Banking Issues Continue While Surety Bond Underwriters Embrace MSBs

MSB Talk 4

bnelson

Authored by: Brian Nelson, Bond Manager at Alpha Surety Brokerage

Why are MSBs are locked out of the traditional banking sector while at the same time surety bonds are becoming cheaper and underwriting requirements continue to loosen? I know I’m oversimplifying this a bit, but surety bond underwriters understand that claims on MSB bonds are typically caused by a breach in compliance. Naturally, banks understand the same. However, as banks continue to close MSB accounts, surety underwriters are issuing approvals on lower underwriting requirements and at premiums that have previously been reserved for only the top revenue companies. It used to be that new money transmitters, check cashers and prepaid access companies would pay at least 3% for their bonds if they could even qualify based on verification of substantial personal assets or substantial cash in the business bank account. Things have changed. Recently, a company with neither a large amount of cash in the bank or a strong personal financial statement for the owner, received an approval for 1.5% on a multi-million dollar aggregate bond need. According to the underwriters, the reason for the low quote was because competition for these types of bonds has increased significantly. (For a state-by-state list of bond amount requirements, click State by State Bonds.)

Wouldn’t it be nice if banks felt the same way about competition? MSBs around the country are dying to find banking partners that will treat them fairly. I recently spoke to an MSB about a potential partnership that would have brought them a substantial amount of new business. After my presentation, I was told that their bank wouldn’t allow for them to partner with other MSBs. I’m still confused by the comment because both entities involved in the partnership would have been licensed money transmitters. Since when does a partnership between two licensed companies create a compliance risk for banks?

Unfortunately, it is the poor, underserved and deprived populations that suffer the most when MSBs are cutoff from serving them. Organizations like the NMTA, NBPCA and others have been fighting the banking battle for years with little to no progress. We can only hope that newer industries like the digital currency and the electronic payments industries will bring their resources, connections and energy to the fight. Without them, I’m afraid we’ll be talking about the same banking issues for many more years.

If you know of any groups or efforts focused on the non-banking issue, please share details in the comments section.

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Are Money Transmitters Risking Licenses By Partnering With Virtual Currency Operators?

MSB Talk 4

Since March of this year, when FinCEN released new guidelines requiring virtual currency operators to be licensed as money transmitters, the subject of compliance has been the main topic of conversation within the virtual currency world. Conferences devoted to federal and state regulations such as the Virtual Currency Compliance Conference “VC3” hosted by the NMTA two weeks ago are being held in order to connect and learn from regulators, traditional money transmitters and virtual currency operators. And although the efforts of conference organizers are valiant, one huge piece of the compliance puzzle is being overlooked; Surety Bonds.

The process of getting licensed and bonded nationally is onerous for emerging startups in the money transmitter space. For that reason, a number of traditional money transmitters have expanded their business models to include an agent program that allows virtual currency operators to “piggyback” off of their licenses, and by extension, their surety bonds. But there is a mounting problem with that business model. The surety bond carriers that are denying bond applications from virtual currency operators are the same carriers that are currently providing the bonds to the money transmitters offering agent programs to the virtual currency industry. Surety bond carriers are beginning to question their desire to continue providing bonds to money transmitters interested in opening their licenses and bonds to be piggybacked on by virtual currency operators.

A leading underwriter for a large surety bond carrier expressed his concern for the business model in a recent message where he points out that one misstep by an agent could be a money transmitter’s demise and easily cause a claim on one of the bonds. He goes on to say that he understands that they are only underwriting the money transmitter, but that they are ultimately relying on the principal’s ability to underwrite the agents. The pinnacle of his concerns is this; “They (traditional money transmitters) are getting into the Bitcoin arena, which is a class of business we are not comfortable with at the moment.”

It is yet to be seen if surety bond carriers will take action against traditional money transmitters that partner with virtual currency operators by cancelling their bonds and therefore rendering them unlicensed. However, we do know that bond carriers have the right to cancel a bond at renewal for whatever reason they deem appropriate. For example, virtual currency companies that have been issued a money transmitter bond in the past are now seeing those bonds being cancelled upon renewal due to the uncertainty of the virtual currency industry. Without the ability for companies to secure the necessary surety bonds, there is no hope for a legitimate virtual currency market.

The success of math-based currency relies on the efforts of advocates involved in each aspect of compliance. Alpha Surety is working hard to educate surety bond carriers on the virtual currency industry by representing both virtual currency operators and traditional money transmitters seeking to provide solutions to emerging technology companies.

FinCEN to Bitcoin Administrators & Exchangers – You are Money Transmitters

MSB Talk 4

According to the statutes and regulations released by FinCEN on March 18, 2013 regarding virtual currencies, administrators and exchangers of Bitcoin will be treated as money transmitters.

An administrator or exchanger that (1) accepts and transmits a convertible virtual currency or (2) buys or sells convertible virtual currency for any reason is a money transmitter under FinCEN’s regulations, unless a limitation to or exemption from the definition applies to the person.

The definition of a money transmitter does not differentiate between real currencies and convertible virtual currencies. Accepting and transmitting anything of value that substitutes for currency makes a person a money transmitter under the regulations implementing the BSA.

Bitcoin

What does it mean to be classified as a money transmitter in respect to surety bonds?

Although money transmitters are regulated at the federal level, surety bond requirements are set by each individual state. The majority of US states require a company licensed as a money transmitter to post a surety bond as part of the state licensing process. Bond amounts range from $25,000 to $2,000,000+ based on a statutory or variable amount set by the state’s regulators.

A nationally licensed money transmitter is required to post approximately $7,000,000 in total surety bonds. At a premium cost of 1-2% of the aggregate total, Bitcoin administrators and exchangers with clients on a national scale will pay $70,000 – $140,000 for their surety bonds and the opportunity to be in business.

Since Bitcoin is a virtual currency, it would be extremely difficult to operate on anything other than a national scale. Therefore, any administrator or exchanger that is unable to qualify or pay for the $7,000,000 in surety bonds will be forced to close their doors or face legal action.

The question is, what will the impact be on the Bitcoin market as the number of administrators and exchangers decrease due to new regulations?

Please share your thoughts in the comments section. 

Raising Capital to Fund Expansion: How MSB’s can leverage Crowdfunding to fuel business growth

MSB Talk 4While working with MSB’s in the process of acquiring surety bonds, I have noticed an increase in the number of companies seeking additional capital to finance their growth plans. Due to state regulations, expansion into new states is cost prohibitive for small business owners in this industry. MSB’s are faced with high costs to get licensed and stay compliant in states with varying compliance regulations. MSB’s are also confronted with the financial burden of acquiring the necessary surety bonds for state licensing purposes. In order to be licensed nationally, a company pays a premium of 1-2% on their aggregate bond need, which is anywhere between $6M – $40M.

Due to the lack of debt financing provided by banks, business owners have naturally turned to individual investors as they seek to raise capital. Unfortunately, raising funds as an MSB can be difficult because of a lack of understanding by investors who are not familiar with the industry. It’s not all bad news though. Thanks to the JOBS Act signed into law by President Obama on April 5th 2012, companies will soon have a method to raise capital from those who are already invested in the MSB industry, CUSTOMERS and AGENTS.

Crowdfunding

I recently attended a talk presented by Jason Best of Crowdfund Capital Advisors. Jason co-created the Crowdfund Investing framework that was the basis for the JOBS Act. The presentation centered on how small business owners can utilize Crowdfunding to raise capital.

What does this mean for MSB’s?

The structure of Crowdfunding benefits companies with a large customer base. MSB’s can capitalize on the Crowdfunding structure by leveraging their customer and agent relationships to aggregate a large number of individuals willing to invest in a business they are already familiar with. Based on how the business owner structures their offering, customers and agents can either own a small percentage of equity or receive a percentage of the money provided to the company as a loan (debt based Crowdfunding).

Why should MSB’s participate in Crowdfunding?

Not only will the MSB benefit from the additional capital, but they will also convert customers and agents into long-term loyal supporters. Customers and agents will naturally continue using the services provided by the company they have invested in.

Crowdfunding Basics

–          A company can raise up to $1M annually

–          Investors can invest up to $10,000 annually depending on their income and net worth

–          Funding happens through two groups: Broker dealers or funding portals

–          Fund raising can be structured as debt or equity financing

–          The volume of money raised through Crowdfunding is expected to surpass bank loans, venture capital, and angel investments combined in the next two years.

–          The SEC has not released rules regarding equity Crowdfunding campaigns

–          The SEC rules are expected to be released in the fall of 2013

Do you have experience with Crowdfunding? Please share your comments.