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FDIC Federal Register Citations


BANK OF AMERICA, N.A.
 

July 12, 2004

Robert E. Feldman
Executive Secretary (Attn: Comments/Legal ESS)
Federal Deposit Insurance Corporation
550 17th Street, Northwest
Washington, D.C. 20429

Definition of “Deposit”; Stored Value Cards

Dear Mr. Feldman:

Bank of America Corporation (“Bank of America”) appreciates the opportunity to comment on the proposed rule (the “Proposed Rule”) to clarify the definition of “deposit” as it relates to funds at insured depository institutions that underlie stored value cards. Bank of America is one of the world’s leading financial services companies, and is the sole shareholder of Bank of America, N.A., and Fleet National Bank. The two banks serve 33 million consumer relationships with 5,700 retail banking offices, more than 16,000 ATMs and online banking with more than ten million active users.

The Federal Deposit Insurance Corporation (the “FDIC”) published the Proposed Rule for comment on April 16, 2004. The Proposed Rule would add a new section to part 303 of title 12 of the Code of Federal Regulations and would supersede General Counsel’s Opinion No. 8.

A. General Comments. We agree with the comment in the summary to the Proposed Rule that since publication of General Counsel’s Opinion No. 8 the banking industry has develop new types of stored value card systems, and as a result there is a need to provide new guidance as to when the underlying funds will be a “deposit” for purposes of section 3(l) of the Federal Deposit Insurance Act (the ”FDIA”). However, we believe that prior to the adoption of any new rules, it is essential that the FDIC consider two fundamental concerns: the significant differences among the wide and growing variety of stored value products; and the likely impact the Proposed Rule, if adopted, would have on the application of other regulations on stored value cards.

1. The variety of stored value cards has grown tremendously in recent years. Stored value cards now include such disparate products as payroll cards, gift cards, electronic benefit transfer cards, promotional and incentive cards, and flexible health care spending cards. The list is certain to grow as issuers and both commercial and consumer users seek to achieve the convenience and cost reductions offered by stored value cards. However, the Proposed Rule ignores this diversity of uses and asks only if funds are received by the depository institution in exchange for the stored value cards and if the institution uses an accounting methodology to track the value with respect to each cardholder. This approach ignores the policy implications of offering deposit insurance for different products. The purpose of deposit insurance has been to protect the banking system from runs on deposits while protecting depositors’ funds. While this may argue for extending protection, and imposing the resultant costs, for some stored value products, such as pay roll cards, it does not seem to apply for other products, such as gift cards and other single-purpose or limited use cards.

We believe that looking at just one type of stored value card will illustrate some of the difficulties that will be created by the approach contained in the Proposed Rule. Bank of America currently sells gift cards online. In this situation, we obtain the name and the address of the purchaser. Since we track the balance on the individual cards, under the Proposed Rule it would appear that the balance for each gift card is a “deposit” for purposes of the FDIA. However, the bank also sells gift cards through a number of affinity partners. These small value cards are sold in a variety of locations, such as shopping malls, often for cash. For these transactions, neither the bank nor the selling agent ever obtains the name and address of the purchaser, and so the card would not be a “deposit” under the Proposed Rule. This difference in treatment, completely unrelated to the characteristics of the product or the perception of the consumer, will result in consumer confusion and additional costs to the bank as it must create different disclosures showing that one card is FDIC insured and the other is not, as well as administer separately.

2. Although on its face the Proposed Rule appears to address the rather limited issue of when funds underlying a stored value accounts are “deposits” under the FDIA, as noted in footnote 4 of the Supplemental Information, there are a number of other significant issues that could be effected by any adoption of the Proposed Rule. We believe the Proposed Rule should not be adopted until the following issues are addressed through coordinated rule-making by the relevant agencies. A failure to do so will cause significant regulatory uncertainty, and so risk, to any issuer of stored value cards. This may in turn cause many regulated institutions to avoid new product development, causing loss of opportunities as well as less protection to consumers as the void is filled by less regulated companies.

Regulation D Requirements—Reserve Requirements of Depository Institutions

Regulation D establishes requirements for depository institutions to hold reserves against transaction accounts that are held by banks on behalf of their customers. To the extent that stored value cards give rise to insured deposits, they are also likely to be viewed as transaction accounts. For Bank of America and most other bank issuers, the marginal reserve requirement would be 10%. This reserve requirement would affect the cost of all covered stored value cards and would need to be reflected in the fees charged to the users.

Regulation E Requirements—Electronic Fund Transfer Disclosures and Other Requirements

Regulation E sets forth the requirements for electronic fund transfers to or from a consumer asset account, such as a deposit account, at a financial institution. The applicability of many Regulation E provisions, including periodic statements, limited liability for unauthorized transactions and error resolution procedures, to stored value products is not clear. Section 205.2(b) (1) of Regulation E defines “account” as a “demand deposit (checking), savings, or other consumer asset account. . .held directly or indirectly by a financial institution and established primarily for personal family, or household purposes.” The Federal Reserve Board (“FRB”) has refrained from adopting final amendments to Regulation E to specifically cover stored value products out of concern that too much regulation could inhibit the development of these emerging products. If the Proposed Rule is adopted, however, it is likely that the FDIC’s characterization of certain stored value products as “deposits” would lead to an interpretation that such deposits are consumer asset accounts under Regulation E. Given the practical and economic obstacles of providing monthly statements for some stored value products, such as gift cards, this could lead to the immediate end of popular products within regulated financial institutions.

USA PATRIOT Act Customer Identification Rules—Customer Identification Programs

Financial institutions are required to gather specified information about customers and to verify the identity of customers. In addition, financial institutions must establish risk-based procedures for verifying the identity of each customer to the extent reasonable and practicable. Also, a Customer Identification Program (“CIP”) must have procedures in place for opening an account that specify the identifying information that will be obtained from each customer. Further, at a minimum a financial institution must obtain the customer’s name, date of birth, address, and identification number. It is simply not feasible for financial institutions to make CIP requirements for the recipients of gift cards because they have no interaction with the recipients other than perhaps the sending of the card. The FDIC should not proceed with the Proposed Rule until it has determined, as part of its comprehensive study, the resulting USA Patriot Act implications, if any, of the Proposed Rule.

In light of the above concerns, we believe the FDIC should not adopt any rule until it confers with the appropriate financial regulatory agencies. This should lead to coordinated rule-making designed to provide certainty to a growing product type rather than the piece-meal approach implicit in the current proposal.

B. Responses to Specific Questions. The FDIC asked for comments on the following questions:

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?

Although Bank of America believes that a new rule is needed, as noted above we believe the current approach is seriously flawed. New regulations should more carefully consider the functional features of various stored value cards that support treatment as a “deposit” under the FDIA, and should be adopted only after the FDIC has conferred with other financial regulatory agencies to assure more comprehensive regulation of stored value cards.

2. If so, should the FDIC adopt the Proposed Rule? Why?

Bank of America opposes the adoption of the Proposed Rule. Without addressing the issues raised above, adoption of the Proposed Rule will create unfair regulatory risk for financial institutions and burden development of new uses for stored value cards.

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”?

For the reasons discussed above, the FDIC should issue a final rule only after thoroughly considering the range of stored valued products and structuring the rule to recognize as “deposits” only those funds where consistent with the underlying purposes of FDIC insurance. In addition, the FDIC should work with the other financial regulatory agencies to assure more comprehensive regulation of stored value cards.

4. What should be the treatment of funds underlying “payroll cards”?

Payroll cards most closely resemble other traditional deposit accounts. It assumes an ongoing banking relationship with debits and credits over an extended period of time. We believe there are sound policy reasons to extend the protection of FDIC insurance to the holders of these cards, who are often poorer and less familiar with the banking system. However, even here the FDIC would need to be careful in attempting to define a “payroll” card. We suggest that it should include only cards marketed with the assistance of the employer with the explicit intent that the card be used primarily as a method of delivering payroll. The term should not include all cases in which payroll may be deposited onto the card, even if this was not the primary purpose of the card. For example, any card that permits funding through ACH deposits could be easily used for direct payroll deposit without the encouragement of the issuer.

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?

Clearly there will be some impact, but until the Proposed Rule is better refined we believe that it is premature to speculate. We also do not believe this should be a material concern in adoption of the final rule.

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”?

The term “prepaid card” is used generically to describe various types of cards in the marketplace with a value limited to the amounts placed on the card. “Debit card” (or “check card”) describes a device used to access a deposit account, but with no value directly associated with the card. Typically a debit card will be one of several methods for accessing the deposit account, while for a stored value card it will be the only method of accessing the underlying value. “Payroll card” is used to describe a card marketed explicitly for payroll purposes. It is frequently marketed through the employer who will assist in establishing the card. Because the card acts as the primary method of accessing the funds, payroll cards are frequently referred to as a type of stored value card. However, in some cases even today these are treated as an FDIC account under General Counsel Opinion No. 8.

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?

As the Proposed Rule is currently drafted, any requirement to disclose FDIC insurance is likely to create confusion, as illustrated above in the discussion about gift cards. However, if the term “deposit” is extended only to stored value cards in a manner consistent with the policy considerations of the FDIA, perhaps to payroll cards, we believe a required disclosure as suggested in the preamble would be appropriate to provide information to consumers.

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

If adopted in its current form, the Proposed Rule would require additional guidance on insurance coverage. For example, in the case of a gift card, it is the intention of the purchaser to transfer the card to another individual, who will generally not be known to the bank. The impossibility of determining who should receive the benefit of the FDIC insurance provides another argument why not all stored value cards should be treated as insured deposits.

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

As suggested by the above comments and answers, stored value cards are marketed in a variety of manners and for a variety of purposes. Cards are sold both by the issuers and through third parties, to the intended user or to a third-party with the expectation of delivery by the third-party to the actual cardholder, and for business and personal purposes. A limited list of examples includes:

a. Payroll cards.
b. Gift cards sold directly by the financial institution on the internet or in person, or sold through affinity partners such as shopping malls.
c. Card purchased by businesses for use by employees for business purposes or intended for personal use as an incentive award.
d. Teen cards that allow parents to monitor spending of their children.
e. Money transfer cards that permit individuals to quickly and safely send money to friends or relatives in other countries.
f. Cards that act as an access device for flexible health care spending accounts.
g. Cards used for disbursement of government payments or benefits, such as tax refunds, student loans, disability or welfare benefits.

Each of the above uses poses different issues regarding the expectations of the different parties and the policy behind providing FDIC insurance, again arguing against the overly inclusive approach suggested by the Proposed Rule.

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? What technology is used? How does the institution know when and whether to make payments to merchants?

Bank of America does not currently issue this type of card.

Summary. Although Bank of America supports the decision to reopen the status of stored value cards in connection with the FDIA, we urge the FDIC to engage in a more comprehensive review of the types of stored value cards available and consider a more narrowly drawn approach. Although it may be appropriate to include some stored value products within the definition of “deposit”, such as for pay roll or other products that intend an ongoing banking relationship with multiple deposits, other products should be excluded. In addition, to avoid creating significant regulatory uncertainty it is equally important that the FDIC engage the other financial regulatory agencies in this effort to assure a comprehensive regulatory approach to stored valued cards.

If you have any questions about the issues raised in this letter, please contact the undersigned.

Sincerely,

Daniel G. Weiss
Associate General Counsel
Bank of America, NA
555 California Street, 8th Fl
San Francisco, CA  94101

DGW/rts(687828)

 

Last Updated 07/15/2004 regs@fdic.gov