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4000 - Advisory Opinions


Insurance Coverage of Funds Underlying Stored Value Cards

FDIC--04--02 May 15, 2003 Christopher L. Hencke, Counsel

You have requested clarification of General Counsel's Opinion No. 8 ("GC8"). That opinion involves "stored value cards" and the extent to which funds underlying such cards may constitute "deposits" under the statutory definition at 12 U.S.C. § 1813(l). See 61 Fed. Reg. 40490 (August 2, 1996). You have asked whether stored value cards issued by ****** Bank of ********** pursuant to a system developed by a company called ****** are insured "deposits." In order to analyze this issue, it is first necessary to review the framework set out in GC8.

At the outset, it is important to note that while GC8 identified several types of stored value card systems, no attempt was made to identify all types of systems. In addition, no attempt was made to analyze systems offered by particular insured depository institutions. Rather, the FDIC merely created a mechanism or general framework for determining "the circumstances under which the funds underlying stored value cards may or may not be considered deposits. . . " 61 Fed. Reg. at 40490 n.3. This framework was based upon information available to the FDIC in 1996.

In analyzing the issue of whether funds underlying stored value cards are insured "deposits," an important distinction exists between the following types of stored value card systems: (1) a system in which the stored value cards are issued by an insured depository institution; and (2) a system in which the stored value cards are issued by a sponsoring company against the sponsoring company's account at an insured depository institution. In the former type of system, under GC8, the funds received by the depository institution from the cardholders are not viewed as "deposits" if the depository institution transfers the funds into a pooled "reserve account." In the latter type of system, however, the funds are not received from the cardholders. Rather, the funds are received from a sponsoring company. In this type of system, which was not addressed in GC8, the funds are "deposits" belonging to the sponsoring company.

Also, a distinction exists between liabilities in a "reserve account" and liabilities in a "custodial account." Even if the stored value cards have been issued by the insured depository institution (and not issued by a sponsoring company), the institution's liabilities will be "deposits" if these liabilities are recorded in a "custodial account" (and not in a "reserve account"). Thus, in the case of systems in which the cards are issued by the depository institution, the institution itself--through the structuring of its accounts--can determine whether the cardholders' funds are insurable "deposits."

Below, these distinctions are explained in detail.

"Bank Primary-Reserve Systems"

In GC8, the FDIC described several variations or types of stored value card systems sponsored by insured depository institutions. One of these types was denominated the "Bank Primary-Reserve System." The FDIC described this system as follows: "[A]s value is downloaded onto a card, funds are withdrawn from a customer's account (or paid directly by the customer) and paid into a reserve or general liability account held at the institution to pay merchants and other payees as they make claims for payments. . . ." 61 Fed. Reg. at 40490.

As described in GC8, a "Bank Primary-Reserve System" includes the following characteristics: (1) the depository institution receives funds from cardholders; (2) the depository institution does not maintain an account for each cardholder but instead maintains a pooled "reserve account" for multiple cardholders; and (3) in making payments to merchants or other payees, the depository institution draws "value" or "funds" from this pooled "reserve account."

The FDIC found that the liabilities represented by a "reserve account" in a "Bank Primary-Reserve System" do not qualify as "deposits" as defined in section 3(1) of the Federal Deposit Insurance Act ("FDI Act"). See 12 U.S.C. § 1813(l). In taking this position, the FDIC specifically addressed the applicability of paragraph 3(1) (1) (defining "deposit" as "the unpaid balance of money or its equivalent received or held by a bank or savings association in the usual course of business and for which it has given or is obligated to give credit, either conditionally or unconditionally, to a commercial, checking, savings, time, or thrift account . . .") and paragraph 3(1) (3) (defining "deposit" as "money received or held by a bank or savings association, or the credit given for money or its equivalent received or held by a bank or savings association, in the usual course of business for a special or specific purpose. . ." See 12 U.S.C. § 1813(l) (1); 12 U.S.C. § 1813(l) (3). First, in finding that the liabilities do not satisfy paragraph 3(1) (1), the FDIC stated that the "stored value card products appear to be structured so that the institution does not credit and is not obligated to credit a commercial, checking, savings, time or thrift account." 61 Fed. Reg. at 40492. Second, in finding that the liabilities do not satisfy paragraph 3(1) (3), the FDIC stated that the "funds appear to be held by an institution to meet its obligations to payees as they make claims on such funds pursuant to general or miscellaneous and unrelated transactions [as opposed to a special or specific purpose'] undertaken within the stored value card system." 61 Fed. Reg. at 40493.

In summary, the FDIC found that the funds entrusted to an insured depository institution by cardholders in a "Bank Primary-Reserve System" are not insurable as "deposits" belonging to the cardholders because (1) the cardholders' funds are transferred into a pooled "reserve account" as opposed to individual checking or savings accounts; and (2) the purpose of the cardholders in maintaining funds at the depository institution is general rather than specific.

Stored Value Cards Issued by Sponsoring Companies

A type of system not addressed in GC8 is a system in which (1) consumers place funds with a sponsoring company in exchange for stored value cards; and (2) in order to make payments on the stored value cards, the sponsoring company maintains an account at an insured depository institution.

Significant differences exist between a "Bank Primary-Reserve System" and the type of system described above. For the reasons presented in GC8, the pooled "reserve account" in a "Bank Primary-Reserve System" is not considered a "deposit" as defined at section 3(1) of the FDI Act. See 12 U.S.C. § 1813(l). The sponsoring company's account in the second type of system, however, would satisfy section 3(1) under either paragraph 3(1) (1) or paragraph 3(1) (3). First, the account would be a "commercial account" under paragraph 3(1) (1) because the account would be owned by a commercial enterprise (i.e., the sponsoring company) and not owned by the bank. See 12 U.S.C. § 1813(l) (1) (defining "deposit" as "the unpaid balance of money or its equivalent received or held by a bank or savings association in the usual course of business and for which it has given or is obligated to give credit, either conditionally or unconditionally, to a commercial, checking, savings, time, or thrift account. . ."). Second, the funds received from the sponsoring company by the bank would be held "for a special or specific purpose" under paragraph 3(1) (3) because the funds would be held for the very specific purpose of making payments on stored value cards and not held for the purpose of meeting obligations to payees as they make claims on such funds pursuant to general or miscellaneous transactions undertaken within the stored value card system. See 12 U.S.C. § 1813(l) (3) (defining "deposit" as "money received or held by a bank or savings association, or the credit given for money or its equivalent received or held by a bank or savings association, in the usual course of business for a special or specific purpose. . .").

Thus, a distinction exists between stored value card systems in which multiple customers' funds are transferred into a "reserve account" held by the bank and systems in which a sponsoring company's funds are placed into the company's account at the bank. Under GC8, the funds in the former type of system are not "deposits." In the latter type of system, however, the funds are "deposits" owned by the sponsoring company. This means that the funds would be recoverable by the sponsoring company in the event of the expiration of the stored value cards.1 Also, this means that the insurance coverage of the funds would be limited to $100,000 in aggregation with the sponsoring company's other deposits (if any) at the same insured depository institution. See 12 C.F.R. § 330.11(a) (providing that the deposit accounts of a corporation are "added together and insured up to $100,000 in the aggregate").

"Reserve Accounts" Versus "Custodial Accounts"

In the case of stored value cards issued by an insured depository institution (as opposed to stored value cards issued by a sponsoring company), the FDIC recognizes a distinction between the following types of systems: (1) a system in which the depository institution records its liabilities in a pooled "reserve account"; and (2) a system in which the depository institution records its liabilities in a pooled "custodial account." As explained above, the liabilities in the former type of system are not viewed as "deposits." In the latter type of system, however, the liabilities are "deposits" under paragraph 3(1) (3) of section 3(1) because the funds are held for the "special or specific purpose" of satisfying "predetermined specific parties" (i.e.., the cardholders). See 12 U.S.C. § 1813(l) (3). See also FDIC Advisory Opinion No. 97-4 (May 12, 1997). In essence, the pooled account is viewed not as a "reserve account" in a "Bank Primary-Reserve System" but as a group of individual accounts in a "Bank Primary-Customer Account System." As explained in GC8, individual accounts in the latter type of system are "deposits." See 61 Fed. Reg. at 40494.

An example of a "custodial account" would be an account with the following title: "ABC Bank as Custodian for Multiple Cardholders." Such an account would be entitled to "pass-through" insurance coverage if the bank maintains records as to the interest of each cardholder. "Pass-through" coverage means that the interest of each cardholder would be insured up to $100,000 separately from the interests of the other cardholders but in aggregation with the cardholder's other "single ownership" deposits (if any) at the same insured depository institution. See 12 C.F.R. § 330.5(b); 12 C.F.R. § 330.7(a); 12 C.F.R. § 330.6.

In summary, funds underlying stored value cards and held in a pooled account at an insured depository institution will be classified as non-deposits only if the following conditions exist: (1) the cards are issued by the depository institution and not by a sponsoring company; and (2) the account is maintained in the form of a "reserve account" and not in the form of a "custodial account." If either one of these conditions does not exist, the funds will be "deposits."

Below, these distinctions are discussed in connection with the system developed by ****** and offered by ****** Bank.

The System Offered by ****** Bank

As explained in your letter, ****** Bank offers "an electronic account for those persons who otherwise would not have credit cards or checking accounts." You have described the system as follows:

Under the ****** program, a customer purchases a ****** card from an agent by paying a specific amount. The value is not stored on the card itself. Rather, the card is a mechanism for accessing that customer's account. The agent acts as a messenger service for the bank. The funds are deposited into the agent's account and then wired to the bank. The funds are transferred to [the bank] which maintains all of the funds in a pooled account. There is detailed account information on each customer. As noted, the account balance is not stored on the card itself, but rather is maintained in the account. [The bank], through its agents and its data processing systems, tracks the purchases and uses of the card and debits the balance appropriately. Furthermore, the customer may reload additional value on the card one or more times.

In order to use the card, the customer must have a unique password. Thus, if the card is stolen, it cannot be used to access the account unless the thief also in some way learns the password for that specific account and individual.

*  *  *  *

[****** Bank] believes that the insured deposit is not created until the money is received by the bank and the application is accepted. Prior to that time, the funds are in the special account set up by the agent. Presumably, that account is insured up to $100,000 in the agent's name.

With your letter, you submitted a diagram of the system described above. According to this diagram, the system operates as follows: (1) the customer purchases a "generic" or temporary card from a store; (2) the store places the collected funds into an account (at a bank other than ****** Bank?); (3) by wire transfer, the funds are sent to ****** Bank; (4) ****** Bank records its liability for these funds in a pooled account for multiple cardholders; and (5) ***** Bank issues a "personalized ******** debit card" to the customer (providing the customer with access to the pooled account).

As previously discussed, two factors are important in determining whether the funds held by a bank in connection with a stored value card system are "deposits." The first factor is whether the cards are issued by the bank (as opposed to being issued by a sponsoring company); the second factor is whether the bank has transferred the funds into a "reserve account" (as opposed to holding the funds in a "custodial account"). Both of these factors are discussed below.

The Identity of the Issuer

The issuer of a stored value card is the party who promises to make payments on the card. In this case, I do not have copies of a model agreement between the issuer and the cardholder (or a model set of disclosures given by the issuer to the cardholder). Hence, I cannot determine the identity of the issuer. There are several possibilities, some of which are outlined below.

First, the issuer might be a store. This possibility is suggested by the fact that a cardholder will receive his/her stored value card from a store. Assuming that the issuer is the store, the funds placed at ****** Bank will be "deposits" owned by the store. The insurance coverage will be $100,000 (in aggregation with any other deposits owned by the store at ****** Bank). See 12 C.F.R. § 330.11(a) (providing that the deposit accounts of a corporation are added together and insured up to $100,000).

Second, the issuer might be ****** (with the store serving as an agent for ****** in collecting the cardholder's funds and then placing these funds at ****** Bank). This possibility is suggested by the fact that the stored value card system was developed by ******. Assuming that the issuer is ******, the funds placed at ****** Bank will be "deposits" owned by ****** with insurance coverage limited to $100,000. See id. The deposits will not be insurable to ******, however, unless the deposit account records reflect the agency relationship between the store and ****** (e.g., through an account title such as "Store as Agent for ******"). See 12 C.F.R. § 330.5.

Third, the issuer might be ****** Bank (with the store serving as an agent for ****** Bank in collecting the cardholder's funds and issuing the card). Under this scenario, for the reasons previously explained, the funds at ****** Bank will not be "deposits" if the funds are held in a pooled "reserve account." On the other hand, the funds will be "deposits" if they are held in a "custodial account." The latter type of account will be insured on a "pass-through" basis provided that (1) the account title reflects the custodial nature of the account (e.g., "Custodial Account for Cardholders"); and (2) ****** Bank maintains records reflecting the ownership interest of each cardholder. See 12 C.F.R. § 330.5(b). "Pass-through" insurance means that the interest of each cardholder would be insured separately up to $100,000 (but in aggregation with the cardholder's other deposit accounts at ****** Bank). See 12 C.F.R. § 330.6 (providing that the deposit accounts of a person are added together and insured up to $100,000).2

Whether an agency relationship exists between the stores and some other party (such as ****** or ****** Bank) depends upon whether the stores have executed agency agreements with another party. In order to resolve this question, you should review the agreements (if any) executed between the stores and any other party.

Conclusion

As explained in this letter, a distinction exists under GC8 between the following types of stored value card systems: (1) a system in which the cards are issued by the insured depository institution; and (2) a system in which the cards are issued by a sponsoring company against an account at an insured depository institution. In the former type of system, the funds held by the depository institution are "deposits" only if the institution records its liabilities in a "custodial account" (as opposed to a "reserve account"). In the latter type of system, the funds are "deposits" irrespective of the institution's accounting techniques.

In an e-mail, you identified a number of ways in which the FDIC's interpretation of the term "deposit" at 12 U.S.C. § 1813(1) could affect the operation of other laws. On the basis of such concerns, the FDIC may issue further guidance on stored value cards and the meaning of "deposit."

I hope that this information is useful. If you have any questions, please feel free to contact us.

1If the sponsoring company has surrendered the right to recover the funds, an argument might exist that the funds should not be viewed as "deposits." This argument is not addressed in this letter because the FDIC is unaware of the existence of any stored value card system in which a sponsoring company--in placing funds at an FDIC-insured depository institution--surrenders all rights with respect to the funds (including the right to recover the funds in the event of the expiration of the cards). Go back to Text

2Perhaps an argument also could be made that the store is an agent of the cardholders. I do not think that this argument is consistent with the fact that the store will sell temporary cards to the cardholders (according to your letter). The selling of cards by a store suggests that the store is either the issuer of the stored value cards itself or an agent on behalf of the issuer (and not an agent on behalf of the cardholders). Go back to Text


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