By Cynthia Bailey
The Idea People
Following up on Troutman Sanders LLP's excellent article outlining the legal aspects of Georgia's Merchant Acquirer Limited Purpose Bank Act, I will present some operational and practical matters organizations wishing to apply for MALPB status in the state of Georgia need to consider.
The article referenced was written by attorneys Tyler B. Dempsey and Brendan J. Thomas and published in The Green Sheet March 24, 2014. Understanding the legal requirements of MALPB is a great place to start. All who aspire to swim in the banking pool should seek the advice of an experienced payment attorney (which I am not). Reporting requirements, limitations, standards and capital levels must be met and maintained – many of which may be different from those your company faces today.
Significant oversight will be given all MALPBs; consequences for noncompliance will be considerable. The process of seeking the Georgia Banking Department's blessing to eliminate your sponsor bank and work directly with the card networks will revolutionize the way you do business. Not just for you, but for your employees, partner and affinity relationships, and risk management and best practice processes. It will also affect your ability to offer new products and services and enter into new channel partner relationships.
While cutting out the middleman may sound like a godsend, you must first consider many practical, everyday issues, not the least of which involves carrying liability for risk.
The Georgia MALPB Act presents a compelling opportunity to cut operational costs; recover revenue previously lost to upstream processors and sponsor banks; and provide your merchants, agents and value-added partners a significant cost advantage. That is no small carrot in today's commoditized, disrupted payments sphere. So let's examine what you need to do, in practice, before you request an application.
Applications for MALPB charters are proffered only after a company meets with the Georgia Banking Department and is prequalified to begin the application process. Approval is solely dependent on the Department's discretion. It is vital to understand how the act applies to your company before you walk in the door. By appreciating both the legal aspects of the act and the way your business practices will change as an MALPB, you can make an informed decision about whether applying to be an MALPB makes sense for you.
Each ISO and acquirer faces distinct considerations. Setup and distribution processes that one company may have to revise may not be of concern for another. In addition, while the act is specific in some areas, such as to the number of employees a company must have in the state of Georgia dedicated to merchant acquiring and the various types and amounts of capital each MALPB must maintain, it leaves room for interpretation in others, often defaulting to the verbiage, "will be determined under the sole discretion of the Banking Department." Thus, there is no single "playbook" with steps for all to apply.
The MALPB Act was passed in December 2013 and, as of this writing, the first charter has yet to be issued. This presents a challenge and an opportunity. With all new laws there is typically more oversight initially applied to companies acting under them, which can be onerous for independent, privately held businesses that have always set their own standards and processes.
Also, since MALPB is new and without practical precedence, the companies qualified early will enjoy "first impression" benefits. Akin to when Congress passes a law that is then interpreted by the courts, new MALPBs may shape the very way the act is effectively applied in the future.
For forward-thinking organizations, this is an awesome chance to influence change in the industry and shape the environment in which they will be conducting business. ISOs, long treated as the "stepchildren" of payments, now have the chance to define the ground rules instead of having to adapt to sponsor banks with different priorities.
In addition, before requesting a MALPB application from the Georgia Banking Department, all organizations need to conduct an internal assessment, or due diligence, of the company's operations, processes, standards, etc. Each aspect of your business – including the products you offer, the way you manage risk, specific duties of employees, reports and audits you conduct, the way you enter into affinity relationships, and the way you issue stock, ownership or bonus payments – must be understood, qualified and quantified, and then balanced against the requirements laid out in the act.
It is common, particularly in an entrepreneurial industry where companies grow both organically and acquisitively, to have various sets of standards and practices applied depending on a variety of factors. You may have different ways of handling the parts of your merchant portfolio that you bought versus the parts you boarded yourself. Many organizations apply differing pricing schemes based on aspects such as merchant type and risk, as well as on buy rates for agents versus direct employees and on different services and technologies deployed.
Additional portfolio management variances occur with regard to onboarding, rate and funding structure, risk management, and merchant support based on merchant type, the company's sponsor bank relationship(s), its agent and channel relationships, and on portfolio ownership and portability rights. Each of these aspects, and others that may apply to your business, must be assessed and defined in a way that a third party, that is, the Georgia Banking Department, can measure and understand.
Another area to consider while conducting an internal operational assessment relates to product and service offerings. For example, the MALPB Act defines the activities that MALPBs may conduct as those relating to merchant acquiring and settlement. The act prohibits any type of activity that could be considered "lending."
Organizations that offer cash advance, merchant loans and money transfers must pay particular attention to the aspects of the act that prohibit certain activities in this realm, and, as a result of their internal assessments, they may realize the need to create distinct divisions of their organization that can offer these services separately from the MALPB itself.
In some of its gray areas, the act addresses businesses based outside Georgia that have corporate partnerships with qualified Georgia companies and the opportunities for such businesses to piggyback their way into MALPB status as a result of these partnerships.
Again, leaving much to interpretation that will undoubtedly be decided upon review of an actual court case, this provision could present the opportunity for small groups of ISOs that don't, on their own, meet the capital and other requirements of the act to join together under one corporate umbrella for the purposes of the MALPB charter, or to partner with qualified Georgia companies to meet the resident employee provision.
The original purpose of the MALPB Act was to serve as a jobs bill for the state of Georgia; the Banking Department will likely strongly scrutinize any out-of-state applications. But this could be huge for small ISOs and acquirers seeking to grow their businesses and not be beholden to buy rates and oversight from sponsor banks. Again, careful assessment of each piece of the whole – be it parts of one organization or parts of a number of smaller organizations banding together – must be taken before applying for MALPB status.
Each organization, based on its assessment, will have unique areas to assess and will have a different tactical plan for applying for a MALPB charter. This article is not exhaustive. It is meant to frame the question of whether seeking a charter is timely and appropriate for your organization in terms of how it will affect your business operations.
I welcome your thoughts on whether you think the MALPB Act is a positive development for the payments industry. It's trite but true – people don't plan to fail; they fail to plan. So before you decide about MALPB, acquire all the information you need – what lies within your organization as well as what is in the body of the act.
Cynthia Bailey is the CEO and co-founder of The Idea People, a full-service management consultancy based in Atlanta, Ga. She has over 23 years' experience in various leadership roles in the payments industry, including most recently as the Vice President of the Payments Practice at management consultancy, Brand Velocity Inc. and, for 14 years previously, as the Chief Marketing Officer for Calpian Inc. and Editor-in-Chief of Transaction World Magazine. Cynthia has put innovative ideas to work in the areas of strategic development, product management, investor and public relations, corporate development, marketing, and global team management while working with processors, banks, ISOs, large billers and retailers. She sits on the Mobile Payments Committee of the Electronic Transactions Association and can be contacted at firstname.lastname@example.org.
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