| Manufacturers and Traders Trust Company
July 14, 2004
Robert E. Feldman Executive Secretary
(Attention: Comments/Legal ESS)
Federal Deposit Insurance Corporation
550 17th Street, NW
Washington, DC 20429
VIA e-mail to: comments@fdic.gov
Dear Mr. Feldman:
Thank you for the opportunity
to comment on the amendments that the Federal Deposit Insurance Corporation
(the "FDIC") proposes to make to part
303 of Title 12 of the Code of Federal Regulations (the "Proposed Rule")
regarding when funds at insured depository institutions underlying stored
value cards would constitute "deposits" under the Federal Deposit Insurance
Act ("FDIA").
In general, Manufacturers and
Traders Trust Company ("M&T Bank") would
prefer that the FDIC withdraw the Proposed Rule. Although we do not believe
that classifying stored value card funds as deposits for FDIC insurance
purposes will have a significant impact on deposit insurance premiums,
we
are concerned that the Proposed Rule is likely to have significant
implications in other regulatory areas and in the development of stored
value card products. In effect, we see the Proposed Rule as opening the door
to unnecessary regulation of bank-issued stored value cards that could
have
a chilling impact on the ability of banks to continue in this line of
business. In addition, we are concerned that the Proposed Rule does not
sufficiently distinguish between different types of stored value cards in
applying a blanket approach which focuses on whether the funds underlying
the card are held by a bank in a pooled reserve account for which the
bank
maintains no subaccounting records for each cardholder.
To this end we offer the following comments on the Proposed Rule.
The Proposed Rule Departs from the Principles of GC8:
The Proposed Rule would replace General Counsel's Opinion No. 8 ("GC 8")
which, until now, formed the basis for the widespread belief that funds held
by insured depository institutions in pooled reserve accounts for
cardholders were not deposits for insurance and assessment purposes. The
FDIC states that the Proposed Rule "retain[s] the basic principles set forth
in GC8 and extend[s] these principles to new types of stored value card
systems." However, the Proposed Rule indicates that funds received by
an insured depository institution from cardholders, or funds received from
others on behalf of cardholders or for payment to cardholders, in exchange
for such cards, would constitute deposits, unless the institution
records its liabilities for such funds in a pooled account for multiple
cardholders and the institution does not maintain "supplemental
records or subaccounts reflecting the amount owed to each cardholder." We
believe that this represents a significant departure from the FDIC's
previous opinion expressed in GC 8.
The Proposed Rule May Have Wide Ranging Regulatory Implications:
As noted above, M&T Bank would prefer that the FDIC withdraw its Proposed
Rule. Although we are not concerned that the Proposed Rule will have a
significant impact on deposit insurance premiums, we are concerned that it
may impact regulation in other areas and the future development of stored
value card products. We are concerned that the treatment of funds underlying
stored value cards as deposits under FDIA may lead to other regulation of
bank-issued stored value cards that could negatively impact the ability of
banks to continue in this line of business.
Although the Proposed
Rule focuses on the limited issue of whether funds underlying stored
value cards constitute deposits, the FDIC, itself,
acknowledges in a footnote that rulemaking leaves open a number
of other issues, including, among other things, matters that relate to
reserve
requirements, money laundering and application of electronic fund transfer
rules. We believe that the FDIC should not move forward with the Proposed
Rule until it has determined, in concert with other bank regulatory
agencies, the effect that the Proposed Rule would have on such other
matters.
For example, if Federal Reserve
Board ("FRB") were to treat prepaid cards
as transaction accounts with respect to reserve requirements under
Regulation D, the cost of cards such as gift cards could increase
significantly. This cost would likely be passed on to consumers. In
addition, the treatment of such cards as reserveable transaction accounts
presents additional issues for banks because the opportunities to reduce
reserve requirements that are available for conventional bank deposits,
such
as sweep arrangements, may not be available for gift cards.
In addition, we believe that the Proposed Rule should not be adopted
without consideration and clarification of the application of the FRB's
Regulation E to stored value card products. It is not clear how many
Regulation E provisions, including periodic statements, limited liability
for unauthorized transactions and error resolution procedures, apply to
certain stored value card products. It is our understanding that the FRB
refrained from adopting final rules under Regulation E to address stored
value products because it did not want to inhibit the development of these
emerging products. As a result, we believe that the FDIC should work with
the FRB to address the treatment of stored value products under Regulation E
before adopting the Proposed Rule which might impact how such products are
viewed under Regulation E.
We share the concern of many financial institutions and card issuers that
the Proposed Rule raises issues with respect to gathering customer
information as required by the USA PATRIOT Act. Even gathering the minimum
identifying information required by Customer Identification Programs may not
be feasible with respect to the recipients of gift cards because banks often
have no interaction with the recipients other than perhaps sending cards to
them. We respectfully request that the FDIC study the impact of the Proposed
Rule on the obligations of financial institutions under the USA PATRIOT Act.
Inconsistency with FDIC Policy Considerations:
The Proposed Rule would treat all stored value cards as deposits unless the
institution records its liabilities for such funds in a pooled account
for
multiple cardholders and the institution does not maintain "supplemental
records or subaccounts reflecting the amount owed to each cardholder." The
Proposed Rule makes no distinctions based upon the nature and purpose of
various types of cards, We believe that this blanket approach fails to take
into consideration differences in the cards that impact whether such cards
should be insured based upon the policies underlying the system of FDIC
insurance.
In summary, FDIC insurance is designed to protect the banking system from
runs on deposits that might be caused if depositors feared that their funds
were at risk. Customers and issuers alike may consider some types of stored
value cards as essentially equivalent to deposit accounts; however, other
types of stored value cards are not used or viewed as equivalent to deposit
accounts but rather are substitutes for cash. We believe that the Proposed
Rule should distinguish between types of cards rather than merely focusing
on whether funds are received by an insured depository institution in
exchange for stored value cards and whether that institution uses a
subaccount accounting methodology to track the value remaining with respect
to each cardholder.
It seems to us that it may be consistent with the policies underlying
FDIC insurance to characterize certain stored value cards as insured
deposits, such as certain payroll cards that are used as substitutes for
deposit accounts. However, other cards, such as gift cards, differ
fundamentally from bank deposits, despite the fact that banks may hold the
funds underlying both. Gift cards generally offer broader transaction
capabilities than store gift certificates but more limited capabilities than
deposit accounts (e.g.. payments from deposit accounts may be made to
individuals and cash may be withdrawn while these features are not
applicable to gift cards). It is our belief that the recipients of gift
cards do not view such cards as investment or savings vehicles and do not
expect them to be covered by FDIC insurance.
We respectfully request that the FDIC consider the fact that the
structure, design, funding and settlement of stored value products vary
widely in crafting a final rule.
Branching Issues:
In addition to the uncertainty surrounding the legal and regulatory matters
noted above, we would also point out that a classification of stored value
card funds as deposits raises branching issues as well. It is our
understanding that many stored value card programs in existence today rely
on various retail distribution points to load funds onto cards. For example,
certain cards allow consumers to load funds at check cashing outlets,
Moneygram and Western Union locations, and even Rite Aid drugstores. If the
funds underlying cards such as these are considered deposits, it is
questionable whether loading cards at such retail distribution points would
remain legal in light of the fact that banks may not accept deposits at
locations other than their authorized branch offices.
Required Disclosures to Cardholders:
We have several comments regarding the proposal to mandate disclosure to
cardholders. First, we respectfully request that the FDIC refrain from
mandating specific cardholder disclosures.
Pursuant to previously issued guidance regarding stored value cards, it
is industry practice to provide such disclosures to the extent such
disclosures are needed. We believe that banks should continue to have the
ability to determine whether, and to what extent, disclosures are needed
based all applicable factors (e.g.. the design of the card and consumer
confusion regarding the product).
In the alternative, if the FDIC does mandate disclosures, we respectfully
request that the final rule provide banks with at least least six (6) months
after publication of the final rule in the Federal Register to provide any
required disclosure to cardholders. This would allow banks sufficient time
to modify existing stored value card documentation provided to cardholders
and plan for effective communication to cardholders.
In addition, we strongly urge that any final regulation provide that any
required disclosure need only be made prospectively to cardholders to whom
stored value cards are issued on or after the specific compliance date
(e.g., 6 months after publication in the Federal Register). In other words,
we ask that banks need not provide disclosure to cardholders who were issued
cards before the compliance date, including cardholders who were advised, in
reliance on the guidance provided in GC 8, that the funds underlying their
stored value cards are not deposits and are not insured by the FDIC.
Once again, we thank you for the opportunity to comment on the Proposed
Rule. Should you have any questions regarding our comments, please do not
hesitate to contact Marissa Briggs (716-842-2366) or David Burstein
(212-350-2580).
Sincerely,
Marissa K. Briggs
M&T Bank
One M&T Plaza
Buffalo, NY 14203
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