The Georgia DBF recently published its proposed rules (the “Rule”) for implementing the Georgia Merchant Acquirer Limited Purpose Bank Act. The Act was adopted 2012 to create a special purpose state-chartered bank that would allow companies to enter card networks directly rather than renting a Bank Identification Number (“BIN”) from a financial institution sponsor. Existing networks currently require that members be “eligible” for FDIC deposit insurance coverage in order to obtain a BIN and currently the only institutions that are eligible for such coverage are state and federal owned financial institutions that accept demand deposits. The Act addresses that issue by only authorizing a MALPB to accept deposits from a corporation that owns majority of the shares of the MALPB. It may not operate in any manner that attracts deposits from the general public and no deposit can be withdrawn by check or similar means for payment to third parties or others. Since the MALPB will not actually hold any demand deposits is it will not be subject to examination by the FDIC.  A MALPB will end up only being regulated and examined by the DBF. This creates some unique regulatory challenges for the DBF that it attempts to solve in some creative ways.

The Rule is 43 pages long and is open for comments through September 9, 2013.  Should the DBF receive a large number of substantive comments it reserves the right to withdraw the proposed Rule and submit a revised version at a later date.

Highlights are as follows:

Scope of permitted activities. Unless otherwise limited by the terms of a conditional approval, an MALPB would be authorized to carry out the following functions: obtaining and maintaining membership in one or more payment card networks; signing up and underwriting merchants to accept payment card network branded payment cards; providing the means to authorize valid card transactions at client merchant locations; facilitating the clearing and settlement of the transactions through a payment card network; providing access to one or more payment card networks to the MALPB’s affiliates, customers, or customers of affiliates; sponsoring the participation of the MALPB affiliates, customers, or customers of its affiliates in one or more payment card networks; statement generation and other information reporting for client merchants; training and technical assistance for merchants; terminal support; encryption servicing; and chargeback processing. A MALPB would be able to engage in certain other incidental activities only with the prior consent of the DBF.

Significantly, a MALPB will only be allowed to engage in merchant acquiring activities originating in the United States and authorized by this rule with a merchant having a physical location in the United States. Similarly, for transactions over the internet or other similar electronic medium, an MALPB shall only engage in merchant acquiring activities authorized by this rule with a merchant whose hosting facility is located in the United States. For purposes of this rule, United States means any state of the United States, the District of Columbia, any territory of the United States, Puerto Rico, Guam, America Samoa, the Trust Territories of the Pacific Islands, the Virgin Islands, and the Northern Mariana Islands.

Activities specifically prohibited.  A MALPB would be precluded from the business of banking; deposit taking other than from the company that controls it; the transmission of money; acting as a fiduciary; sponsoring ATMs or cash dispensing machines; issuing payment card network branded payment cards; and soliciting, processing, or making loans pursuant to payment cards or otherwise. This is consistent with the overall approach that a MALPB charter is intended to be very narrow in scope.

Outsourced Application and Examination Assistance.  The Rule provides for the use of outside parties to assist in evaluating the application and in the examination of a MALPB. In the application process the DBF may determine that the applicant needs to retain a third-party expert, approved in writing by the Department, as a special examiner to assist the Department with the review and analysis of the charter application. The third-party expert will analyze the data or information requested by the Department and provide the results to the Department and the applicant simultaneously. Any fees or costs associated with a third-party expert retained to aid the Department with the review and analysis of the application will be paid directly by the MALPB charter applicant.

Once the MALPB is created the DBF may determine that the MALPB needs to retain a third-party expert, approved by the Department in writing as a special examiner, to assist the Department with the examination or investigation. The third-party expert will analyze the accounts, records, affairs, systems, data, or information requested by the Department and provide the results to the Department and the MALPB simultaneously. Any fees or costs associated with a third-party expert retained to aid the Department with the examination or investigation of the MALPB will be paid by the MALPB.

In informal discussions with the DBF they have indicated that they expect the larger accounting firms, particularly ones that are familiar with handling IT audits will probably be the entities used to assist the DBF for these functions.

Capital requirements. The Act requires that a MALPB have a minimum statutory capital of $3 million. The Rule builds on that and provides that the minimum leverage capital ratio requirement for an MALPB shall not be less than ten (10) percent. The Rule also requires a MALPB to have a certain level of tier 1 capital based upon payment volume or (“PV”).  PV capital shall not be less than:

(a) 5.00 percent of the tier of PV up to $10 million, plus
(b) 3.00 percent of the tier of PV above $10 million up to $25 million, plus
(c) 1.50 percent of the tier of PV above $25 million up to $100 million, plus
(d) 0.75 percent of the tier of PV above $100 million up to $250 million, plus
(e) 0.25 percent of the tier of PV above $250 million.

The final requirement is that the minimum risk capital requirement for an MALPB shall not be less than the aggregate dollar volume of chargebacks for the previous six (6) months.

One unique feature of the capital requirement is found in the definition of Tier 1 Capital. “Tier 1 Capital” means the sum of statutory capital, retained earnings, noncumulative perpetual preferred stock, and a capital letter of credit, less any loans or accounts payable by an affiliate to the MALPB, goodwill, and intangible assets. The capital letter of credit is not something one sees in a normal FDIC banking environment so it will be interesting to see if any MALPB is actually able to use such a structure.

Employees. When the Act was being promoted in the Georgia legislature it was billed as something of a “jobs creation act.”  The Rule closely tracts the Act in this regard and sets out the requirement that the MALPB shall have, and must continuously employ, at least fifty (50) employees that reside in this State and are devoted to performing merchant acquiring activities for the MALPB. This not just a “we promise” requirement, the MALPB is specifically required to inform the DBF when it has met the requirement and to later inform the DBF if the number has fallen below the statutory requirement. If an MALPB contracts with an eligible organization that is an affiliate of the MALPB, then the employees of the eligible organization or its parent, affiliates, or subsidiaries that reside in this State and are devoted to performing merchant acquiring activities shall be considered employees of the MALPB for purposes of determining compliance with this rule.

Things get more complicated if the MALPB is contracting with a company that is not an affiliate. In that situation the DBF Commissioner has the discretion to determine the minimum number of employees that must continuously reside in this State in order to assure the continued and substantive presence of the MALPB in this State for the purpose of conducting its corporate affairs and operations. However, under no circumstances, shall the combined number of employees of the eligible organization and the MALPB that reside in the State and are devoted to performing merchant acquiring be less than fifty (50) employees. Further, under no circumstances, shall the eligible organization, its parent, affiliates, or subsidiaries, employ less than two hundred fifty (250) individuals residing in Georgia who are directly or indirectly engaged in merchant acquiring or settlement activities.

When trying to decide what is the appropriate mix of direct employees vs. employees retained by a service provider one needs to keep in mind the jobs creation umbrella that the Act was created under. The DBF has indicated in informal discussion that setting up a company which directly employed only a core group of management employees (a typical C suite) and then contracted out the work with a number of service providers would not meet the spirit of the Act with respect to creating jobs in Georgia. Exactly what the proper mix should look like is being left open for determination on a case by case basis.

Liquidation. Another unique provision in the Rule is the requirement that a MALP obtain a receivership letter of credit issued in favor of the DBF to satisfy costs and expenses associated with a receivership of the MALPB. The letter of credit shall be in the principal sum of $100,000.00 or such greater amount as the Department may require. A MALPB is unique from a traditional bank in that it is eligible to file for relief under the Bankruptcy Code whereas a traditional bank may not.