Aside from emergency cash for a stranded child or support for relatives in the home country, consumers rarely used to send money electronically. Years after grandmothers started shopping on the Web, most individuals still relied on credit and bank cards to pay for things online and cash or checks to pay one another. Stalwarts like Western Union and MoneyGram controlled the money transfer market. But PayPal's steady rise and the recent success of new entrants such as Square, Venmo, and Xoom have ignited the transfer industry.
By 2012, U.S. companies other than banks were transferring billions of dollars a month. In 2013's first quarter PayPal alone, with 110 million active accounts, moved more than $40 billion. Users still need bank accounts in most cases, but some companies are bypassing traditional finance altogether.
Regulators are struggling to keep abreast. The federal government - concerned primarily about criminal behavior such as money laundering - requires transmitters to register but largely defers to laws in 45 states on domestic transfers. By May, California had licensed 74 transmitters under its Money Transmission Act (MTA). Drafted in 2010 by a group representing big, traditional institutions like American Express and Western Union, the MTA requires payment and payroll processors and other businesses to hold substantial capital, post their fees, be bonded, and meet other standards. The law doesn't cover banks or currency.
Michelle Jun, senior attorney with Consumers Union in San Francisco, says the MTA seems to be protecting consumers - though she worries many consumers don't know the law exists and may assume that any money transmitter with a nice website is trustworthy.
But many in the industry see the MTA as a barrier to entry and are supporting Assembly Bill 786 (pending in the state Senate), which would relax parts of the law and exempt payroll processors - most of which aren't licensed anyway. One California payroll and human resources firm, TriNet, says it's not subject to state law because it's a "professional employer organization." An industry directory of 137 payroll processors in California included just one with a license.
The state may have clouded things further when it formally warned Bitcoin Foundation, a nonprofit promoting the digital currency called bitcoins, against acting as a money transmitter without a license. The nonprofit said its charter prohibits that. State officials declined to comment.