Elon Musk has talked about plans to turn Twitter, now known as X (or TwiX, to me) into a payments platform that will give it us users the ability to send money to one another and move money into and out of bank accounts. The company has committed to launch peer-to-peer payments, “unlocking more user utility and new opportunities for commerce, and showcasing the power of living more of your life in one place”. This is part of what seems to be a wider vision of X as a a kind of “super app”, a Western version of WeChat, where users will read the news, book travel, paty taxes and everything else. It’s an exciting and challenging goal, but I think it’s going to be difficult to disrupt tjis particular market.
People who are tweeting from time to time (eg, me) tend to think that everyone is on X. But they are not. It is not even in the top 10 most used social media networks. Facebook has some three billion monthly active users, whereas X has some 670 million (half the number that TikTok has) and most of them are not particularly active, since data shows that almost all tweets (92%) come from just 10% of them. Most people come to X to check in on the news or find entertainment rather than to contribute to the sum total of human knowledge.
Nonetheless, there are users (mostly male, dominated by the 25-34 age group) who do represent a monetisable pool of potential financial services customers and it is a plausible hypothesis that I might pay a friend who uses X for a concert ticket by sending them money from my bank account to their bank account using X (rather than my bank’s Zelle option) if it easy and convenient. There is plenty of competition but if you could DM money, you probably would. provided it was free (back to this later).
Central to this grand vision are Money Transmitter Licenses (MTLs), and at the time of writing X has already obtained a bunch of these licences. Amercia has no equvialent of the European Payments Institution licence, so companies have to obtain these licences in every state, which is time-consuming (Mr. Musk says he undderestimated that) and tedious. It is, however, a necessary first step on the journey to replace Citi and Revolut, Wise and Wells Fargo on users’ home screens.
But what is a money transmitter licence? Writing in the Journal of Payments Strategy & Systems 17(3): 315-322 (Fall 2023), Ximeng Tang (an associate at Goodwin Procter LLP) explains that the Bank Secrecy Act of 19701 (BSA) and the regulations implemented by the Financial Crimes Enforcement Network (FinCEN) impose customer identification, reporting and other compliance requirements on regulated financial institutions, includng Money Services Businesses (MSBs). MSBs provide a number of different financial services, including:
- Transferring money (money transmission);
- Selling payment instruments (e.g., money orders, traveler’s checks);
- Providing prepaid or other stored value products, such as digital wallets; and
- Administering currency exchange (foreign and digital).
Put another way, MSBs are non-bank financial companies with three general functions: receiving and sending money on behalf of consumers; providing products that receive, store, or send money for consumers; and providing an exchange for currencies. MSBs that are money transmitters are regulated and licensed at the state level and, as the Congressional Research Service report on the regulations notes, the terms money transmitter and MSB are effectively synonymous. Indeed, for the purposes of the BSA, a ‘money service business’ (MSB) is a regulated businesses that includes a money transmitter. Most companies providing domestic and international money transfer services are MSBs, such as Western Union and PayPal, as well as some payment processors such as Square and Stripe.
A fundamental element in FinCEN’s interpretation of a money transmitter is that the person must engage in both ‘acceptance’ and ‘transmission’ of money to be a money transmitter. Although “acceptance” is not defined (and as it happens neither is “transmission”), a number of interpretive letters issued by FinCEN suggest that they key is the control of the funds and where they are directed to, which seems liek a good working definition: if X routest the money from me to person with the Taylor Swift tickets, they are a money transmitter.
Now, money transmitters play a crucial role in America’s financial ecosystem which is why they are subject to these regulatory obligations including background checks on officers, maintaining sufficient liquid assets, periodic reports and (here comes the hard part) AML compliance including customer identity verification and transaction monitoring. The mixture of varying state regulations and the fact that America has no digital identity infrastructure (nor does the UK) so that means compliance is expensive and inconvenient and, as has been obvious for some time, undeniably inhibits valuable innovation by forcing startups to spend dollars on lawyers instead of new products and services.
(It should be noted that things are changing on the MTL front. Many states have already opted to adopt the Model Money Transmission Modernization Act (MTMA), sample legislation developed by the Conference of State Bank Supervisors to establish nationwide standards and requirements for licensed money transmitters. For traditional money transmitters and new fintech entrants, the MTMA has the potential to reduce compliance burdens, encourage innovation, and remove barriers to entry for new market participants. It is very important given the growth in person-to-person payments via apps. Among all US consumers, half of P2P payments were sent using noncash methods in 2022, up from less than a third two years previously.)
But back to Mr. Musk and his plan. It’s now, as American Banker puts it, a “more modest plan” than the global payments system that he was going to build sometime this year, but it is realistic. But what I keep wondering is why he is bothering. In order to offer payment services to American users., X will need approval in every state, a process that could take up to 18 months and cost several million dollars according to Aaron Klein, a senior fellow focused on financial technology and regulation at the Brookings Institution.
Why would Mr. Musk want to spend a ton of money on AML compliance and identity verification? My crackpot theory is that this is really all about identity, not money. Mr. Musk doesn’t care if he earns a single cent on you sending a couple of hundred bucks to someone for that Taylor Swift ticket. But he does care who you, who you are sending money to and why you are sending it. Your data is worth vastly more than any transaction fees he might be able to collect from you.
Snippings 