Federal Deposit
Insurance Corporation

Re: RIN 3064-AC80, Comments in general support of notice of proposed rule to clarify the meaning of “deposit” as it relates to funds underlying stored value cards (such as payroll cards, child support cards, prepaid debit cards, and tax refund loan proceeds cards)

Dear FDIC:

These comments are submitted by Consumers Union, Arizona Consumers Council, California Reinvestment Committee, Capital Area Asset Building Corp., Center for Economic Progress, Coalition of Religious Communities, Community Legal Services, Inc. of Philadelphia, Community Reinvestment Association of North Carolina, Consumer Action, Consumer Federation of America, Democratic Processes Center, Just Harvest, Legal Aid Society of Milwaukee, Massachusetts Consumers’ Coalition, Michigan Consumer Federation, National Association of Consumer Advocates, National Community Reinvestment Coalition, National Consumer Law Center, National Consumers League, Neighborhood Economic Development Advocacy Project, San Diego Housing Federation, Sargent Shriver National Center on Poverty Law, Texas Legal Services Center, UAW, U.S. PIRG, and Virginia Citizens Consumer Council.

Nature of commenters’ interest:

As consumer groups and other groups who work with individuals who are being asked to accept stored value cards to receive payments of essential funds, we are deeply interested in the legal treatment of stored value cards. These cards are increasingly targeted to those not well-served by traditional deposit accounts. This includes payroll cards, prepaid cards sold to individuals for Internet and in-person card use, and cards used to deliver income tax refund monies or income tax refund loan proceeds, child-support funds and unemployment payments.

Stored value cards are increasingly offered to low- and moderate-wage workers as a way to receive wages. These products are being marketed to workers as “safe” even though the law is at best unclear about whether these cards carry the same federal consumer protections which apply to bank debit cards linked to a deposit account. Payroll cards also may be offered under structures which involve nonbanks, which pose risks for cardholders and require special care by employers who are selecting a payroll card program. Other types of stored value cards, including cards marketed directly to individuals raise many of the same issues.

Deposit insurance is just one of several issues that must be addressed to make the stored value card, including the payroll card, a valuable stepping stone into the banking system, rather than a high-cost, inferior product. We call upon the Federal Reserve Board to clarify the full application of federal Regulation E to all stored value cards, including payroll cards, regardless of whether the funds are held in individual or a pooled account, and regardless of how the accounting is performed for these cards. Consumers Union has prepared materials discussing the issues and risks of payroll cards for employees and employers, as well as the ways in which these products could be enhanced to build a stronger bridge to financial security and fuller access to the banking system for unbanked workers. That information is found at http://www.consumersunion.org/pub/core_financial_services/000920.html, March 16, 2004 and http://www.consumersunion.org/pub/core_financial_services/000922.html, March 16, 2004.

Although the FDIC’s jurisdiction is narrower than the full scope of the issues related to stored value cards, the FDIC’s proposal is a welcome initial response to the fact that stored value cards are increasingly being marketed to and used by consumers as a substitute for a deposit account or as a substitute for a payment mechanism linked to an individual deposit account.

The rule should be modified to reach all stored value cards offered as account substitutes:

The FDIC's proposal is highly technical. If the problems described below with the definition of stored value cards and with the exemptions to that definition are resolved, then the FDIC’s proposal should cover most kinds of stored value cards that are now being marketed to consumers as alternatives to a deposit-account-linked bank debit card. However, it may be difficult for individual consumers, and indeed even for bankers, to easily determine whether the funds underlying some categories of stored value products are or are not “deposits” under the proposed rule. For this reason, we respectfully suggest that the proposed rule be augmented to add a general section stating in substance:

This type of a catch-all rule would help to ensure that the proposed rule is not rendered out of date by continuing technological progress. It would also help to ensure that the nuances of the rule do not create loopholes and gaps in the deposit insurance coverage which would be highly inconsistent with the ordinary and reasonable expectations of employees and employers who use a payroll card, and of individuals who use other types of stored value cards, including individual-purchase “internet shopping” cards.

The definition of stored value card should be expanded:

The definition of a stored value card is too narrow. Proposed section 303.16(f) defines “stored value card” to mean a device that enables the cardholder to transfer the underlying funds (i.e., the funds received by the issuer of the card in exchange for the issuance or reloading of the card) to a merchant at the merchant’s point-of-sale terminal. This definition is overly narrow. The definition should not be restricted to stored value cards which enable a transfer of funds to a merchant at a POS terminal. Stored value cards which bear a VISA or MasterCard mark, which many of them do, can also be used in all of the additional ways in which a debit card can be used. This includes Internet payments, ATM withdrawals, and even off-line signature debit using a manual card processing machine rather than a merchant POS terminal.

A further reason to broaden the definition is that new types of stored value cards are coming into the marketplace which are designed to pay persons who may not be merchants. For example, recent IRS rulings allow the use of employer-sponsored Health Reimbursement Accounts (HRAs). HRA funds can be placed on a stored value card which the consumer presents to a health provider as a method of payment. Is a physician a “merchant?” If not, the definition will exclude the funds backing these cards from deposit insurance protection. A similar problem will arise with cards which draw from flexible spending account funds (FSAs), which hold employee pre-tax funds for designated purposes such as health care costs or child care costs. Is a nonprofit child card provider who accepts debit card payments, including an FSA card payment, a merchant? Even if so, the use of a manual card-charging plate rather than a POS terminal would appear to exclude the funds on those cards from the protection of the FDIC’s updated rule.

For these reasons, the definition in section 306.16(f) should be revised to read:

This change in the definition is needed to ensure that the definition does not exclude future products, such as a payroll card which can be used only for cash ATM withdrawals, an HRA card usable only at service providers and not with traditional merchants, and an FSA card used only at the local child care provider which is not equipped with POS capability. This change will also ensure that the definition covers prepaid cards marketed to individuals for the purpose of online shopping, rather than for merchant POS processing.

We strongly support the basic rule described in section 303.16(b) that funds are deposits when they are held in individual accounts or when they are held in a pooled account with supplemental records or subaccounts reflecting the amount due to each cardholder. However, we are troubled by the implication in (b)(2) that a financial institution holding funds backing a payroll card or other stored value card could avoid treatment of those funds as insured deposits by avoiding maintaining, or having an agent maintain, subaccounts showing the amounts due each cardholder.

While it is hard to see how these cards could be processed today without such subaccounting, it might be possible for the subaccounting to be handled by a person who is not an agent of the financial institution, thus defeating the protection. Further, future technologies may well support a card where “remaining amount owed” information is maintained on a chip on the card but not by the financial institution, its contractor, its third-party depositor, or the card processor. This would be a major loophole, and might even drive the market toward a model of “chip card only” accounting rather than financial institution subaccounting. That would be a bad development for consumers because the use of subaccounting records strengthens the argument that Regulation E applies to these cards, since, in our view, the subaccounting creates a consumer asset account. A move toward card-chip-based tracking of fund balances would also increase the practical risks to consumers, since damage to or destruction of the card would lead to loss of proof about how much is due to the cardholding consumer.

For these reasons, we strongly suggest removing the “unless” clause at the end of (b) and both (1) and (2) under (b), while retaining the general coverage rule of (b).

Subsection 303.16(c)(1) seems to state the noncontroversial proposition that the funds are not insured after the bank pays them out to a third party. Subsection 303.16(c)(2), however, extends this principle to create a significant loophole to deposit insurance coverage. Under this loophole, a consumer could purchase a stored value card directly from an insured depository institution and yet receive a product for which the underlying funds are not insured. This result seems highly inconsistent with consumer expectations, particularly when funds backing other types of stored value cards issued by the same financial institution will be covered by deposit insurance. The behind-the-scenes arrangement between the bank and the third party processor should not change the protections available to the consumer. The consumer could reasonably expect that the funds he or she paid to the bank are the funds that back the card, even if, due to a contractual arrangement between the bank and the third party card processor, the bank has prepaid the processor for the card which the bank then sells to the consumer.

Responses to the questions posed in the notice of proposed rulemaking:

1. Should the FDIC promulgate a new section to part 303 to clarify the meaning of “deposit” as that term relates to funds at insured depository institutions underlying stored value cards?

Yes. As discussed above, stored value cards are increasingly being offered or marketed to individuals and to groups of individuals, such as employees or child-support recipients, as a product which serves a function previously served within the banking system only by an insured deposit account—the function of receiving funds and providing a payment conduit to withdraw or spend those funds. While stored value cards raise many consumer issues in addition to the issue of deposit insurance, the FDIC rule is a useful initial step.

2. If so, should the FDIC adopt the proposed rule? Why?

Yes, with a few changes to clarify and broaden its application. As discussed above, the four key changes we seek are to:

These changes will make the rule less likely to be outstripped by changes in the evolving technology of these products.

3. In the alternative, should the FDIC adopt some other rule? Under what circumstances should funds received by an insured depository institution not be insurable as “deposits”?

No, except as noted above. Funds belonging to a consumer, or paid by a consumer to facilitate future payments made through a financial institution or through a third party via an arrangement with a financial institution, should always be treated as “deposits.”

4. What should be the treatment of funds underlying “payroll cards”? (This section includes comments on the related issue of pass through insurance coverage for household funds held on stored value cards.)

Payroll cards are the most striking example of why the rules for deposit insurance coverage and for other consumer protections should be clarified. Payroll cards represent wages, often for consumers who have too little household float to make a traditional bank account with high overdraft fees a sensible financial choice. Payroll cards reflect funds that consumers simply cannot afford to lose or to place at risk. Because of the special importance of payroll funds, the rule would be far more useful to consumers if it specifically identified payroll card funds as insured deposits in all cases. However, the rule should not be restricted to payroll cards. Stored value cards in the form of prepaid debit cards are also increasingly being marketed to individuals as a way to participate in some aspects of the economic mainstream, such as Internet shopping. Similarly, prepaid debit card providers offering a stored value card product are approaching state child support agencies and encouraging them to use these cards to deliver state collected, privately-paid, child support payments. There are certain benefits for the cardholder such as quicker receipt of funds. However, these benefits could be outweighed if the consumer has to worry about whether the funds are at risk in the event of a financial institution insolvency.

We are also concerned about the application of the restrictions on “pass through” insurance coverage to benefit the actual cardholder, both for payroll cards and for other types of stored value cards which may represent important household funds (for example, a card used to access state-collected private child support payments). The explanatory material in the proposed rule notes three conditions for pass through of insurance coverage. The FDIC should clarify certain aspects of each of those conditions for pass through insurance to holders of stored value cards.

The first condition described in the notice pf proposed rulemaking for pass through of insurance coverage to the cardholder is disclosure (to the financial institution) in the deposit account records of the fiduciary status of the nominal account holder. The FDIC should, by rule, interpret this condition to be satisfied when the nature of the relationship between the financial institution and the third party card issuer or card funder gives reasonable notice to the financial institution that these funds relate to stored value cards. When the financial institution is marketing payroll cards to private employers; has a contract with a third party which is in that business; or is marketing child support cards to governmental entities, it is on notice of the fiduciary nature of the third party’s role.

The second condition is that the interests of the principals must be ascertainable from the records of the financial institution or of the third party. This condition seems likely to be met in most cases, at least until card technology begins to store key information on a card chip rather than with the financial institution or with the third party. The FDIC should determine now that storage on the card itself qualifies as storage in the records of the third party (or of the financial institution, if it issues the chip card).

The third condition for pass through of insurance coverage is that the deposit must actually belong to the alleged owners, not to the nominal agent. The FDIC should determine now that the possibility of an interest in the funds by the third party (or by an issuing financial institution) which consists of an interest in future dormancy fees does not defeat fulfillment of this condition for pass through coverage.

5. Will the proposed rule affect the operation of the deposit limitations in section 3(d) of the Bank Holding Company Act or section 44(b) of the FDI Act?

We offer no comments on this question.

6. Should the FDIC adopt the proposed definition of “stored value card”? Can this definition be improved? What are the differences (if any) between “stored value cards” and other types of bank cards such as “prepaid cards,” “debit cards,” “check cards” and “payroll cards”?

As discussed above, the definition must be broadened to reach cards that may be later offered without a merchant POS feature. The definition of stored value cards must be broad enough to include all cards not linked to a consumer deposit account which serve as either an account substitute or as a substitute for a payment card linked to an individual account. The types of cards the definition should cover include, but are not limited to: payroll cards; loan proceeds cards, which are already in use for distributing the proceeds of tax refund anticipation loans; state payments distribution cards (such as for state-collected, privately paid, child support payments and for state-paid unemployment benefits); health account cards such as the HRA or FSA cards described above; and prepaid cards sold to individuals, such as for cash withdrawals, Internet shopping, deposits where a credit card is usually required (i.e., to rent a car), or in-person shopping. A “check card” which is linked to an individual deposit account such as a checking account is not a stored value card.

7. Should the FDIC adopt specific disclosure requirements? If so, do the disclosures provided as examples in the preamble adequately address consumer confusion about the insurability of funds underlying stored value products? Are there ways to reduce the costs or burdens associated with providing disclosures about the insurability of such funds?

There is a strong need for mandated minimum federal disclosures about stored value cards, including a “Schumer Box” disclosing and describing all fees associated with holding and using the card. This consumer need extends to issues well beyond the scope of this rulemaking.

If the consumer’s funds are covered by deposit insurance, this disclosure should be treated the same way as the disclosures for other consumer funds. However, it will be very important that any “FDIC insured” disclosure not be misleading. Such a disclosure could be misleading in two ways. First, if the funds are held first by an uninsured entity, then moved to an insured financial institution, the disclosure could easily mislead consumers into thinking that the funds are insured throughout the transaction, rather than only after a third-party card provider transfers the consumer’s funds to an insured entity. Second, the use of the phrase “FDIC insured” in card marketing materials could lead consumers to believe that the cards are insured, misleading consumers into thinking that the funds are safe not only from financial institution insolvency, but also from theft or unauthorized use. Until the Federal Reserve Board clarifies the application of Regulation E to stored value cards, including payroll cards, child support cards, and prepaid debit cards, it is essential to ensure that any disclosure about deposit insurance does not suggest the same level of overall fund security, including from theft or unauthorized use, that accompanies other kinds of debit cards.

8. Should the FDIC adopt any special rules governing the insurance coverage of any “deposits” underlying stored value cards?

As discussed above, the special importance of payroll funds in a household economy means that it would be very useful for the rule to explicitly recognize all funds backing payroll cards which funds are held in an insured depository institution as FDIC insured funds.

9. Are insured depository institutions offering stored value products or systems that are not addressed in this notice of proposed rulemaking? Please explain.

Yes. Health funds cards such as HRA and FSA cards are not addressed. These cards appear to be unintentionally omitted by the choice to tie the definition to use or usability at a merchant’s POS terminal. In addition, card technology allows choices in how products are configured both now and in the future. Any rule that is narrowly tailored to existing product features carries a strong risk that the rule can be evaded in the future by changes in those product features. For this reason, we have suggested broadening the rule in several respects.

10. In the case of a stored value card system in which the cards are issued by an insured depository institution, and the depository institution maintains a pooled “reserve account” reflecting its liabilities for all cards but does not maintain individual accounts or subaccounts reflecting its liabilities to individual cardholders, how does the institution keep track of its liabilities?

We do not know how this is done today, but we are concerned that the rule would apparently exempt the funds from treatment as insured deposits if subaccounting is performed by someone who is not an agent of the financial institution. We are also concerned that future technological choices could transfer the accounting function away from the financial institution or its agent. One example of this would be a chip based form of accounting. It is important that the rule not favor a chip card product over cards which provide for individual accounts or individual subaccounting by the financial institution, particularly because products with individual accounts or individual subaccounting may be more beneficial to the cardholder in other respects. For example, chip-based accounting would seem to expose the consumer to greater risk of loss of funds if the card is destroyed.

Additional information on the marketing of stored value cards, including payroll cards and prepaid debit cards, as account substitutes

Stored value card marketing emphasizes account-style features. At an October 2003 presentation on non-EBT government benefits payment cards such as cards to distribution state-collected private child support, one provider told the NACHA Electronic Benefits Services Council that custodial parents often use these cards as savings devices, carrying portions of their child support payments over from month to month, perhaps in anticipation of larger than usual periodic expenses such as holiday gifts or back-to-school spending. Payroll cards also are touted as a way not to spend the whole paycheck at once. This is an account-substitute feature. Indeed, web descriptions by payroll card issues frequently use terms such as “your account” and “your money” in addressing the cardholders. Here are a few examples: (emphasis added).

Paychex:

PayMaxx:

Money Network:

Advantage Financial Systems:

Conclusion

The FDIC proposed rule is a useful initial step. It should be adopted with the expanded definition and other changes suggested. However, this rule is just a first step. The next step is for the Federal Reserve Board to interpret Regulation E to apply the basic consumer protections of the federal Electronic Fund Transfer Act to the expanding market of non-traditional cards, particularly payroll cards, child support cards, prepaid debit cards, and cards used to distribute unemployment benefits or employee benefits. These cards promise an opportunity to bring persons not using traditional banking products into the electronic payments mainstream, but they cannot fulfill that promise if the cards have absent, ambiguous or inferior consumer rights and protections.

Very truly yours,

Gail Hillebrand
Consumers Union
San Francisco, California

Diane Bacon
Arizona Consumers Council
Phoenix, Arizona