TRAVELERS EXPRESS COMPANY July 15, 2004
VIA HAND DELIVERY Robert E. Feldman
Executive Secretary
(Attention: Comments/Legal ESS)
Federal Deposit Insurance Corporation
550 17th Street, N.W.
Washington, D.C. 20328 Re: Notice of Proposed Rulemaking: Definition of "Deposit";
Stored Value Cards — RIN 3064-AC80 Dear Mr. Feldman: We are pleased to submit this letter on behalf of Travelers Express Company, Inc. ("TEMG") to the Federal Deposit Insurance Corporation ("FDIC"), commenting on the Notice of Proposed Rulemaking ("Notice") relating to the definition of "deposit" as that term relates to funds at insured depository institutions underlying stored value cards. TEMG, a financial services company headquartered in Minneapolis, Minnesota, operates one of the largest funds transfer businesses in the world. Its product lines include Travelers Express money orders, MoneyGram money transfers, ExpressPayment emergency bill payments, gift certificates and utility bill payments. TEMG also is one of the largest providers of official checks and money orders to depository institutions. TEMG's products are available in more than 100,000 locations worldwide. TEMG is a wholly owned subsidiary of MoneyGram International, Inc., which was spun off from Viad Corporation effective June 30, 2004 and is now a public company, whose stock is traded on the New York Stock Exchange. TEMG is duly licensed as a money transmitter in 45 states and Puerto Rico, and is regulated as such by the state bank regulators in each of the states. As the FDIC is aware, prepaid cards (i.e., cards not associated with an existing deposit account, such as an ATM card or a debit card) of all types are becoming increasingly popular. These prepaid cards are issued by either sponsor companies (including retailers for gift cards) or by insured depository institutions. Generally, a card is issued as the result of a customer prepaying the cash to be represented on the card, plus a fee. This cash can be in the form of currency, a credit card advance, a receive on a money transmission, or a wire transfer or ACH debit from a person or a company including to pay wages). The cards usually are activated either at the retail location or later. They can be unembossed and thrown away after expending the value of the card, or embossed with the cardholder's name and reloadable at various locations. Once activated, the cards can be used at retail stores and also often at automated teller machines ("ATMs"). We understand that prepaid cards also can be issued with a MasterCard and VISA logo if issued by a member bank, either on its own behalf or on behalf of a company ("bank-sponsored cards"). Those cards also can be used at any location that accepts MasterCard or VISA debit payments. Generally, it is our understanding that to facilitate settlement, funds received in payment for prepaid cards will be placed by the issuer in an account of some sort (whether a general commercial account, a funding account or a reserve account) at a financial institution. In addition, it is our understanding that, as a business matter, the card issuer, whether it is a retailer or financial institution or other service provider, has to directly or indirectly maintain records that keep track of the value outstanding on each and every card it issues. Otherwise, there would be no way for either the customer or the issuer to know which cards have value and which do not. A. Summary In our view, the FDIC's analysis in General Counsel's Opinion No. 8, issued on August 2, 1996, discussing when funds at depository institutions underlying "stored value cards" are deposits, is complicated and confusing and, given the increasing popularity of prepaid cards, should be clarified. However, we believe the proposal set forth in the Notice continues to make the matter unnecessarily complicated by differentiating between types of cards and accounts when we believe no such differentiation is justified. Furthermore, the implications of the proposal in the Notice should be carefully considered. In this regard, we believe the FDIC should particularly consider the effect of the FDIC's actions on whether transactions subject to the cards would thereby become subject to the disclosure and statement requirements of the Electronic Funds Transfer Act ("EFTA") and Regulation E, and the "know your customer" rules for deposit accounts set forth in the USA Patriot Act. These implications should be weighed against any perceived benefit to consumers, the banking industry and the FDIC. Any final action on this proposal by the FDIC should be undertaken in concert with the agencies responsible for interpreting those provisions, so that unintended consequences do not result in the cost of these cards becoming too high to the issuers or the consumers who use them (many of whom are unbanked consumers or recent immigrants with few resources) to justify their continued issuance. For these reasons, we believe that the proposal should not be implemented as drafted at this time. If the FDIC nevertheless determines a clarification of its position on "stored value cards" is necessary, we request that it be simplified, and then only issued in tandem with concurrent issuances by the Federal Reserve and other regulators on the applicability of, among other provisions, Regulation E, and the USA Patriot Act to prepaid cards. B. Discussion 1. Definition of "Stored Value Card" In general, the proposal set forth in the Notice appears unnecessarily complex. For example, the proposed definition of "stored value card" raises questions as to the type of cards that might be covered. In this connection, the Notice defines "stored value cards" as "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 merchants point of sale terminal." It is unclear whether this definition would also include a card that would be operational at an ATM as well as at a merchant point of sale, as many prepaid cards are. Furthermore, while the proposal states that the definition does not cover "gift cards," the reasoning set forth for that exception appears to be specious, because to our knowledge, retailers, like any sponsor company, need to place funds used to purchase cards in accounts at financial institutions to facilitate the settlement of purchases made on the cards, and need to keep track of each card's value. In fact, the process for purchasing a prepaid card at a sponsor company appears to be the same process described in footnote 1 of the Notice to purchase a gift card. And with bank-sponsored retailers issuing gift cards, the distinction between a "gift card" as the FDIC has defined it, and other prepaid cards is becoming increasingly blurred, making these distinctions arbitrary and potentially stifling to the continued development of this market. Thus, if this proposal were to be implemented, we believe that the FDIC should consider replacing the term "stored value card" with the term "prepaid card" to make clear that it would cover any type of card that is purchased with cash or a cash equivalent, regardless of the use of the card once the card is activated. 2. Funding Systems and Accounts More generally, the FDIC makes distinctions in the Notice that in our view, are no longer substantive. For example, as noted above, the FDIC makes a distinction between funds held by an insured depository institutions in an "open" system (i.e., where funds are cleared through the bank settlement process) and those held by retailers in a "closed" system (i.e., where the retailer settles purchases made on a card from captive funds). In the first, the FDIC is proposing that funds held at depository institutions underlying any card product in an open system would be considered deposits, while those in closed systems would not. However, as noted above, we are not aware of any instance where a sponsor company or a retailer that issues any kind of card, whether a gift card, prepaid debit card, funds transfer card or other card representing prepaid funds, does not place the funds it receives from customers in payment for the cards in a deposit or funding account of some sort at a depository institution in order to facilitate settlement of purchases made with the cards.1 And, as noted, the uses of these cards are becoming increasingly blurred, as retailers seek to issue more general prepaid cards that can be used at ATMs as well as at their stores, and bank-sponsored entities seek to issue gift cards. The type of stored value system -- open or closed – is thus becoming increasingly irrelevant in that regard. The FDIC also describes straight funding or reserve accounts, established by sponsoring companies to hold prepaid card funds and "hybrid" funding accounts, established by a issuing bank to hold prepaid card funds, but notes that in each instance, the issuer maintains sub-accounting systems to track cardholder purchases. In our view, this distinction also is irrelevant. The manner in which each account is established and operates is the same, and thus should be treated the same. In fact, many banks issue card on behalf of companies, with the name and logo of the company on the front, in order to allow that company's customer's access to ATM's or merchant point of sale outlets. The back-office funding and accounting of each type of account is the same as a sponsor card.
In short, the distinction made in the Notice between "stored value cards" and "gift cards," between "open systems" and "closed systems" and among different types of funding or reserve accounts, are not distinctions that should cause a difference in result under the Notice. A settlement account at a depository institution holding funds that represent card purchases should be considered a "deposit" and insured up to $100,000, regardless of what entity establishes the account or the type of card issued as a result of the purchase. Indeed, because under current law, funds placed in any deposit account at insured financial institutions already are generally insured up to $100,000, we believe no amendment to the FDIC regulations is needed on this point. Furthermore, all of these distinctions, if included in a final rulemaking, we believe have the potential to create distortions in the development of these cards. For example, with bank-sponsored entities issuing prepaid gift cards in the same manner as retailers, it is a distortion to exclude funds underlying retail gift cards from these rules while including the funds underlying the essentially identical bank-sponsored cards. Similarly, potentially subjecting transactions customers make with prepaid cards issued by companies, like TEMG that are duly licensed under applicable state law, to potentially additional regulation under the EFTA while exempting other retailer issued cards also has the potential to favor certain issuers over others, increasing compliance costs for licensed entities that already provide appropriate consumer productions, while exempting others from those costs. These distortions are not justified given the direction the market appears to be going. 3. Availability of "Pass Through" Insurance The other material question raised in the Notice (which in our view, is the heart of the proposal) is whether the funds underlying each card which are commingled in one account by the issuer should receive "pass-through" deposit insurance treatment, enabling each cardholder to claim up to $100,000 in deposit insurance for funds represented on the cardholder's card. The Notice deals with this question in two ways. For accounts holding funds from sponsor companies, the Notice proposes to provide "pass-through" insurance if all three of the following factors are present: (1) the account records must reflect a custodial relationship between the sponsoring company and the cardholders; (2) the depository institution or the sponsoring company or some other party must maintain records reflecting the interest of each cardholder; and (3) the deposit must be owned in fact by the cardholders. For accounts holding funds representing cards issued by the depository institution itself, the Notice proposes to treat such funds as separately insured deposits unless the depository institution does not directly or indirectly maintain supplemental records or sub-accounts reflecting the amounts owned to each cardholder. In each case, the most important factor to the FDIC appears to be the sub-accounting of the amounts owed to each cardholders. However, as with the discussion with reserve accounts, we can think of few instances where an issuing depository institution or a sponsoring company would not be required as a business matter to maintain records, either directly or through a third party processor, that reflects the amount of money owed to each cardholder. In our view, the fact sub-accounting is done is not as critical as the intent of the parties in determining whether funds underlying prepaid cards are "deposits." Specifically, in issuing a card, do the parties (the cardholder and the issuer) intend to create a separate deposit relationship such that a cardholder believes that he or she has created an account for which separate pass-through insurance is appropriate. As the Notice indicates, whether a cardholder believes that he or she owns a deposit depends on the agreement between the sponsoring company and the cardholder. We believe that in most instances, a customer purchases a prepaid card with the expectation that it is an alternative form of cash, not an account substitute. For example, customers purchase gift cards with the expectation that they will be used to purchase goods at a retailer as an alternative to giving the gift itself or cash. Similarly, a customer may purchase a prepaid debit card from a company with cash, or a cash advance on a credit card, or a money transfer receive, with the expectation (and justifiable belief) that the card is a safer alternative than cash (and not an alternative to a deposit account) for purchases of goods and services at merchants. In all of these circumstances, we would submit that a "deposit account" is not created, even if the issuing bank or company maintains separate records of the balance on the card.2 In fact, many purchasers of these cards are unbanked or recent immigrants. The purchase of these cards by these consumers is one way for these purchasers to increase the safety of their cash (by being on a card protected by a personal identification number) and enter the traditional banking environment, as well as increase their eligibility for traditional bank deposits and consumer loans.
It may be the case that a company or insured depository institution would like the funds underlying prepaid cards to be separately insured deposits, for marketing or other purposes. In that case, the intent of the parties to create a separate insured deposit would have to be reflected in the cardholder agreement and the existence of deposit insurance would have to be prominently disclosed. In any case, such a result would be consensual, not mandated. If the FDIC determines that a consensual system for determining the deposit insurance coverage of prepaid card funds is unworkable, we would urge the FDIC to delay finalization of this Notice until all of the implications of applying pass-through insurance to pre-paid cards is determined. For example, the Notice indicates at one point that sub-account balances for bank issued cards may qualify as "commercial, checking, savings or time or thrift accounts" under the Federal Deposit Insurance Act. If this is the case, one implication of this proposal may be that such accounts would also be considered to be an "account" for purposes of the requirements of the EFTA and Regulation E, and the "know your customer" rules of the USA Patriot Act. In our view, prepaid cards have become popular in large part because the requirements associated with such cards are not onerous. Subjecting cards for example to a periodic statement requirement or to other requirements of Regulation E3 may make the cards too costly for companies to issue and for consumers (many of whom as noted may be unbanked or recent immigrants) to afford to maintain. Similarly, subjecting cardholders of prepaid cards of modest amounts to the same "know your customer" account initiating process as a deposit account may not be feasible at retail and other convenient locations where prepaid cards routinely are sold. Such requirements could result in some companies suspending their prepaid card programs, and other companies not implementing those that are in the planning stages. For these reasons, we believe it would be advisable for the FDIC to discuss these implications with the Federal Reserve and other federal banking agencies in detail prior to issuing any final rule and to weigh the implications against any perceived benefit of the rule to consumers, the banking industry or the FDIC. Otherwise, any FDIC proposal issued without considering the collateral regulatory implications may very well serve to place an unintentional chill on an accessible, safe and growing cash alternative for consumers. Thank you for the opportunity to provide comments on the Notice. If you have any questions, please do not hesitate to contact the undersigned. Sincerely, Beth S. DeSimone
Arnold & Porter, LLP
555 Twelfth Street, NW
Washington, DC 20004
1 Of course, if a retailer or nonbank company does not hold funds relating to cards with outstanding balances in a depository institution account, but, for example, places them in securities or repurchase accounts, those funds obviously would not be deposits held by a depository institution and would not be insured.
2 The expectations relating to whether an account is being created may be different for payroll cards, as they are not "purchased" in the sense that prepaid cards are, but issued in place of a pay check, and it may be appropriate to provide additional protections to those funds.
3 We understand that most issuers already provide prepaid cardholders with the error resolution and other account opening disclosures required by Regulation E for accounts.
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