AMERICA'S COMMUNITY BANKERS
July 15, 2004
Robert E. Feldman
Executive Secretary
Federal Deposit Insurance Corporation
550 17th Street, NW
Washington, D.C. 20429
Attention: Comments/Legal ESS
Re: Definition of “Deposit”; Stored Value Cards
68 FR 20558 (April 16, 2004)
Dear Mr. Feldman:
America’s Community Bankers (“ACB”)1 is pleased to comment on the Federal
Deposit Insurance Corporation’s (“FDIC”) proposed rule that would clarify
when funds underlying stored value cards will qualify as insurable
“deposits.”2 What is determined to be a “deposit” is important under the
Federal Deposit Insurance Act for assessment and deposit insurance purposes.
In 1996, the FDIC’s General Counsel’s Opinion No. 8 created a general
framework for determining whether the funds underlying stored value cards
are considered “deposits.”3 Over the past eight years, new stored value
systems have been developed, and the FDIC believes that additional
clarification is needed.
ACB Position
ACB supports the FDIC’s proposed rule. As a general matter, we believe
that stored value products should be allowed to evolve without unnecessary
regulatory interference.
Certain variations of stored value products are designed to be treated
like cash, while others have characteristics of traditional deposit
accounts. As a result, we believe that funds underlying stored value cards
should be considered deposits only when a clear and unmistakable deposit is
credited to the owner of an account. We believe that this logic should be
applied to all regulatory aspects of stored value products (e.g. Regulation
E, which implements the Electronic Funds Transfer Act, Regulation CC, which
implements the Expedited Funds Availability Act, and the USA Patriot Act and
its implementing regulations).
We also are concerned that imposing differential regulation on insured
depository institutions and uninsured providers of stored value products
would discourage innovation and could conceivably eliminate insured
institutions as major participants in the development of stored value
products.
Background
Many community banks have been reluctant to enter the stored value
market. Regulatory uncertainties persist regarding the application of
Regulation E, Regulation CC, and the USA Patriot Act. Moreover, community
banks must partner with third party vendors to make stored value products
economically feasible. Many community banks are monitoring the stored value
market, and we expect additional product development as the regulatory
treatment of this product is addressed.
The proposal would address the following types of stored value card
systems:
1. Accounts funded by a sponsoring company. In this type of stored value
system, a sponsoring company issues stored value cards to cardholders in
exchange for cash. The company places funds into an account at an insured
depository institution for the purpose of making payments to merchants as
the cardholders use the cards.
Under the proposal, the funds in such an account would be "deposits." The
insured depositor would be the sponsoring company, and not the cardholders,
unless the FDIC's existing requirements for "pass-through" insurance
coverage are satisfied.
2. Funds received from cardholders or from others on their behalf in
exchange for stored value cards. Under this arrangement, funds would be
“deposits.” However, if the issuing institution maintains a “pooled reserve
account” for all of the stored value cards it issues without maintaining
separate records or sub accounts reflecting the amount owed to each
cardholder, the funds would not be “deposits.”
3. Funds received from cardholders in exchange for stored value cards
issued by a sponsoring company. In the case of funds received by an insured
depository institution from cardholders in exchange for stored value cards
issued by a sponsoring company and not issued by the insured depository
(i.e. the insured depository institution serves as an agent of the
sponsoring company in collecting funds and distributing cards), the funds:
• Would be “deposits” if the depository institution forwards the funds to
the sponsoring company or holds the funds for the sponsoring company. The
funds would cease to be “deposits” when the institution forwards the funds
to the sponsoring company or the company withdrawals the funds.
• Would not be “deposits” if the depository institution has no obligation to
forward or hold the funds (e.g. the depository institution purchases the
cards from the sponsoring company and then resells the cards to the
cardholders.)
4. Payroll cards. The proposal does not have a special provision dealing
with “payroll cards.” Rather, the proposed rule would apply to all types of
stored value bank cards. The proposed rule would clarify that, with one
exception (where the insured depository issues the cards but does not
maintain sub accounts or other records reflecting the amount of money owed
to particular cardholders), funds underlying all three types of stored value
cards would be classified as “deposits” and are thus insured by the FDIC.
Where the underlying funds are maintained in an account belonging to an
employer or card sponsor, the “deposits” are insurable to the employer/card
sponsor and not to the employees/cardholders unless the requirements for
“pass-through” insurance coverage are satisfied.
While the proposal does not establish any new disclosure requirements,
the FDIC is concerned that some purchasers of stored value cards may not
understand if the funds given to an insured depository in exchange for such
cards are FDIC insured.
The proposed rule appropriately treats payroll cards and other types of
stored value cards.
We believe that the proposal properly distinguishes between stored value
products that are designed to be treated like cash and products that have
characteristics of traditional deposit accounts. If there is no evidence
that a stored value card represents account ownership at a depository
institution, deposit insurance should not apply to an individual cardholder.
Some stored value cards are designed to be the functional equivalent of cash
and should be treated as such. In this circumstance, financial institutions
do not maintain deposit account records, such as signature cards, that would
enable the FDIC to determine whether each cardholder would be entitled to
deposit insurance coverage in the event of a bank failure.
Employers often select payroll cards as a cash equivalent for day laborers
and employees that do not have a bank account that can accept direct
deposit. These cards are designed only to provide an alternative to a
paycheck. They are not designed to function like a traditional deposit
account that identifies a specific individual with a specific account number
and account balance.
On the other hand, we believe that it is good public policy to provide
deposit insurance to those stored value cards that mimic traditional deposit
accounts. These types of arrangements clearly attribute funds to a
particular cardholder. For example, issuing banks maintain account ledgers
that relate to the institution’s deposit taking function as well as records
of the funds that belong to each cardholder. In addition, the cardholder’s
name may be printed on the face of the card, the card may have a PIN or
signature based security feature, the cardholder may be able to make
additional deposits to the card, use the card at an ATM, or use the card to
pay for goods at merchants that accept traditional credit and debit cards.
We believe that providing deposit insurance to these types of accounts may
help facilitate trust between the unbanked and the banking industry. Those
unbanked individuals may someday become conventional bank customers.
The proposed definition of “stored value card” should be expanded.
The proposal defines a stored value card as “a device that enables the
cardholder to transfer the underlying funds to a merchant at the merchant’s
point of sale terminal.” Historically, stored value cards could only be used
at a specific merchant; however, advances in technology now allow
cardholders to withdraw funds from an ATM and transfer funds from one card
to another.
Financial service providers will continue to develop new ways to transfer
funds associated with stored value products. Accordingly, we believe that
the FDIC should define “stored value card” in a manner that is sufficiently
broad to include future products. This would avoid frequently revising the
rule to account for new innovations. We suggest that the FDIC define stored
value card as “a device that enables the cardholder to transfer or withdraw
the underlying funds.”
It would be reasonable to require disclosure with respect to whether stored
value cards are FDIC insured.
Community banks face mounting regulatory burden requirements, and ACB
strongly opposes unnecessary regulation that would stifle product
development. Because technology will evolve and market forces will change,
the stored value card arena should be permitted to develop without
unnecessary regulatory interference.
ACB believes that it is reasonable to require disclosure with respect to
whether a stored value card is federally insured. It is important for
depository institutions to have the option of offering both insured and
uninsured stored value products. Likewise, it is vital that customers
understand whether the value underlying a stored value card is insured. We
believe that disclosing whether a stored value card FDIC insured is a quid
pro quo for the ability to offer a variety of insured and uninsured
products.
Studies have shown that consumers do not read the documents financial
institutions are already required to provide with respect to privacy, funds
availability, and other consumer issues. As a result, we suggest we suggest
that any disclosure requirement pertaining to stored value cards could be
met by printing “treat this the same as you would cash” or “this product is
not FDIC insured” or “FDIC insured” on the card.
In addition, requiring a basic disclosure would be consistent with
existing regulatory expectations. The OCC already expects national banks to
take adequate steps to adequately inform consumers of their rights and
responsibilities when using stored value cards, including whether the card
is insured by the FDIC. Similarly, the federal banking agencies expect
financial institutions to inform to customers that nondeposit investment
products such as stocks, bonds, mutual funds, and annuities, are not FDIC
insured.
Conclusion
ACB looks forward to working with the FDIC as important policy
considerations regarding stored value products are explored. We reiterate
our position that any regulation pertaining to stored value cards should
distinguish between those products that are designed to function as a cash
substitute and those that have deposit-like characteristics.
Should you have any questions, please contact the undersigned at
202-857-3121 or via email at cbahin@acbankers.org or Krista Shonk at
202-857-3187 or via email at kshonk@acbankers.org.
Sincerely,
Charlotte M. Bahin
Senior Vice President
Regulatory Affairs
1 America's Community Bankers represents the nation's
community banks. ACB members, whose aggregate assets total more than $1
trillion, pursue progressive, entrepreneurial and service-oriented
strategies in providing financial services to benefit their customers and
communities.
2 69 Fed. Reg. 20558 (April 16, 2004).
3 61 Fed. Reg. 40490 (August 2, 1996).
