KEYCORP
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 Definition of “Deposit”; Stored Value Cards RIN 3064-AC80 To Whom It May Concern: KeyCorp, a financial services company, is pleased to comment on the Proposed Rules (“Proposal”) issued by the Federal Deposit Insurance Corporation (the “FDIC”) that would clarify the meaning of “deposit” as that term relates to funds at insured depository institutions underlying stored value cards. Section I of this letter provides our general comments on the topic and Section II addresses issues regarding specific issues in the proposal and our specific concerns. About KeyCorp Cleveland-based KeyCorp is one of the nation's largest bank-based financial services companies, with assets of approximately $84 billion. Key companies provide investment management, retail and commercial banking, consumer finance, and investment banking products and services to individuals and companies throughout the United States and, for certain businesses, internationally. The company's businesses deliver their products and services through branches, offices, online banking services, telebanking centers and a network of approximately 2,200 ATMs. I. General Comments Although Key understands the FDIC’s decision to review stored value cards and the issue of coverage under the FDI Act, Key opposes the adoption of these proposed regulations for all of the following reasons: • There does not appear to be any advantage in offering a stored value card that carries FDIC insurance protection for the benefit of a cardholder. • The regulatory risk presented by this proposal is the potential for the creation of a deposit account relationship where none exists for purposes of federal law (i.e. the FDI Act). However, if the rules are adopted as proposed, this may influence interpretations of many other banking laws and regulations. The federal banking agencies have noted that, in addition to the question of FDIC insurance, there are a number of other unresolved regulatory issues regarding stored value cards, including the applicability of the Electronic Fund Transfer Act, 15 U.S.C. § 1693 et seq., and Regulation E, 12 C.F.R. Pt. 205; the Expedited Funds Availability Act, 12 U.S.C. § 4001 et seq., and Regulation CC, 12 C.F.R. Pt. 229; the Truth-in-Savings Act, 12 U.S.C. § 4301 et seq., and Regulation DD, 12 C.F.R. Pt. 230; and Section 326 of the USA Patriot Act, 31 U.S.C. § 5318(l), and the Customer Identification Program rules, 31 C.F.R. § 103.121, and the Gramm-Leach-Bliley Act and Regulation P. See, e.g., OCC Adv. Letter AL 2004-6 (May 6, 2004). We recognize that the FDIC’s Proposal does not directly address these issues, but we urge the FDIC to exercise caution in enacting a final rule because of the effect that it may have on these other regulatory questions. The cost of compliance will far outweigh the benefits of offering stored value cards and will drive many of the small member service providers (MSPs) in the networks and other sales promoters or processors out of business.
• Bankcards represent only 25% (source 2004 Gift Certificate FACT Report) of the current card market, and any additional regulations will put financial institutions at a competitive disadvantage with merchants that issue cards in a closed system environment, (i.e. limited to a merchant’s stores or a group of stores at a shopping mall), which are excluded from this proposal.
• FDIC insurance adds little benefit to cardholders from the perspective of potential loss to a cardholder. The average initial balance on prepaid debit cards (stored value cards) issued by KeyBank is less than $800. Also, according to a Value Link survey in August 2003, 54% of the consumers spend the initial card balance within one month; 61% spend the value in the first use of the card.
• The consumer does not perceive FDIC insurance as an advantage when purchasing a card.
• Adding additional regulatory requirements and associated costs may discourage new competitors from entering this card industry, severely curtail future continuation or development of stored value card products by financial institutions. This will reduce competition and lessen downward pressure on pricing to cardholders. • The role of a financial institution, in most instances, is service provider for third party promoters which market and support the card issuance, and customer service provider for the cards. A financial institution primarily operates in an open system as a sublicensor of the service marks of the bankcard networks, serve as the operator of the card program for purposes of access to the card network and participating merchants, and is responsible for performance of the promoter’s duties under the card network rules, including settlement of card transactions. • The profitability of a stored value card would not cover the costs of sending periodic statements under Regulation E; deposit account disclosures under Regulation DD or meeting other regulatory requirements. • The average balance on a payroll card is not large and is generally consumed within two weeks (i.e. by the next payday). Therefore, the risk of loss to a card holder is low and FDIC insurance does not provide a meaningful benefit that outweighs the added cost of regulatory compliance. • The risk of money laundering appears low, because card network rules “self regulate” this product (except for payroll cards) by placing requirements to limit the dollar amount of value that may be purchased or reloaded to a card initially, the value that may be added daily or monthly, the aggregate available balance, and limits on daily card transactions. II. Proposal Comments Key would like to ask that the FDIC strongly consider the following comments on the proposed rules. Stored Value Card Issuer A bank card issuer may not hold funds for settlement purposes and the face amount of outstanding card balances should not be considered "deposits". Also, settlement liabilities of a bank card issuer under network rules should not be classified as a deposit. Under applicable network rules, for purposes of settlement of card transactions, a card issuer carries the liability for settlement of card transactions in the network. This would be true, whether or not the card is marketed (i) directly by a bank card issuer to its own deposit customers or branch customers, (ii) by correspondent banks to their respective local customers, under an "Agent bank" program, or (iii) by a third party sales promoter/service provider to its local commercial customer who redistribute the cards. Finally, when a merchant accepts a card transaction, the merchant does not know if the underlying account (as the ultimate source of funds) is a credit account, stored value account, or a traditional deposit (debit) account. In each scenario, the bank card issuer will be the contracting party under the card terms and conditions distributed to the cardholder. Funds paid by a cardholder to the sales promoter or distributor may be held by the promoter at any card issuing bank or any other financial institution. As card transactions occur daily, the issuer's card processor makes payment settlement to participants in the network on behalf of the issuer, and the issuer is then required to pay the processor same day. At this time, the card issuer looks to reimbursement of the settlement expense by repayment from the card promoter/distributor that has the funds (somewhere). For this purpose, the promoter is required to keep a "funding account" at the card issuer, in an internal account at which there may be a zero balance at end of day. Separately, a card issuer will require a promoter to establish a "reserve account" or "escrow account" as cash collateral to secure or fund this repayment obligation. This reserve account balance may be based on an average daily settlement amount of card transactions over the preceding 30 days, multiplied by a factor (i.e. xxx number) to cover the risk of nonpayment over several (xxx) days for the time period estimated as needed to shut down the ICA # or BIN # for the promoters program and to stop future card transactions. In the summary above, the actual "funds" held by the bank card issuer may be in an amount vastly smaller than the face value of the aggregate purchase price paid for (or reloaded to) the prepaid debit cards. However, for credit reasons a promoter may be required by an issuer to keep larger balances. Key suggests that the FDIC consider clarifying the meaning of the term “issued by” in the Proposal. In order to determine whether paragraph (b) or paragraph (c) of the Proposal applies to a given stored value card product, it is necessary to determine who issues the cards. The Supplementary Information to the Proposal states that “ ‘issuance’ of stored value cards … means the distribution of cards to cardholders (directly or through an agent) and the making of a promise to the cardholder that the card may be used to transfer the underlying funds … to one or more merchants at the merchants’ point of sale terminals.” 69 Fed. Reg. at 20558.
Stored Value Card Exemptions Key also recommends that there should be an exemption for stored value cards issued flexible spending accounts (FSA) under employer benefit plans. For example on medical reimbursement cards under most employer benefit plans, an employee must make an election prior to each calendar year for the dollar amount to be allocated for the following calendar year for qualified medical expenses. Under a paper system (without a stored value card), the employee has to submit paper work and medical expense receipts for reimbursement by the benefit plan. A medical reimbursement card works in the same manner, with the card account balance being deducted for eligible medical payments, and without any paper work or receipts. While the card can be used with any merchant that accepts a network branded card in an open system, authorization processing is limited to eligible medical purchases. The card balance on day of issuance is for the full amount allocated by the employee, but the employee funds this account by a payroll deduction plan during the entire calendar year. If the funds are not used during the year, the funds are forfeited. If the employee terminates employment, the unused funds are forfeited. However, the employee can use the entire balance during the first month of the calendar year, and then immediately terminate employment. In this case, the employee is not obligated to repay the full amount, and the employer takes the loss (due to stoppage of payroll deduction) without deducting this amount from the severance or termination pay to the employee. In this scenario, the primary obligation to fund repayment of card transactions is on the employer. The funds to cover reimbursement of card transactions are not held by the card issuer or by the processing company for the employer benefit plan. Since a bank issuer does not control the funds, a cardholder should not have any confusion and should not expect that the card balance would be and FDIC insured deposit. Key believes that Section 303.16(b) should be expanded to include a new subsection that describes what types of accounts are not subject to this regulation -- similar to the concept of exclusions set forth in Section 303.16(c). For example, there would be significant benefit for compliance purposes (assuming some type of regulation is adopted) if there were an exclusion expressly provided for bona fide trust accounts (i.e. card issued to trustee) or for cards issued under an employer's benefit plan for employees, subject to IRS regulations (i.e. a medical reimbursement account card), where the cardholder's ownership rights are controlled by the employer's benefit plan and an independent plan administrator. Hybrid System The FDIC’s second example involves stored value cards issued by an insured depository institution. The institution maintains a “reserve account” for the cards collectively, and also maintains an individual subaccount for each cardholder. Account statements are made available to cardholders. The Proposal refers to this as a “hybrid system.” Under the Proposal, the funds would be considered “deposits.”
We encourage the FDIC to reconsider whether the funds in a hybrid system meet the definition of a “deposit” under Section 3(l) of the FDI Act. The Proposal indicates that the individual subaccounts would be considered deposits under paragraph 3(l)(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(l)(3) is not consistent with the FDIC’s prior interpretations of paragraph 3(l)(3).1 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 any MasterCard merchant or Cirrus 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(l)(3) of the FDIA.” See 61 Fed. Reg. 40490 (Aug. 2, 1996). Likewise, in the FDIC Advisory Opinion referenced in the Proposal, 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(l)(3) “because such funds are not held for a special or specific purpose.” See FDIC Advisory Opinion No. 97-4 (May 12, 1997).2
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(l)(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 the Proposal’s Example B.
Moreover, it appears that neither the reserve account nor the individual subaccounts mentioned in Example B of the Proposal qualify under the definition in paragraph 3(l)(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 Example B stored value cards should be considered deposits under section 3(1).
We also suggest that, if the Proposal is adopted as it applies to Example B, the FDIC provide additional clarification on the provision in the Proposal that “the depository institution (directly or through an agent) maintains no supplemental records or subaccounts reflecting the amount owed to each cardholder.” Proposed § 303.16(b)(2) (emphasis added). For purposes of a risk control, as well as approving or declining requested transactions, it is virtually certain that the issuer of stored value cards would have to track the value of the cards on a card-by-card basis. Arguably, that would meet the test of “supplemental records.”
However, we do not believe that the FDIC intended to provide for deposit insurance applicability in all such cases. Rather, we understand the intent of the Proposal to be that the issuer must maintain records linked to a specific, identified individual in order to meet the Section 303.16(b)(2) test. That requirement should be clarified in the Proposal. Such clarification could also address the concern identified by the FDIC about whether account records would be sufficient to allow the FDIC to identify the person to whom payment is owed in the event of the issuer’s failure. See 69 Fed. Reg. at 20563-64. Systems for which an issuer does not obtain a name and address of the cardholders, or where the cards are freely transferable and usable by any bearer, should not be covered under the test for “supplemental records.”
Advertising and Disclosures
Key does not believe that the final rule should mandate the use of the specific disclosures set forth by the FDIC or similar disclosures. Rather, once the FDIC has given more clarity to the circumstances when insurance applies through a final rule, issuers can determine appropriate disclosures given the guidance provided.
We also suggest several points of clarification to the guidance provided in the Proposal. First, the Proposal appears to contemplate that the disclosure would be provided on the stored value card itself. Given the small size of most cards, and the other information that must be provided, we suggest that providing disclosure regarding the applicability of FDIC insurance in a terms and conditions document would be sufficient. Second, the FDIC may want to provide guidance on how the advertisement requirements of 12 C.F.R. § 328.3 apply if an insured depository institution issues stored value cards that are not considered to be deposits. Would such an institution be required to disclose its FDIC member status, and then separately state that insurance did not apply to the product in question?
Effect on Reserve Requirements
We also urge the FDIC to consider the effect of its rule on the definition of a deposit under Regulation D, 12 C.F.R. Pt. 204, governing reserve requirements. Regulation D is promulgated by the Board of Governors of the Federal Reserve System under the Federal Reserve Act and the International Banking Act. The definition of “deposit” under Regulation D, 12 C.F.R. § 204.2(a)(1), is substantially similar to the definition under the FDI Act. As a result, the FDIC’s action may have a practical effect on the scope of Regulation D. Classifying the funds underlying stored value cards as “deposits” under Regulation D may substantially and negatively impact depository institutions that issue stored value cards. This is particularly true if the policy is applied retroactively to stored value card obligations already issued. Moreover, careful and detailed consideration should be given to the question of whether stored value card obligations are the type of obligations for which reserve requirements are appropriate. Thus, the Board of Governors should be consulted regarding the effect of the FDIC proposal.
*************************************** We thank the FDIC for the opportunity to provide our comments and thoughts on the Proposal. If you have any questions concerning our comments, or if we may provide further assistance, please contact me at 216-813-8439 or Greg Poore, Vice President and Senior Counsel, KeyBank NA at 216-689-5105. Sincerely, Carl Stauffeneger
Senior Vice President
Payment Services
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1 Such an intrerpretation would also 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.
2 The FDIC reached the contrary conclusion--and held that paragraph 3(1)(3) did apply--to "funds underlying EcashMint individual accounts." However, the conclusion was based on the fact that Ecash Mint proceeds were not available for unrelated, general merchant transactions. Rather, the Ecash Mint funds could be used only for two possible transactions: transfer into a pooled account or transfer into the customer's money market account. Those limited purposes met the "special or specific purpose" test of paragrarph 3(1)(3). It was not enough that the Ecash Mint funds were held for a single customer, as the Proposal suggests.
3 The Proposal noted that reserve requirements "are of great importance to the FDIC" but are "not addressed in this proposed rulemaking." 69 Fed. Reg. at 20559, n.2. However, the Proposal may very well have an effect, whether direct or indirect, on reserve requirements.
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