AMERICAN FINANCIAL SERVICES ASSOCIATION By e-mail: comments@fdic.gov 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 on Stored Value Cards To Whom It May Concern: The American Financial Services Association (AFSA) appreciates the opportunity to provide these comments on the Notice of Proposed Rulemaking issued by the FDIC regarding the definition of "deposit" as it pertains to stored value cards (the "Proposed Rule"). See 69 Fed. Reg. 20558 (Apr. 16, 2004). Some of our member companies are large issuers of payment cards and have developed, or contemplate developing, a number of stored value card programs. We welcome the FDIC's decision to provide new guidance on whether funds underlying stored value cards are considered "deposits" under Section 3(1) of the Federal Deposit Insurance Act (the "FDIA"), 12 U.S.C. § 1813(1). The guidance already issued in FDIC General Counsel's Opinion No. 8 ("GC 8") is helpful, but it no longer covers the scope of stored value cards being issued today. While additional guidance is useful, we believe that the FDIC should expand its regulations with caution in this area. These products are still in the early stages of development and a better understanding of stored value cards will assist in adopting workable rules and avoid unnecessarily hindering development of useful bank products. I. Any regulation should not hinder the development of stored value card programs. Stored value cards are a developing and growing product segment. As the FDIC has recognized, the types of programs offered have expanded and changed greatly since GC 8 was issued eight years ago. Additional development in the product area likewise should be expected. Stored value cards are now being used as a means to pay wages (i.e., payroll cards), and as a way to make other payments that historically have been made by paper instruments or in cash. For example, stored value cards may be issued in lieu of paper checks to pay rebates upon the purchase of consumer products or provide rewards in customer incentive programs. Other stored value cards may be purchased by consumers as a safer way to keep funds than paper currency. Unlike cash, lost cards can often be deactivated and reissued. Stored value cards are given as gifts, or used to provide allowances. Cards can often be used through widely accessible networks, like the MasterCard or Visa systems. Stored value products also include gift cards, single-purpose prepaid cards, electronic benefit transfer cards, telephone cards, and promotional/incentive cards. Moreover, the funding and settlement processes associated with stored value products also vary. Some stored value products are funded by consumer credit or debit cards and ACH transfers, while other products are funded by companies through a batch process. Stored value cards have also become an important product for the "unbanked," i.e., people who do not have traditional bank accounts. Stored value cards offer the unbanked a safer way to carry funds than cash, and they may also provide a gateway to other financial services. Payroll cards, in particular, allow the unbanked to receive wages through a safe and reliable means, without the inconvenience and expense of visiting a check casher. Banks are able to reach larger customer bases through issuance of stored value cards, in comparison to providing in-person banking services, because stored value cards can be issued or sold through a variety of locations as a result of developments in terminal and kiosk technologies. With such a variety of types of cards, it is not apparent that they should all be subject to the same regulatory treatment. Indeed, deposit insurance does not appear to be appropriate for certain types of stored value cards. Some cards, for example, are not registered to a particular cardholder when issued. These cards may be transferred (e.g., as gifts), and/or are often used over a short period of time and in a limited number of transactions. Classifying such cards as deposits under the FDIA does not appear to add any real benefit. Users of these cards would not expect deposit insurance. And the added regulatory expense of treating those funds as "insured deposits" may hinder the development of these programs. Under such circumstances, the FDIC should not impose undue regulatory burdens that provide no customer benefit. We believe the Proposed Rule does not fully consider the policy implications raised by the application of the deposit-insurance regulatory framework and requirements to these various products. The purpose of deposit insurance is to protect the banking system by reducing the incentives for retail product bank runs and to protect depositors' savings and liquid funds. Implicit in both of these policies is that the depositor relies on the security of the banking system, including the Federal Deposit Insurance system, to protect his or her funds. While some stored value products may have these characteristics, other stored value products more closely resemble payment vehicles such as cash. However, instead of focusing on the policy reasons for subjecting certain products to deposit insurance, the Proposed Rule focuses 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. As stated above, we believe this emphasis is incorrect, because the structure and design of stored value products vary widely. For instance, most gift cards fundamentally differ from bank deposits, even though the proceeds of both products are held by banks. Gift cards serve as a more flexible substitute for store gift certificates by providing broader transaction capabilities. At the same time, these transaction capabilities generally are more limited than deposit accounts in terms of the parties to whom payment can be made — payments generally cannot be made to individuals and cash withdrawals may not be available. Further, the recipients of gift cards do not choose the financial institution issuing the card, nor is the gift card produced on the assumption that it is backed by the deposit insurance system. Similarly, gift cards are not viewed by either the producers or recipients as an investment or savings vehicle. While it may be appropriate to characterize certain stored value cards as insured deposits for deposit insurance assessment purposes, we believe that the FDIC should tailor any regulation in this regard to the characteristics of specific products. We request the FDIC to conduct a comprehensive study designed to identify these different characteristics and to treat each product appropriately for the purposes of deposit-insurance regulations. We further urge the FDIC to consider and provide guidance only for the types of stored value card programs now in the marketplace, as identified by such a study. The FDIC should continue the approach taken in GC 8 and subsequent advisory letters, offering specific guidance to new programs as they are brought into the market. Thus, for example, AFSA suggests that the FDIC not attempt to adopt a rule that covers all bank-issued stored value cards (as it appears it may be doing in proposed section 303.16(b)), but rather adopt a rule for only those types of cards that currently are actually in use, such as payroll cards. Just as the FDIC proposes to supplement the products covered in GC 8 at this time, the proposed regulation could expressly state that the FDIC is not intending to address the issue of all stored value cards at this time, but will supplement the regulation at a later time when sufficient information is available to make an informed decision about the issues. II. The FDIC should clearly limit its interpretation to the FDIA. Clarification of the scope of coverage under the FDIA for stored value cards is a key regulatory issue, and AFSA welcomes the FDIC's proposal and the opportunity to comment upon it. There are, however, a number of additional important regulatory issues facing the stored value card industry, especially the applicability of the Electronic Funds Transfer Act and Regulation E, Section 326 of the USA PATRIOT Act and the CIP rules, and other anti-money laundering rules. AFSA urges the FDIC to clearly and expressly indicate that any regulation issued by it does not affect these other regulatory areas. The applicability of these other statutes and regulations may significantly shape the ability of financial institutions to offer stored value cards. For example, one of the requirements under Regulation E is to provide monthly statements to customers. Holders of many types of stored value cards, however, likely do not expect to receive statements. Nor would such statements provide any obvious benefit, particularly if the card is a low-value card that is used quickly—or if the card is transferred to someone other than the purchaser. If Regulation E is extended to apply generally to all stored value cards, the significant expense of providing statements will ultimately be borne by cardholders. And, the higher costs may make cards unattractive to consumers, and uneconomical for banks to offer. In addition, application of anti-money laundering and customer identification rules could foreclose the ability to offer small-value "bearer" cards that may be sold anonymously or may be freely transferable once sold. The economics of offering such small-value cards may be defeated if the issuer is required to collect and store identifying information. It is far from clear, however, that such cards pose any appreciable risk of money laundering.
Moreover, bearer cards typically are less expensive to offer because issuers are not required to track the small denominations to individual cardholders and, if the anti-money laundering regulations effectively require stored value cards to be personally identifiable, banks effectively will be precluded from issuing these new products that offer consumers attractive alternatives to carrying cash. In short, there are significant policy issues in considering whether other regulatory requirements should apply to stored value cards. These other statutes and regulations do not necessarily use the same definition of "deposit" as appears in the FDIA. And, the purposes and policies underlying these other statutes and regulations are very different in many cases to those underlying the FDIA. Thus, we urge the FDIC to limit its rule to the issue presented under the FDIA, and expressly state that its regulation is not intended to provide any guidance regarding whether other statutes and regulations, such as Regulation E or the CIP rules, apply to stored value cards. Those other regulatory issues are properly addressed by the appropriate agency or agencies with due notice and a separate opportunity to comment on those issues. III. Application to stored value cards that do not access the funds of the cardholder. As noted above, banks are beginning to issue stored value cards as a substitute for a more traditional payment instrument. Thus, instead of giving a paper check to make a payment, a payor can give a stored value card loaded with the amount of the payment. A payroll card, for example, can function in this manner. In the case of payroll cards, state wage payment laws often require that the employer actually transfer the funds to an account of the employee on payday. Other payments, however, can be made by issuing a stored value card to a payee that allows the payee to access funds that remain owned by the payor until the card is actually used, just as a paper check might access funds in a checking account maintained by a payor. For example, a company could use such a card to make a per diem travel allowance or relocation expenses available to employees. Another example is the use of a card to pay a rebate. A manufacturer offering a $5 rebate on the purchase of a product traditionally pays the rebate by a paper check. The manufacturer could issue a stored value card, entitling the recipient to $5. The manufacturer could enter into an agreement with a bank to hold the funds and issue the cards, and the manufacturer would then distribute the cards to the rebate recipients. However, the $5 could actually be retained by the manufacturer in its own account and the card could access the manufacturer's account rather than an account established for the payee. We request that the FDIC clarify the application of the proposed rule to programs such as these and confirm that the arrangements involve deposits of the payor rather than the payee if unused funds ultimately belong to the payor rather than the cardholder.1 More specifically, proposed section 303.16(b) applies to bank-issued cards if funds are received "from cardholders, or funds received from others on behalf of cardholders or for payment to cardholders...." These programs do not involve funds received from cardholders. Arguably, the funds provided by the payor to a bank issuer might be covered by proposed section 303.16(b) to the extent that the funds are received "for payment to cardholders."2 However, AFSA suggests three clarifications from the FDIC on the application of the proposed rule to programs in which the stored value cards do not access funds of the cardholder. First, the definition of a "stored value card" refers to the cardholder's right to transfer funds "to a merchant." In contrast, the introductory language in proposed section 303.16(b) with respect to funds received "from others" refers to funds "for payment to cardholders." AFSA suggests that the FDIC consider conforming the introductory language in proposed section 303.16(b) to the definition of stored value cards and to refer to payments "made at the direction of the cardholder" (i.e. to the merchant), rather than "to the cardholder." Second, at least with respect to funds that are not received from the cardholder, the introductory language to proposed section 303.16(b) seems to focus solely on the definition of deposit in section 3(1)(3) (i.e. funds held on behalf of or for payment to cardholders) and does not take into account the more general definition of deposit in section 3(1)(1). For example, the language of the Proposed Rule would not appear to cover a payor's general demand deposit account where funds are not held exclusively for payment when stored value cards are used, and thus not necessarily for "for payment to cardholders." AFSA suggests that the FDIC clarify in the supplementary information that the value underlying a stored value card is a deposit if the card accesses a deposit (as defined in section 3(1)(1)) of a person other than the cardholder (although the funds would be a deposit of such other person, rather than the cardholder). Third, as a related item, AFSA suggests that language be added to the proposed rule or the supplementary information recognizing that bank issued stored value cards may give rise to deposit relationships with either a cardholder, or a third party that provides the funds underlying the stored value cards that are issued to others. For example, consistent with the FDIC's discussion of the party that may be entitled to FDIC insurance coverage in connection with non-bank issued cards, the FDIC should indicate that the deposit relationship is established with the person that is entitled to funds that are not used. In general, we would expect that the person who provides the funds is entitled to unused funds, and thus would be considered the depositor. However, if ownership of the funds clearly passed to the cardholder (as in the case of a payroll card, as required by state law), then the cardholder would be the depositor. IV. Bearer cards should not be treated as deposits under the FDIA. AFSA also requests that the FDIC clarify the Proposed Rule to conclude that cards that are issued anonymously and freely transferable to others after issuance, i.e., "bearer cards," are not deposits. Excluding bearer cards from the definition of deposit is supported by the analysis in GC 8. In GC 8, the FDIC reasoned that the funds held in a Bank Primary — Reserve System were not deposits under the FDIA. In such a system, funds are not held as part of an account relationship with a cardholder but, rather, as a general liability account to satisfy the issuer's payment obligation when the cards are actually used. The relationship between such a card issuer and the "bearer" of a card may not involve any express agreement and it is difficult to imagine an "account" relationship for purposes of the FDIA where the initial relationship by its very nature does not involve an individual that the bank can identify. Bearer cards fit within the "Reserve System" framework. When an issuer sells a bearer card, it is not opening an "account" with the purchaser. Indeed, the issuer will not know the identity of the purchaser or, since the card can be freely transferred, the ultimate user. Instead, the issuer is committing itself to provide funds to a person who honors the stored value card. The FDIC has recognized that this potential liability is broad in its nature given the variety of merchants that might be asked to honor the card. This presumably is an example of the type of "general liability" that the FDIC concluded was not a deposit in GC 8. If not, it is hard to envision a relationship with a cardholder that would constitute a "general liability" insofar as it is necessary for virtually all stored value card programs in existence to at least track the value of the card to a number for administrative purposes, such as fraud prevention. The Proposed Rule does not clearly address bearer cards. Proposed Section 303.16(b)(2), however, states that funds underlying a stored value card issued by a financial institution will be deposits unless the issuer "maintains no supplemental records or subaccounts reflecting the amount owed to each cardholder." As drafted, the language does not state clearly whether deposit coverage depends on maintaining records of the value of each card, or maintaining records of the value owed to an identifiable cardholder. Almost every stored value card must track value as to a card for purposes of authorizing transactions; declaring such systems to result in insured deposits would require development of costly new technologies if a bank is to be able to issue any stored value cards that were not insured deposits. Presumably, the FDIC is not proposing to adopt a rule that effectively means all bank issued cards currently in use necessarily involve insured deposits or it essentially would be overruling the concepts set forth in GC 8 and setting a test in the "exception" in proposed section 303.16(b)(2) that may never apply. This interpretation also is in line with likely reasonable consumer expectations. By their nature, bearer cards tend to be issued in smaller dollar denominations and most likely are not re-loadable. Consumers typically will view them as effectively disposable, much like they would a subway card, and usually will expect that they have the risk that such cards are lost or stolen. In short, consumers are unlikely to expect that they will have an "account" relationship in which they are entitled to deposit insurance. Moreover, the FDIC's proposal that banks disclose whether funds underlying stored value cards are insured also will protect against consumer misunderstandings. AFSA respectfully submits that the FDIC's proposed regulation should not interpret the bank's general liabilities on such cards as creating deposit liabilities. If it does, the proposed regulation may unnecessarily stifle the development of these useful payment devices. For the foregoing reasons, AFSA urges the FDIC to clarify that only records or subaccounts linked to an identifiable cardholder will satisfy the requirement of proposed section 303.16(b)(2) and result in deposit treatment.
V. The rule should include a definition of the term "issuer. " Under the Proposed Rule, it is very important to understand who is the "issuer" of a stored value card. Determining whether an insured depository institution or a non-bank sponsor is the "issuer" of a given card is vital to understanding which prong of the Proposed Rule applies (i.e. 303.16(b) or (c)). Nevertheless, as currently proposed, the rule does not define the term. We urge the FDIC to include a definition of "issuer" in the final rule. The "issuer" of a stored value card should be defined as the entity with the obligation to transfer the funds when the card is used. A distributor of cards should not be considered the issuer. This definition is proper because there should only be one issuer of a card, whereas multiple parties may be involved in distributing a card. In addition, this definition would properly link the applicability of deposit insurance to whether an insured depository institution has the obligation to provide funds when the card is used. For example, in the case of payroll cards, if a depository institution has a cardholder agreement with the employee/cardholder and agrees to provide funds when the card is used, then the depository institution should be considered the issuer of the card. The fact that an employer may "sponsor" the program, and even distribute the plastic cards, should not result in the employer's being considered the issuer. Likewise, a company may provide funds to a bank to be used to pay for travel expenses charged with the bank's stored value cards. The bank should be the issuer of these stored value cards if it is obligated to make payments when the cards are used, even if the company retains ownership of the underlying funds until the cards are used or if the company provides the cards to employees to satisfy its contractual obligations to its employees. AFSA also requests that the FDIC clarify that a bank that is the "issuer" of stored value cards (under the above definition) does not hold a "deposit" if it has not received an "unpaid balance of money or its equivalent," or, as interpreted by the Supreme Court, "hard earnings" that are entrusted to it. See FDIC v. Philadelphia Gear Corp., 476 U.S. 426, 435 (1986). For example, one financial institution (Bank A) might create a stored value card program in which Bank A issues stored value cards to cardholders for a payor, and the payor's money is kept at an account at a separate financial institution (Bank B) until the cards are used. When the card is used, Bank A authorizes the transaction, and then initiates a transfer of the underlying funds from Bank B to the person who honored the card. Since Bank A has not received any money or "hard earnings," there is no "deposit" at Bank A. However, the account at Bank B, in which money has been deposited, should qualify as a deposit under Section 3(1). VI. The treatment of "subaccounts" in a hybrid system should be reconsidered Finally, we encourage the FDIC to reconsider whether the funds in a "hybrid system" (Example B in the Proposed Rule) meet the definition of a "deposit" under Section 3(1) of the FDIA. The Proposed Rule indicates that the individual subaccounts would be considered deposits under paragraph 3(1)(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(1)(3) is not consistent with the FDIC's prior interpretations of paragraph 3(1)(3).
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 a merchant or an 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(1)(3) of the FDIA." See 61 Fed. Reg. 40490 (Aug. 2, 1996). Likewise, in the FDIC Advisory Opinion referenced in the Proposed Rule, 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(1)(3) "because such funds are not held for a special or specific purpose." See FDIC Advisory Opinion No. 97-4 (May 12, 1997). The interpretation of "special or specific purpose" in the Proposed Rule would 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. 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(1)(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 a hybrid system such as the Proposed Rule's Example B. Moreover, it appears that neither the reserve account nor the individual subaccounts mentioned in a hybrid system qualify under the definition in paragraph 3(1)(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 stored value cards in a hybrid system such as Example B should be considered deposits under section 3(1). Conclusion We appreciate the opportunity to comment on the Proposal and again thank the FDIC for their efforts. Should you have any questions about this letter, please do not hesitate to contact the undersigned at (202) 466-8606. Respectfully submitted, Robert McKew
Senior Vice President and General Counsel
American Financial Services Association
1 The treatment should be exactly the same as if the manufacturer issued a paper check on an account that contains funds that are not held exclusively for payment to third parties. The money remains in the manufacturer's account, and is insured as the manufacturer's deposit, unless and until the recipient actually cashes the check. 2 We also note that it would not appear that the bank would be receiving the funds "on behalf of the cardholder" to the extent that the payor retains ownership of the funds.
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