A Payment Facilitator That Holds Merchant Money Is Transmitting It Unless an Exemption Fits. Here Is What the Federal and State Tests Require.

An ISO that only refers merchants to an acquirer usually never touches the money. A payment facilitator often does: settlement lands in an account it controls, and it pays its sponsored merchants out of it. Receiving money from one person and sending it to another is the core of how federal and state law define money transmission, and a business doing it without a licence needs an exemption that fits what it actually does.

This piece sets out the two tests that decide whether a payment facilitator needs one, as of September 2026: FinCEN's payment processor exemption for federal registration, and the agent-of-payee exemption found in the model state law and in many state statutes. It is drawn from the federal regulation, FinCEN's published rulings, the CSBS model act and the statutes of three states. It is not legal advice, and the answer for any particular platform depends on its own funds flow and its counsel's reading of each state's law.

The Federal Test: FinCEN's Payment Processor Exemption

FinCEN defines money transmission services as the acceptance of currency, funds or other value that substitutes for currency from one person and its transmission to another location or person by any means. The regulation then lists activities that do not make a person one, including acting as a payment processor to facilitate the purchase of, or payment of a bill for, a good or service through a clearance and settlement system by agreement with the creditor or seller.

FinCEN's administrative rulings turn that sentence into four conditions, all of which must be met:

the business facilitates the purchase of goods or services, or the payment of bills for them, other than money transmission itself;
it operates through clearance and settlement systems that admit only BSA-regulated financial institutions;
it provides the service under a formal agreement; and
that agreement is, at a minimum, with the seller or creditor that provided the goods or services and receives the funds.

FinCEN set out the conditions in a November 2013 ruling and explained where the second came from: the three earlier rulings on which the exemption was based all involved a clearance and settlement system that intermediates solely between BSA-regulated institutions, specifically the ACH system, and that was a significant factor in each decision.

The ruling that was written about an ISO

In August 2014 FinCEN answered a request from a company that was both an ISO and a payment processor. As an ISO it solicited merchants for the card processing services of two counterparties and never took possession or control of merchant funds; as a processor it collected card and ACH payments for its merchants and settled with them under its own merchant agreement.

FinCEN found that the ISO activity did not make the company a money transmitter, because it neither accepted nor transmitted funds. On the processing side the activity appeared to meet three of the four conditions, but FinCEN could not reach a conclusion on the second, because the request did not say how the company paid its merchants. Collecting through ACH and the card networks was not enough on its own. If the disbursements went out through a system that admits only BSA-regulated institutions, the company was inside the exemption; if they were made outside one, for example in the form of monetary instruments, it could not claim it.

For an operations team, that is the practical point: the payout leg matters as much as the collection leg.

The State Test: Licensing, and the Agent-of-Payee Exemption

State money transmitter licensing is a separate regime with its own definitions, and a platform that satisfies FinCEN has not thereby satisfied any state. The Conference of State Bank Supervisors drafted a model statute, the Money Transmission Modernization Act, to standardise the rules, and says that as of September 2026 thirty-one states have enacted it in full or in part. CSBS also says money transmitters licensed in at least one adopting state account for 99% of reported money transmission activity. Adoption is still moving: CSBS's own tracker lists Illinois's version as effective on 1 January 2026 and Virginia's on 1 July 2026.

Under the model act, money transmission includes receiving money for transmission from a person located in the state. Section 3.01(b) of the model act then exempts a person appointed as an agent of a payee to collect and process a payment from a payor to the payee for goods or services, other than money transmission itself, that the payee provided, if three conditions are met:

a written agreement between the payee and the agent directs the agent to collect and process payments from payors on the payee's behalf;
the payee holds the agent out to the public as accepting payments for goods or services on the payee's behalf; and
payment is treated as received by the payee when the agent receives it, so the payor's obligation is extinguished and the payor bears no risk of loss if the agent fails to pass the money on.

The third condition is the heart of it. Once the buyer has paid the agent, the buyer has paid the seller, so the only party left exposed to the agent is the seller who appointed it. The model act's separate exemption for payment system operators is narrower than it sounds: it covers processing, clearing and settlement between or among persons that are themselves exempt or licensed. On its wording it does not cover a platform paying out to merchants that are neither.

Section 3.02 of the model act lets the state regulator require anyone claiming an exemption to provide information and documents demonstrating that it qualifies.

Same Idea, Different Texts

The exemption does not read the same in every state, and the differences change what a platform must be able to show.

Texas adopted the model act through S.B. 895, effective 1 September 2023. Finance Code section 152.004 carries the agent-of-payee exemption with the model act's three conditions.
California's exemption, in Financial Code section 2010(l), covers a transaction in which the recipient of the money is an agent of the payee under a preexisting written contract and delivery of the money to the agent satisfies the payor's obligation to the payee. It has no separate holding-out condition. It defines the payee as the provider of goods or services who is owed payment for them.
Michigan's Money Transmission Services Act has three similar conditions, though its third says only that payment is treated as received by the payee when the agent receives it. The exemption applies only if the person demonstrates to the director that all three are met. The Department of Insurance and Financial Services asks for a request by email with the signed agreement, evidence of the holding-out, such as a customer receipt, website address or advertisement, and evidence of when payment is treated as received. Its published procedure states that until it issues an exemption determination letter, all agent of a payee activity is treated as money transmission requiring a licence.

Michigan's approach is the one to plan around. A platform that has never asked a state regulator anything may be relying on an exemption that, in at least one state, does not yet apply to it.

What the Exemption Does Not Reach

The agent-of-payee exemption describes one flow: money from a buyer, through the agent, to the seller who supplied the goods or services. Both the model act and Michigan's procedure say that money transmission itself does not count as the good or service. Payment features that move money anywhere else are not described by the exemption and need their own analysis.

Payroll. The model act defines money transmission to include payroll processing services, meaning receiving money under a contract to deliver wages or salaries, pay payroll taxes or make other authorised deductions. Several states that adopted it have since passed separate exemptions for payroll processors.
Stored value. Selling or issuing stored value is a separate branch of the model act's definition of money transmission. A balance a sub-merchant can spend or send elsewhere is a different product from settlement waiting to be paid out, and needs to be checked against that definition.
Payouts to anyone other than the payee. Paying a merchant's suppliers, staff or other third parties out of its settlement is not collecting a payment for goods or services the merchant provided.

What a Merchant-Services Team Should Check

Draw the funds flow for every product: which account the money lands in, whose name that account is in, and how each payout leaves. The one open question in FinCEN's 2014 ruling was the payout method.
Read the sub-merchant agreement for an express appointment of the platform as the merchant's agent to collect payments, and for a clause stating that payment to the platform satisfies the buyer's obligation to the merchant. This is a different agency from the one Mastercard's rules require, under which the payment facilitator signs the sponsored merchant agreement as agent of the acquirer. The agreement may need both.
Check the holding-out. Michigan names receipts, website addresses and advertisements as evidence, so checkout pages and receipts should show that the platform accepts payment on the merchant's behalf.
Keep a state-by-state table of which exemption you rely on, its statutory text, whether the state requires a filing or determination, and a copy of any determination letter.
List every feature that is not buyer-to-seller collection, including payroll, balances and third-party payouts, and get a separate answer for each before it launches.
For an ISO that never holds merchant funds, record that fact and keep it true. FinCEN's ISO finding rested on the company neither accepting nor transmitting funds.

None of this is exotic. Most of it is contract language, a funds-flow diagram and a record of which exemption applies where, and it is easier to assemble before a regulator or sponsor bank asks for it than after.