Manufacturers and Traders Trust Company July 14, 2004
Robert E. Feldman Executive Secretary
(Attention: Comments/Legal ESS)
Federal Deposit Insurance Corporation
550 17th Street, NW
Washington, DC 20429 VIA e-mail to: comments@fdic.gov Dear Mr. Feldman: Thank you for the opportunity to comment on the amendments that the Federal Deposit Insurance Corporation (the "FDIC") proposes to make to part 303 of Title 12 of the Code of Federal Regulations (the "Proposed Rule") regarding when funds at insured depository institutions underlying stored value cards would constitute "deposits" under the Federal Deposit Insurance Act ("FDIA"). In general, Manufacturers and Traders Trust Company ("M&T Bank") would prefer that the FDIC withdraw the Proposed Rule. Although we do not believe that classifying stored value card funds as deposits for FDIC insurance purposes will have a significant impact on deposit insurance premiums, we are concerned that the Proposed Rule is likely to have significant implications in other regulatory areas and in the development of stored value card products. In effect, we see the Proposed Rule as opening the door to unnecessary regulation of bank-issued stored value cards that could have a chilling impact on the ability of banks to continue in this line of business. In addition, we are concerned that the Proposed Rule does not sufficiently distinguish between different types of stored value cards in applying a blanket approach which focuses on whether the funds underlying the card are held by a bank in a pooled reserve account for which the bank maintains no subaccounting records for each cardholder. To this end we offer the following comments on the Proposed Rule. The Proposed Rule Departs from the Principles of GC8:
The Proposed Rule would replace General Counsel's Opinion No. 8 ("GC 8") which, until now, formed the basis for the widespread belief that funds held by insured depository institutions in pooled reserve accounts for cardholders were not deposits for insurance and assessment purposes. The FDIC states that the Proposed Rule "retain[s] the basic principles set forth in GC8 and extend[s] these principles to new types of stored value card systems." However, the Proposed Rule indicates that funds received by an insured depository institution from cardholders, or funds received from others on behalf of cardholders or for payment to cardholders, in exchange for such cards, would constitute deposits, unless the institution records its liabilities for such funds in a pooled account for multiple cardholders and the institution does not maintain "supplemental records or subaccounts reflecting the amount owed to each cardholder." We believe that this represents a significant departure from the FDIC's previous opinion expressed in GC 8. The Proposed Rule May Have Wide Ranging Regulatory Implications:
As noted above, M&T Bank would prefer that the FDIC withdraw its Proposed Rule. Although we are not concerned that the Proposed Rule will have a significant impact on deposit insurance premiums, we are concerned that it may impact regulation in other areas and the future development of stored value card products. We are concerned that the treatment of funds underlying stored value cards as deposits under FDIA may lead to other regulation of bank-issued stored value cards that could negatively impact the ability of banks to continue in this line of business. Although the Proposed Rule focuses on the limited issue of whether funds underlying stored value cards constitute deposits, the FDIC, itself, acknowledges in a footnote that rulemaking leaves open a number of other issues, including, among other things, matters that relate to reserve requirements, money laundering and application of electronic fund transfer rules. We believe that the FDIC should not move forward with the Proposed Rule until it has determined, in concert with other bank regulatory agencies, the effect that the Proposed Rule would have on such other matters. For example, if Federal Reserve Board ("FRB") were to treat prepaid cards as transaction accounts with respect to reserve requirements under Regulation D, the cost of cards such as gift cards could increase significantly. This cost would likely be passed on to consumers. In addition, the treatment of such cards as reserveable transaction accounts presents additional issues for banks because the opportunities to reduce reserve requirements that are available for conventional bank deposits, such as sweep arrangements, may not be available for gift cards. In addition, we believe that the Proposed Rule should not be adopted without consideration and clarification of the application of the FRB's Regulation E to stored value card products. It is not clear how many Regulation E provisions, including periodic statements, limited liability for unauthorized transactions and error resolution procedures, apply to certain stored value card products. It is our understanding that the FRB refrained from adopting final rules under Regulation E to address stored value products because it did not want to inhibit the development of these emerging products. As a result, we believe that the FDIC should work with the FRB to address the treatment of stored value products under Regulation E before adopting the Proposed Rule which might impact how such products are viewed under Regulation E. We share the concern of many financial institutions and card issuers that the Proposed Rule raises issues with respect to gathering customer information as required by the USA PATRIOT Act. Even gathering the minimum identifying information required by Customer Identification Programs may not be feasible with respect to the recipients of gift cards because banks often have no interaction with the recipients other than perhaps sending cards to them. We respectfully request that the FDIC study the impact of the Proposed Rule on the obligations of financial institutions under the USA PATRIOT Act.
Inconsistency with FDIC Policy Considerations:
The Proposed Rule would treat all stored value cards as deposits unless the institution records its liabilities for such funds in a pooled account for multiple cardholders and the institution does not maintain "supplemental records or subaccounts reflecting the amount owed to each cardholder." The Proposed Rule makes no distinctions based upon the nature and purpose of various types of cards, We believe that this blanket approach fails to take into consideration differences in the cards that impact whether such cards should be insured based upon the policies underlying the system of FDIC insurance. In summary, FDIC insurance is designed to protect the banking system from runs on deposits that might be caused if depositors feared that their funds were at risk. Customers and issuers alike may consider some types of stored value cards as essentially equivalent to deposit accounts; however, other types of stored value cards are not used or viewed as equivalent to deposit accounts but rather are substitutes for cash. We believe that the Proposed Rule should distinguish between types of cards rather than merely focusing on whether funds are received by an insured depository institution in exchange for stored value cards and whether that institution uses a subaccount accounting methodology to track the value remaining with respect to each cardholder. It seems to us that it may be consistent with the policies underlying FDIC insurance to characterize certain stored value cards as insured deposits, such as certain payroll cards that are used as substitutes for deposit accounts. However, other cards, such as gift cards, differ fundamentally from bank deposits, despite the fact that banks may hold the funds underlying both. Gift cards generally offer broader transaction capabilities than store gift certificates but more limited capabilities than deposit accounts (e.g.. payments from deposit accounts may be made to individuals and cash may be withdrawn while these features are not applicable to gift cards). It is our belief that the recipients of gift cards do not view such cards as investment or savings vehicles and do not expect them to be covered by FDIC insurance. We respectfully request that the FDIC consider the fact that the structure, design, funding and settlement of stored value products vary widely in crafting a final rule. Branching Issues:
In addition to the uncertainty surrounding the legal and regulatory matters noted above, we would also point out that a classification of stored value card funds as deposits raises branching issues as well. It is our understanding that many stored value card programs in existence today rely on various retail distribution points to load funds onto cards. For example, certain cards allow consumers to load funds at check cashing outlets, Moneygram and Western Union locations, and even Rite Aid drugstores. If the funds underlying cards such as these are considered deposits, it is questionable whether loading cards at such retail distribution points would remain legal in light of the fact that banks may not accept deposits at locations other than their authorized branch offices. Required Disclosures to Cardholders:
We have several comments regarding the proposal to mandate disclosure to cardholders. First, we respectfully request that the FDIC refrain from mandating specific cardholder disclosures.
Pursuant to previously issued guidance regarding stored value cards, it is industry practice to provide such disclosures to the extent such disclosures are needed. We believe that banks should continue to have the ability to determine whether, and to what extent, disclosures are needed based all applicable factors (e.g.. the design of the card and consumer confusion regarding the product). In the alternative, if the FDIC does mandate disclosures, we respectfully request that the final rule provide banks with at least least six (6) months after publication of the final rule in the Federal Register to provide any required disclosure to cardholders. This would allow banks sufficient time to modify existing stored value card documentation provided to cardholders and plan for effective communication to cardholders. In addition, we strongly urge that any final regulation provide that any required disclosure need only be made prospectively to cardholders to whom stored value cards are issued on or after the specific compliance date (e.g., 6 months after publication in the Federal Register). In other words, we ask that banks need not provide disclosure to cardholders who were issued cards before the compliance date, including cardholders who were advised, in reliance on the guidance provided in GC 8, that the funds underlying their stored value cards are not deposits and are not insured by the FDIC.
Once again, we thank you for the opportunity to comment on the Proposed Rule. Should you have any questions regarding our comments, please do not hesitate to contact Marissa Briggs (716-842-2366) or David Burstein (212-350-2580). Sincerely, Marissa K. Briggs
M&T Bank
One M&T Plaza
Buffalo, NY 14203
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