By e-mail:
comments@fdic.gov
July 15, 2004
Mr. Robert E. Feldman, Executive Secretary
(Attention: Comments/Legal ESS)
Federal Deposit Insurance Corporation
550 17th Street, N.W.
Washington, D.C. 20429
Re: FDIC Proposed Rulemaking on Stored Value Cards
To Whom It May Concern:
The American Financial Services Association (AFSA) appreciates
the opportunity to provide these comments on the Notice of Proposed Rulemaking
issued by the FDIC regarding the definition of "deposit" as it pertains to
stored value cards (the "Proposed Rule"). See 69 Fed. Reg. 20558
(Apr. 16, 2004). Some of our member companies are large issuers of payment
cards and
have developed, or contemplate developing, a number of stored value card
programs.
We welcome the FDIC's decision to provide new guidance
on whether funds underlying stored value cards are considered "deposits" under Section 3(1)
of the Federal Deposit Insurance Act (the "FDIA"), 12 U.S.C. § 1813(1). The
guidance already issued in FDIC General Counsel's Opinion No. 8 ("GC 8")
is helpful, but it no longer covers the scope of stored value cards being
issued today. While additional guidance is useful, we believe that the
FDIC
should expand its regulations with caution in this area. These products
are still in the early stages of development and a better understanding
of
stored value cards will assist in adopting workable rules and avoid
unnecessarily hindering development of useful bank products.
I. Any regulation should not hinder the development of stored value
card programs.
Stored value cards are a developing and growing product segment. As the
FDIC has recognized, the types of programs offered have expanded and changed
greatly since GC 8 was issued eight years ago. Additional development in the
product area likewise should be expected. Stored value cards are now being
used as a means to pay wages (i.e., payroll cards), and as a way to make
other payments that historically have been made by paper instruments or in
cash. For example, stored value cards may be issued in lieu of paper checks
to pay rebates upon the purchase of consumer products or provide rewards in
customer incentive programs. Other stored value cards may be purchased by
consumers as a safer way to keep funds than paper currency. Unlike cash,
lost cards can often be deactivated and reissued. Stored value cards are
given as gifts, or used to provide allowances. Cards can often be used
through widely accessible networks, like the MasterCard or Visa systems.
Stored value products also include gift cards, single-purpose prepaid cards,
electronic benefit transfer cards, telephone cards, and
promotional/incentive cards. Moreover, the funding and settlement processes
associated with stored value products also vary. Some stored value products
are funded by consumer credit or debit cards and ACH transfers, while other
products are funded by companies through a batch process.
Stored value cards have also become an important product
for the "unbanked,"
i.e., people who do not have traditional bank accounts. Stored value
cards offer the unbanked a safer way to carry funds than cash, and they may
also provide a gateway to other financial services. Payroll cards, in
particular, allow the unbanked to receive wages through a safe and reliable
means, without the inconvenience and expense of visiting a check casher.
Banks are able to reach larger customer bases through issuance of stored
value cards, in comparison to providing in-person banking services, because
stored value cards can be issued or sold through a variety of locations as a
result of developments in terminal and kiosk technologies.
With such a variety of types of cards, it is not apparent
that they should all be subject to the same regulatory treatment. Indeed,
deposit
insurance does not appear to be appropriate for certain types of stored
value cards. Some cards, for example, are not registered to a particular
cardholder when issued. These cards may be transferred (e.g., as gifts),
and/or are often used over a short period of time and in a limited number
of
transactions. Classifying such cards as deposits under the FDIA does not
appear to add any real benefit. Users of these cards would not expect
deposit insurance. And the added regulatory expense of treating those funds
as "insured deposits" may hinder the development of these programs.
Under such circumstances, the FDIC should not impose undue regulatory burdens
that
provide no customer benefit.
We believe the Proposed Rule does not fully consider the policy
implications raised by the application of the deposit-insurance regulatory
framework and requirements to these various products. The purpose of deposit
insurance is to protect the banking system by reducing the incentives for
retail product bank runs and to protect depositors' savings and liquid
funds. Implicit in both of these policies is that the depositor relies on
the security of the banking system, including the Federal Deposit Insurance
system, to protect his or her funds. While some stored value products may
have these characteristics, other stored value products more closely
resemble payment vehicles such as cash. However, instead of focusing on the
policy reasons for subjecting certain products to deposit insurance, the
Proposed Rule focuses 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.
As stated above, we believe this emphasis is incorrect,
because the structure and design of stored value products vary widely.
For instance,
most gift cards fundamentally differ from bank deposits, even though the
proceeds of both products are held by banks. Gift cards serve as a more
flexible substitute for store gift certificates by providing broader
transaction capabilities. At the same time, these transaction capabilities
generally are more limited than deposit accounts in terms of the parties
to
whom payment can be made payments generally cannot be made to individuals
and cash withdrawals may not be available. Further, the recipients of gift
cards do not choose the financial institution issuing the card, nor is
the
gift card produced on the assumption that it is backed by the deposit
insurance system. Similarly, gift cards are not viewed by either the
producers or recipients as an investment or savings vehicle.
While it may be appropriate to characterize certain stored value cards as
insured deposits for deposit insurance assessment purposes, we believe that
the FDIC should tailor any regulation in this regard to the characteristics
of specific products. We request the FDIC to conduct a comprehensive study
designed to identify these different characteristics and to treat each
product appropriately for the purposes of deposit-insurance regulations. We
further urge the FDIC to consider and provide guidance only for the types of
stored value card programs now in the marketplace, as identified by such a
study. The FDIC should continue the approach taken in GC 8 and subsequent
advisory letters, offering specific guidance to new programs as they are
brought into the market. Thus, for example, AFSA suggests that the FDIC not
attempt to adopt a rule that covers all bank-issued stored value cards (as
it appears it may be doing in proposed section 303.16(b)), but rather adopt
a rule for only those types of cards that currently are actually in use,
such as payroll cards. Just as the FDIC proposes to supplement the products
covered in GC 8 at this time, the proposed regulation could expressly state
that the FDIC is not intending to address the issue of all stored value
cards at this time, but will supplement the regulation at a later time when
sufficient information is available to make an informed decision about the
issues.
II. The FDIC should clearly limit its interpretation to the FDIA.
Clarification of the scope of coverage under the FDIA for stored value
cards is a key regulatory issue, and AFSA welcomes the FDIC's proposal and
the opportunity to comment upon it. There are, however, a number of
additional important regulatory issues facing the stored value card
industry, especially the applicability of the Electronic Funds Transfer Act
and Regulation E, Section 326 of the USA PATRIOT Act and the CIP rules, and
other anti-money laundering rules. AFSA urges the FDIC to clearly and
expressly indicate that any regulation issued by it does not affect these
other regulatory areas.
The applicability of these other statutes and regulations
may significantly shape the ability of financial institutions to offer
stored
value cards. For example, one of the requirements under Regulation E is
to
provide monthly statements to customers. Holders of many types of stored
value cards, however, likely do not expect to receive statements. Nor would
such statements provide any obvious benefit, particularly if the card is
a
low-value card that is used quicklyor if the card is transferred to someone
other than the purchaser. If Regulation E is extended to apply generally
to
all stored value cards, the significant expense of providing statements
will ultimately be borne by cardholders. And, the higher costs may make
cards
unattractive to consumers, and uneconomical for banks to offer.
In addition, application of anti-money laundering and customer
identification rules could foreclose the ability to offer small-value "bearer" cards
that may be sold anonymously or may be freely transferable once sold. The
economics of offering such small-value cards may be defeated
if the issuer is required to collect and store identifying information.
It is far from clear, however, that such cards pose any appreciable risk
of
money laundering.
Moreover, bearer cards typically are less expensive to offer because
issuers are not required to track the small denominations to individual
cardholders and, if the anti-money laundering regulations effectively
require stored value cards to be personally identifiable, banks effectively
will be precluded from issuing these new products that offer consumers
attractive alternatives to carrying cash.
In short, there are significant policy issues in considering
whether other regulatory requirements should apply to stored value cards.
These
other statutes and regulations do not necessarily use the same definition
of "deposit" as appears in the FDIA. And, the purposes and policies
underlying these other statutes and regulations are very different in many
cases to
those underlying the FDIA. Thus, we urge the FDIC to limit its rule to
the issue presented under the FDIA, and expressly state that its regulation
is
not intended to provide any guidance regarding whether other statutes and
regulations, such as Regulation E or the CIP rules, apply to stored value
cards. Those other regulatory issues are properly addressed by the
appropriate agency or agencies with due notice and a separate opportunity
to comment on those issues.
III. Application to stored value cards that do not access the funds of
the cardholder.
As noted above, banks are beginning to issue stored value cards as a
substitute for a more traditional payment instrument. Thus, instead of
giving a paper check to make a payment, a payor can give a stored value card
loaded with the amount of the payment. A payroll card, for example, can
function in this manner. In the case of payroll cards, state wage payment
laws often require that the employer actually transfer the funds to an
account of the employee on payday. Other payments, however, can be made by
issuing a stored value card to a payee that allows the payee to access funds
that remain owned by the payor until the card is actually used, just as a
paper check might access funds in a checking account maintained by a payor.
For example, a company could use such a card to make a per diem travel
allowance or relocation expenses available to employees.
Another example is the use of a card to pay a rebate. A manufacturer
offering a $5 rebate on the purchase of a product traditionally pays the
rebate by a paper check. The manufacturer could issue a stored value card,
entitling the recipient to $5. The manufacturer could enter into an
agreement with a bank to hold the funds and issue the cards, and the
manufacturer would then distribute the cards to the rebate recipients.
However, the $5 could actually be retained by the manufacturer in its own
account and the card could access the manufacturer's account rather than an
account established for the payee.
We request that the FDIC clarify the application of the proposed rule to
programs such as these and confirm that the arrangements involve deposits of
the payor rather than the payee if unused funds ultimately belong to the
payor rather than the cardholder.1
More specifically, proposed section 303.16(b) applies to
bank-issued cards if funds are received "from cardholders, or funds received from others
on behalf of cardholders or for payment to cardholders...." These
programs do not involve funds received from cardholders.
Arguably, the funds provided by the payor to a bank issuer
might be covered by proposed section 303.16(b) to the extent that the
funds are
received "for payment to cardholders."2 However,
AFSA suggests three clarifications from the FDIC on the application of
the proposed rule
to programs in which the stored value cards do not access funds of the
cardholder. First, the definition of a "stored value card" refers to the
cardholder's right to transfer funds "to a merchant." In contrast, the
introductory language in proposed section 303.16(b) with respect to funds
received "from others" refers to funds "for payment to cardholders." AFSA
suggests that the FDIC consider conforming the introductory language in
proposed section 303.16(b) to the definition of stored value cards and to
refer to payments "made at the direction of the cardholder" (i.e. to the
merchant), rather than "to the cardholder."
Second, at least with respect to funds that are not received
from the cardholder, the introductory language to proposed section 303.16(b)
seems
to
focus solely on the definition of deposit in section 3(1)(3) (i.e. funds
held on behalf of or for payment to cardholders) and does not take into
account the more general definition of deposit in section 3(1)(1). For
example, the language of the Proposed Rule would not appear to cover a
payor's general demand deposit account where funds are not held exclusively
for payment when stored value cards are used, and thus not necessarily
for "for payment to cardholders." AFSA suggests that the FDIC
clarify in the supplementary information that the value underlying a stored
value card is a
deposit if the card accesses a deposit (as defined in section 3(1)(1))
of a person other than the cardholder (although the funds would be a deposit
of
such other person, rather than the cardholder).
Third, as a related item, AFSA suggests that language be added to the
proposed rule or the supplementary information recognizing that bank issued
stored value cards may give rise to deposit relationships with either a
cardholder, or a third party that provides the funds underlying the stored
value cards that are issued to others. For example, consistent with the
FDIC's discussion of the party that may be entitled to FDIC insurance
coverage in connection with non-bank issued cards, the FDIC should indicate
that the deposit relationship is established with the person that is
entitled to funds that are not used. In general, we would expect that the
person who provides the funds is entitled to unused funds, and thus would be
considered the depositor. However, if ownership of the funds clearly passed
to the cardholder (as in the case of a payroll card, as required by state
law), then the cardholder would be the depositor.
IV. Bearer cards should not be treated as deposits under the FDIA.
AFSA also requests that the FDIC clarify the Proposed Rule
to conclude that cards that are issued anonymously and freely transferable
to others
after issuance, i.e., "bearer cards," are not deposits.
Excluding bearer cards from the definition of deposit is
supported by the analysis in GC 8. In GC 8, the FDIC reasoned that the
funds held in
a Bank
Primary Reserve System were not deposits under the FDIA. In such a system,
funds are not held as part of an account relationship with a cardholder but,
rather, as a general liability account to satisfy the issuer's payment
obligation when the cards are actually used. The relationship between such a
card issuer and the "bearer" of a card may not involve any express agreement
and it is difficult to imagine an "account" relationship for
purposes of the FDIA where the initial relationship by its very nature
does not involve an
individual that the bank can identify.
Bearer cards fit within the "Reserve System" framework. When an issuer
sells a bearer card, it is not opening an "account" with the purchaser.
Indeed, the issuer will not know the identity of the purchaser or, since the
card can be freely transferred, the ultimate user. Instead, the issuer is
committing itself to provide funds to a person who honors the stored value
card. The FDIC has recognized that this potential liability is broad in its
nature given the variety of merchants that might be asked to honor the card.
This presumably is an example of the type of "general liability" that the
FDIC concluded was not a deposit in GC 8. If not, it is hard to envision a
relationship with a cardholder that would constitute a "general liability" insofar
as it is necessary for virtually all stored value card programs in existence
to at least track the value of the card to a number for
administrative purposes, such as fraud prevention.
The Proposed Rule does not clearly address bearer cards.
Proposed Section 303.16(b)(2), however, states that funds underlying
a stored value card
issued by a financial institution will be deposits unless the issuer "maintains no supplemental records or subaccounts reflecting the amount owed
to each cardholder." As drafted, the language does not state clearly whether
deposit coverage depends on maintaining records of the value of each card,
or maintaining records of the value owed to an identifiable cardholder.
Almost every stored value card must track value as to a card for purposes of
authorizing transactions; declaring such systems to result in insured
deposits would require development of costly new technologies if a bank is
to be able to issue any stored value cards that were not insured deposits.
Presumably, the FDIC is not proposing to adopt a rule that effectively means
all bank issued cards currently in use necessarily involve insured deposits
or it essentially would be overruling the concepts set forth in GC 8 and
setting a test in the "exception" in proposed section 303.16(b)(2)
that may never apply.
This interpretation also is in line with likely reasonable
consumer expectations. By their nature, bearer cards tend to be issued
in smaller
dollar denominations and most likely are not re-loadable. Consumers
typically will view them as effectively disposable, much like they would
a subway card, and usually will expect that they have the risk that such
cards
are lost or stolen. In short, consumers are unlikely to expect that they
will have an "account" relationship in which they are entitled
to deposit insurance. Moreover, the FDIC's proposal that banks disclose
whether funds
underlying stored value cards are insured also will protect against consumer
misunderstandings. AFSA respectfully submits that the FDIC's proposed
regulation should not interpret the bank's general liabilities on such
cards as creating deposit liabilities. If it does, the proposed regulation
may
unnecessarily stifle the development of these useful payment devices.
For the foregoing reasons, AFSA urges the FDIC to clarify that only
records or subaccounts linked to an identifiable cardholder will satisfy the
requirement of proposed section 303.16(b)(2) and result in deposit
treatment.
V. The rule should include a definition of the term "issuer. "
Under the Proposed Rule, it is very important to understand
who is the "issuer" of a stored value card. Determining whether an insured depository
institution or a non-bank sponsor is the "issuer" of a given card is vital
to understanding which prong of the Proposed Rule applies (i.e. 303.16(b) or
(c)). Nevertheless, as currently proposed, the rule does not define the
term. We urge the FDIC to include a definition of "issuer" in
the final rule.
The "issuer" of a stored value card should be
defined as the entity with the obligation to transfer the funds when
the card is used.
A distributor of
cards should not be considered the issuer. This definition is proper because
there should only be one issuer of a card, whereas multiple parties may
be
involved in distributing a card. In addition, this definition would properly
link the applicability of deposit insurance to whether an insured depository
institution has the obligation to provide funds when the card is used.
For example, in the case of payroll cards, if a depository
institution has a cardholder agreement with the employee/cardholder and
agrees to
provide funds when the card is used, then the depository institution should
be considered the issuer of the card. The fact that an employer may "sponsor" the
program, and even distribute the plastic cards, should not result in the
employer's being considered the issuer. Likewise, a company
may provide funds to a bank to be used to pay for travel expenses charged
with the bank's stored value cards. The bank should be the issuer of these
stored value cards if it is obligated to make payments when the cards are
used, even if the company retains ownership of the underlying funds until
the cards are used or if the company provides the cards to employees to
satisfy its contractual obligations to its employees.
AFSA also requests that the FDIC clarify that a bank that
is the "issuer"
of stored value cards (under the above definition) does not hold a "deposit"
if it has not received an "unpaid balance of money or its equivalent," or,
as interpreted by the Supreme Court, "hard earnings" that are entrusted to
it. See FDIC v. Philadelphia Gear Corp., 476 U.S. 426, 435 (1986). For
example, one financial institution (Bank A) might create a stored value card
program in which Bank A issues stored value cards to cardholders for a payor,
and the payor's money is kept at an account at a separate financial
institution (Bank B) until the cards are used. When the card is used, Bank A
authorizes the transaction, and then initiates a transfer of the underlying
funds from Bank B to the person who honored the card. Since Bank A has not
received any money or "hard earnings," there is no "deposit" at
Bank A. However, the account at Bank B, in which money has been deposited,
should
qualify as a deposit under Section 3(1).
VI. The treatment of "subaccounts" in a hybrid
system should be reconsidered
Finally, we encourage the FDIC to reconsider whether the
funds in a "hybrid system" (Example B in the Proposed Rule) meet the definition of a
"deposit" under Section 3(1) of the FDIA. The Proposed Rule indicates that
the individual subaccounts would be considered deposits under paragraph
3(1)(3), because each subaccount is held for the " `special or specific
purpose' of satisfying the institution's obligations to a specific
customer." 69 Fed. Reg. at 20562. Such a broad interpretation of paragraph
3(1)(3) is not consistent with the FDIC's prior interpretations of paragraph
3(1)(3).
The fact that a subaccount is held for a particular cardholder is not a
sufficient "special or specific purpose" when the cardholder can use the
card for any number of very different transactions (e.g., at a merchant or
an ATM). For example, in GC8, the FDIC reasoned that if a consumer "may
engage in any of a number of unrelated transactions," then the purpose for
which the funds are held "does not appear to be as specific a purpose as the
examples in the statute and in the cases finding deposit liabilities under
section 3(1)(3) of the FDIA." See 61 Fed. Reg. 40490 (Aug. 2, 1996).
Likewise, in the FDIC Advisory Opinion referenced in the Proposed Rule, the
FDIC concluded that funds "held at the institution to pay merchants and
other payees as they make claims for payments" were not deposits under
paragraph 3(1)(3) "because such funds are not held for a special or specific
purpose." See FDIC Advisory Opinion No. 97-4 (May 12, 1997). The
interpretation of "special or specific purpose" in the Proposed Rule would
essentially swallow paragraph 3(1)(1) because, for example, an institution
holds a savings account or checking account for the "specific" purpose
of satisfying its obligations to the depositor.
In short, the language of the statute itself, the case
law, and the FDIC's prior opinions suggest that simply holding a sum
of money on behalf
of a specific individual is not enough to meet the definition under
paragraph 3(1)(3). A further "special or specific purpose" as to how the
funds may be used is required, and is not present in the case of a hybrid
system such as the Proposed Rule's Example B. Moreover, it appears that
neither the reserve account nor the individual subaccounts mentioned in a
hybrid system qualify under the definition in paragraph 3(1)(1). Neither of
those accounts fits the commonly understood meaning of a "commercial,
checking, savings, time, or thrift account...." Therefore, it does
not appear that funds underlying the stored value cards in a hybrid system
such
as Example B should be considered deposits under section 3(1).
Conclusion
We appreciate the opportunity to comment on the Proposal and again thank
the FDIC for their efforts. Should you have any questions about this letter,
please do not hesitate to contact the undersigned at (202) 466-8606.
Respectfully submitted,
Robert McKew
Senior Vice President and General Counsel
American Financial Services Association