By Tyler B. Dempsey and
Brendan J. Thomas
Troutman Sanders LLP
On March 28, 2012, the Merchant Acquirer Limited Purpose Bank Act was enacted in the State of Georgia. The statute permits a company that performs merchant acquiring activities or settlement activities in the State of Georgia to apply for a merchant acquirer limited purpose bank (MALPB) charter from the Georgia Department of Banking and Finance. The rules implementing the statute became effective on Dec. 23, 2013.
Upon receipt of an MALPB charter, a company may apply directly to the card companies for access to their networks and would no longer be required to rely on a relationship with a sponsoring bank in order to gain access to such networks. As traditional banks have seemed less interested in assuming the sponsorship function in recent years, the statute (and its accompanying rules) presents merchant acquiring businesses with the potential opportunity to reduce or eliminate dependency on sponsor banks, as well as to lower their operating costs.
An MALPB is authorized to carry out key merchant acquiring functions, such as:
An MALPB must seek authorization from the Georgia Department of Banking and Finance in order to engage in any incidental activities and is precluded from performing the following functions:
Furthermore, the rules state that an MALPB may only engage in merchant acquiring activities originating in the United States with a merchant having a physical location within the country. With respect to transactions taking place over the Internet or other similar electronic mediums, an MALPB may only engage in merchant acquiring activities with a merchant that has a fixed place of business located in the United States where the economic activity is completed.
Additionally, the rules require that an MALPB have, and continuously employ, at least 50 employees that reside in the State of Georgia and are devoted to performing merchant acquiring activities for the MALPB within one year of the MALPB receiving its charter.
In certain instances the employees of an eligible organization (an organization that an MALPB has contracted with to perform certain administrative support, information technology support, financial support, or tax and finance support) who reside in the State of Georgia and are devoted to performing merchant acquiring activities may be considered employees of the MALPB for purposes of meeting this requirement.
The rules also set forth minimum capital requirements that must be maintained by an MALPB. The minimum leverage capital ratio of an MALPB cannot be less than 10 percent. The minimum payment volume capital requirement for an MALPB is determined using a tiered formula that takes into account the total dollar amount of payment transactions executed by an MALPB over a 12-month period.
The minimum risk capital requirement of an MALPB cannot be less than the greater of the aggregate dollar volume of chargebacks for the previous six-month period or the forecast dollar volume of chargebacks for the following six-month period. Lastly, an MALPB's charter approval will include a requirement to maintain minimum statutory capital of no less than $3 million. It is possible that the card brands may seek to impose additional or increased capital requirements on an MALPB.
In addition to the employee and capital requirements discussed above, the rules impose certain other requirements on an MALPB that are similar to those requirements imposed on financial institutions. For instance, as part of the MALPB charter application process, the Georgia Department of Banking and Finance must approve the ownership of the applicant and the applicant's holding company, as well as the directors and executive officers of the applicant and the applicant's holding company.
The rules exempt the principal shareholders, executive officers, directors and control persons of a holding company that is a public company from certain requirements related to this approval process.
As the MALPB concept is in its infancy, it can be expected that the statute and the accompanying rules will be revised and interpreted as companies obtain MALPB charters and commence operations. All participants in the merchant acquiring business should review and understand the MALPB alternative and monitor continued developments in this area.
Tyler B. Dempsey is a partner in the Atlanta office of Troutman Sanders LLP, focusing on the representation of public and private companies in mergers and acquisitions, joint venture transactions, private equity financings and general corporate and securities matters. Tyler also has experience in representing payment processing companies in general commercial matters. He can be reached at firstname.lastname@example.org or 404-885-3764. Brendan J. Thomas is an associate in the Atlanta office of Troutman Sanders LLP, focusing on the representation of public and private companies in general corporate matters, mergers and acquisitions, and joint venture transactions. Brendan also has experience assisting community banks with bank regulatory and general commercial matters. He can be reached at email@example.com or 404-885-2552.
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