States' efforts to rein in fly-by-night companies are starting to have an effect on some payments startups' operations.
This week, Think Computer Corp., the mobile-payments company behind an application that relies on facial recognition to confirm a user's identity, shut down its California FaceCash merchant network because of the state's new money-transmission law.
The law, called the Money Transmission Act, requires companies wishing to do business as a funds transmitter to have a $500,000 tangible net worth and a $750,000 aggregate surety bond to obtain a license. The aggregate surety bond pertains to insurance on the funds kept in consumers' FaceCash accounts. Consumers must link their FaceCash account to a valid bank account.
Think Computer says it is capable of meeting both requirements but says the California Department of Financial Institutions requires more than that amount to obtain a license. The department has not told it the actual figure needed to obtain a license, the company says.
"Because [the department] doesn't publish its actual requirements anywhere, we have no way of knowing [whether] our application would be approved," Aaron Greenspan, FaceCash's founder and chief executive, says.
A department spokeswoman says the actual amount needed is "more than $1 million."
The amount varies on a company-by-company basis. "It depends on the proposed plan, including size of the business," she says.
The application's rejection would have consequences in other states that Think Computer is seeking to enter, Greenspan says. "If it's rejected in California, it certainly will be rejected in other states," he says.
A new licensee is required to have more tangible net worth to offset the expected losses of a new transmitter and support its operational needs at all times, according to the law.
"I don't think it's in the public's best interest [for] regulatory agencies to have information hidden from the public, but they may see it a different way," Greenspan says.
Think Computer approached the department when the law was being formed. The company did not receive an answer concerning whether it needed to worry about the law, Greenspan says.
"I think I did what due diligence was necessary," he says. "You want to be savvy about legal issues and any changing situations, but I think it's unreasonable to expect someone to call the same agency every day to see what has changed."
Some 10 companies ceased operations as a result of the law, Greenspan says. "We've just been the most vocal about it," he says.
The law puts FaceCash in a difficult position, Beth Robertson, Javelin Strategy and Research director of payments research, says.
"California is one of the key markets for technology innovation and trialing new technology," she says. "It's a big blow for them."
Robertson says Think Computer is an acquisition candidate for a company that might be in a better position to provide the necessary funding to obtain a license. "It's an interesting product that could attract some [suitors]," she says.
