businesses must obtain licenses from each state where they want to do business. State regulators require money transfer providers to have millions of dollars in surety bonds or reserves on deposit. Additionally, the paperwork and auditing processes businesses must undergo to obtain licensing in each state can take six to 18 months. Martin likened the state-by-state audits to applying for a mortgage two times over and "applying for a job at the same time."
To maintain licenses, providers must fork over approximately $500 to $5,000 every year or two per state, Martin said. He added that each state agency has different regulations and reporting requirements. But all this complexity has a purpose. "It's effective because it is a barrier to entry," Martin said. "And it makes your investment in licenses more valuable."
Martin said money transmitter licensing came about in the late 1990s with the emergence of eBay Inc.'s alternative money transfer network PayPal Inc. Martin explained that because PayPal wasn't a traditional, federally regulated money transfer provider, such as MoneyGram or The Western Union Co., a framework had to be developed to include "quasi banks" that held funds in stored-value accounts on behalf of consumers.
"So the states picked up the pace and basically extended the money transmission responsibilities to folks like PayPal," Martin said.
In 2006, Obopay began moving money in the United States via prepaid cards. Martin said Obopay built its stored-value network based on PayPal's system, which required Obopay to obtain licensing.
Over time, Obopay has amassed state licenses in 41 U.S. jurisdictions – 40 states and the District of Columbia. Martin stated the company is currently in the application process for licenses in Georgia, New York and California, where regulations have evolved to now include alternative network operators such as Obopay.
Martin said state licensing is necessary to comply with anti-money laundering (AML) regulations, as well as data privacy, security and consumer notification requirements. The fraud problem involving money transfers seems to be increasing.
In August 2011, the Financial Services Information Sharing and Analysis Center (FS-ISAC) released a fraud survey that showed an increase in account takeover schemes, where phishing scams solicit account details from consumers, resulting in bank accounts being drained via money transfers. The 77 financial institutions that responded to the survey reported a total of 108 commercial account takeovers during the first six months of 2010, compared with 86 for the entirety of 2009.
The Financial Crimes Enforcement Network (FinCEN) requires money services businesses (MSBs) to comply with complex and time consuming AML requirements, including registration with the federal financial crime fighting bureau.
FinCEN differentiates between a money services provider, such as Obopay, and a money services seller, such as a post office that sells prepaid cards. A provider is called the "principal MSB" and the seller the "agent MSB." Only the principle MSB is required to register as an MSB with FinCEN. Martin said businesses can leverage Obopay's AML experience through Obopay Licensed Payment Services. "They will be considered an agent of Obopay because Obopay is the primary license holder," Martin said.
Martin is thus confident that Obopay's new service can help businesses navigate through the complex licensing requirements and accelerate their time to market. 
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