Association
for Financial Professionals
July 15, 2004
Mr. Robert E. Feldman
Executive Secretary
[Attention: Comments/Legal ESS]
Federal Deposit Insurance Corporation
550 17th Street, N.W.
Washington, DC 20429
Re: 12 CFR Part 303
Definition of “Deposit”; Stored Value Cards
Dear Mr. Feldman:
The Association
for Financial Professionals (AFP) welcomes the opportunity to comment
on the rule
proposed by the Federal Deposit Insurance Corporation
(FDIC) to clarify the meaning of “deposit” as that term
relates to funds at insured depository institutions underlying stored
value cards.
AFP represents
about 14,000 finance and treasury professionals who, on behalf of
over 5,000 corporations
and other organizations, are significant
participants in the nation’s payments system. Organizations represented
by its members are drawn generally from the Fortune 1,000 and the largest
of the middle market companies. AFP members’ companies use stored
value cards for a variety of purposes, most commonly for payroll and
related functions such as bonuses, commissions and expense reimbursements.
Payroll cards are a valuable corporate tool for migrating from check
to electronic payments and achieving an all-electronic payroll. They
have proven to be effective in reaching the unbanked and those who
do not enroll in direct deposit of payroll. Many of AFP’s members
play a significant role in implementing payroll cards at their companies.
They thus have a sizeable stake in FDIC regulations governing payroll
cards.
AFP’s comment letter will address payroll cards, and will not
deal with other types of stored value cards. AFP agrees with the general
premise that the funds underlying payroll cards should be considered “deposits.” AFP’s
comments will cover four related issues:
• Status of dual-branded cards
• Definition of stored value cards
• Disclosures about the insurability of funds
• Regulatory burden
Status of Dual-Branded Cards
The FDIC’s rule makes a distinction between two categories of
stored value cards: cards issued by sponsoring companies and cards
issued by insured depository institutions. However, in the payroll
card area, dual-branded cards are not uncommon. Payroll cards may carry
the logos of both the employer company and the financial institution.
It is unclear in the proposed rule how such payroll cards would be
categorized. AFP recommends that the FDIC clarify the status of dual-branded
payroll cards in its final regulation.
Definition of Stored Value Cards
The proposed rule defines the term “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.” The FDIC asks if this definition should
be adopted in the new rule and if it can be improved.
The funds underlying
payroll cards are frequently accessible through automated teller
machines
(ATMs) operated by banks or third parties
as well as at merchants’ point of sale terminals. Sometimes the
funds are accessible only through ATMs. AFP recommends that the definition
of stored value cards not be limited to those usable at a merchant’s
point of sale terminal. The definition should be expanded to include
those usable at a merchant’s point of sale terminal and at an
ATM, as well as those usable at an ATM only.
The proposed definition
of stored value cards includes references to “merchant,” but it does not define that term. This leaves
unanswered the question of whether the term covers sellers of services
in addition to sellers of goods. Payroll cards may, in the future,
be used to pay for a wide array of services, for example, medical services.
The FDIC is advised to clarify and define the scope of the term, “merchant.”
Disclosures about Insurability
The FDIC states that it is concerned that some purchasers of stored
value cards may not understand whether the funds given to an insured
depository institution in exchange for such cards are covered by
federal deposit insurance. The FDIC’s current guidance states
that it “expects insured depository institutions to clearly
and conspicuously disclose to customers the insured or non-insured
status of the stored value cards they offer to the public.”
In the case of cards issued by sponsoring companies, the FDIC states
that the company should not suggest that the holder will be protected
by FDIC insurance. The proposed rule notes that in such cases the insured
party may be the sponsoring company unless the requirements for pass-through
insurance have been met. The FDIC requests comments as to whether any
particular disclosures should be mandated.
Payroll cards may be the first introduction to the financial system
for employees who are unbanked and who may distrust financial institutions.
When the regulatory requirements for pass-through insurance for cardholders
have been met, statements as to the availability of federal deposit
insurance may encourage acceptance. AFP believes it may be appropriate
to mandate disclosure of FDIC coverage when the issuer is a financial
institution, since such issuers, as FDIC members, have sufficient knowledge
and expertise to determine the exact nature of the coverage.
In the case of
cards issued by sponsoring companies, however, disclosure should
be permissive,
but not mandatory. For example, in an effort
to foster wider acceptance of payroll cards, an employer who is a “sponsoring
company” under the FDIC’s proposed rule may work closely
with a financial institution to achieve pass-through insurance coverage
for cardholders. In such cases, it would be appropriate to allow the
employer to make accurate disclosures about such coverage. On the other
hand, when a sponsoring company is uncertain about the coverage, it
would be appropriate to remain silent.
In the proposed
rule, the FDIC seems to imply that the sponsoring company should
make no statement
about FDIC coverage. However, companies
that understand the regulations governing “deposits” and
pass-through insurance should be able to make a statement regarding
FDIC coverage. As noted by the FDIC, existing criminal law discourages
sponsoring companies from making false representations about FDIC insurance
coverage.
Regulatory burden
AFP understands that there are other unsettled regulatory issues
involving payroll cards, including the application of Regulation
E governing electronic funds transfers, Regulation CC governing availability
of funds, verification of new customers under the Patriot Act, and
money-laundering controls. The FDIC’s rule on when stored value
cards are considered “deposits” will also impact the
level of financial institution reserves that are required to be held
at the Federal Reserve.
Increasing numbers of consumers are receiving stored value cards for
a growing number of applications. AFP understands that the federal
government will be called upon to update consumer protection and anti-money
laundering regulations to reflect the changed environment. The costs
of complying with these regulations will undoubtedly be passed on by
financial institutions to the companies issuing payroll cards and other
types of stored value cards. AFP recommends that the level of regulation
not be made so burdensome as to discourage companies from offering
the cards to their employees.
Summary of AFP Recommendations
AFP members’ companies view payroll cards as an efficient electronic
funds distribution mechanism for payroll and related functions. AFP
recommends that the FDIC’s proposed rule clarifying the meaning
of “deposit” as it applies to the funds at depository financial
institutions underlying payroll cards would be strengthened by:
• Clarifying the status of dual-branded payroll cards.
•
Expanding the scope of the definition of stored value cards to encompass
cards usable at ATMs as well as those usable at a merchant’s
point of sale terminal, and clarifying the meaning of “merchant.”
• Mandatory disclosure of FDIC coverage or non-coverage for payroll cards
issued by financial institutions and permissive disclosure for those
issued by sponsoring companies.
• Avoiding undue regulatory burdens on financial institutions and sponsoring
companies that would inhibit the growth of payroll cards.
AFP thanks the FDIC for the opportunity to comment on its proposed
rules for stored value cards. If you have any questions about this
comment letter, please call Arlene Chapman of AFP at 301-961-8825.
Sincerely,
Alvin C. Rodack, CTP
Associate Treasurer
The Ohio State University
Chairman
AFP Government Relations Committee
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