WELLS FARGO July 7, 2004 Robert E. Feldman
Executive Secretary (Attn: Comments/Legal ESS)
Federal Deposit Insurance Corporation
550 17th Street, Northwest
Washington, D.C. 20429 Re: Definition of "Deposit"; Stored Value Cards Dear Mr. Feldman: Wells Fargo & Company ("Wells Fargo") is a diversified financial services company providing banking, insurance, investments, mortgage, and consumer finance through over 5,900 banking facilities, the Internet ("wellsfargo.com"), and other distribution channels throughout North America, including all 50 states, and the international marketplace. Wells Fargo has $397 billion in assets and 143,000 employees. Wells Fargo is one of the United States' top-40 largest employers. Wells Fargo ranked fifth in assets and fourth in market value of its stock at March 31, 2004, among its peers. I. Background to the Proposed Rule. The Federal Deposit Insurance Corporation ("FDIC") has published for notice and comment1 a proposed rule (the "Proposed Rule") that would clarify the meaning of "deposit" as that term relates to funds at insured depository institutions underlying stored value cards. The Proposed Rule would add a new section to part 303 of title 12 of the Code of Federal Regulations and would supersede General Counsel's Opinion No. 8 ("GC8") published by the FDIC on August 2, 1996.2 Since the issuance of GC8, the banking industry has developed new types of stored value card systems. Consequently, the FDIC believes that this new section is necessary to provide guidance to the industry and the public as to when funds underlying stored value cards will satisfy the definition of "deposit" at section 3(1) of the Federal Deposit Insurance Act (the "FDI Act"). The FDIC seeks to promote accuracy and consistency by insured depository institutions in reporting "deposits." Based on the foregoing, Wells Fargo offers the following comments to the Proposed Rule. II. Comments. A. General Comments. The Proposed Rule ostensibly has a narrow focus: it merely seeks comment to determine if certain funds associated with a stored value card are "deposits" under the FDI Act. Wells Fargo is concerned, however, about the apparent failure of the FDIC to recognize the fallout of its Proposed Rule on other laws or regulations possibly impacting stored value cards. By providing a more expansive meaning to the term "deposits" for purposes of the FDI Act (and in effect changing and expanding the FDIC's current position under GC8), the FDIC may prompt other federal banking agencies, such as the Board of Governors of the Federal Reserve System (the "Board") and the Office of the Comptroller of the Currency (the "OCC"), to evaluate this Proposed Rule and definitively bring stored value cards into the complex set of federal laws and regulations governing deposits (and "accounts") in general. While the FDIC welcomes input on its Proposed Rule with regard to any other issue that may be related to the meaning under the FDI Act of the term "deposits" in the context of stored value cards, it fails to recognize the possible unintended consequence of the issuance of a final rule under the Proposed Rule on other federal laws and regulations dealing with deposits and accounts.
Currently, the applicability of the following federal laws and regulations, among others, to stored value cards is unclear in many circles: Regulation D3
Regulation E4
Regulation P5
Regulation CC6
Regulation DD7
USA PATRIOT Act8 § 326 and the regulations issued thereunder.9 As you can determine from the above list, a number of federal laws and regulations may be inadvertently impacted by providing an expansive definition for the term "deposit" under the FDI Act. By so expanding the definition, the FDIC may cause stored value cards to become subject to these other laws and regulations. The Board maybe more willing to apply a number of the listed regulations to stored value cards due to this development, notwithstanding the burden of compliance. Due to compliance burdens, banks may lose their appetite to issue stored value cards. Consequently, these cards may be issued by other businesses to fill the product vacuum. These businesses may be less regulated than the banking industry, resulting in less protection to consumers. Wells Fargo strongly urges the FDIC to conduct a comprehensive study of the impact of the Proposed Rule, and in that connection, to confer closely with the Board and the OCC to identify common regulatory interests prior to issuing a final rule.) 10 Rather than regulating stored value cards in a piecemeal fashion with unarticulated goals, Wells Fargo urges the FDIC to engage in close dialogue with the other banking regulators to develop a rational plan relative to the federal regulation of stored value cards. The FDIC and the other banking regulators may wish to identify the federal interest in regulating stored value cards. If a federal interest is identified, Wells Fargo encourages the regulators to define the relationship between specific regulations and that interest. In this manner, an orderly plan may be developed to address the regulatory management of stored value cards. B. The Proposed Rule. With this background, I wish to explore some of the other issues surfaced in the Proposed Rule. The FDIC specifically asks the following ten questions. Responses thereto will be provided thereafter. 1. Should the FDIC promulgate a new section to part 303 to clarify the meaning of "deposit" as that term relates to funds at insured depository institutions underlying stored value cards?
As noted above, Wells Fargo has concerns about clarifying the meaning of the term "deposit" as that term relates to funds at insured depository institutions underlying stored value cards. Wells Fargo encourages the FDIC to confer with other bank regulatory agencies to foster uniformity in the application of that term as it relates to other applicable federal laws and regulations.) 11 2. If so, should the FDIC adopt the Proposed Rule? Why? For the reasons outlined above, Wells Fargo does not support the adoption of the Proposed Rule at this time.
3. In the alternative, should the FDIC adopt some other rule? Under what circumstances should funds received by an insured depository institution not be insurable as "deposits"? For the reasons provided above, Wells Fargo does not indorse the adoption of the Proposed Rule at this time. A study of this proposal should be undertaken first. Further, the Proposed Rule does not take into account the complex variety of stored value cards offered in the marketplace. For example, many banks offer gift cards. If the gift card is purchased online, the purchaser is required to provide the name and address of the card recipient. That name and address would be associated with the purchased card and the information would be maintained by the issuing bank. Further, the name of the gift card recipient is embossed on the card. Thus, assuming that the bank maintains "subaccounts" in a "reserve account," the bank could conclude that each gift card holder maintains a "deposit" for purposes of the FDI Act, applying the principles articulated under the Proposed Rule. However, in addition to purchases online, that same bank could sell gift cards through its branches. In such purchase transactions, the name and address of the card recipient is not maintained by the bank. Further, the gift card recipient's name is not embossed on the card. Under the Proposed Rule, the value associated with that card would not be viewed as a "deposit." Thus, for purposes of the terms and conditions of the gift card, the bank would need to prepare two sets, one showing that the gift card is FDIC insured and another showing that the card is not so insured. This result will lead to consumer confusion. In addition, the bank will find this system difficult to administer for purposes of payment of FDIC assessments because some cards may be covered by FDIC insurance and other cards of the same variety may not be so covered. 4. What should be the treatment of funds underlying "payroll cards"? In a common payroll card service, the employer maintains a funding account for the cards. On payday, this account is funded, and the cards in turn are "loaded" with value, the payroll, by the depository institution. As and when the employee uses the card, the value is deducted therefrom. The following payday, the card is again loaded with value for use by the employee cardholder. Unlike a gift card (contemplating a single, set value at issuance), the payroll card contemplates a continuous banking relationship, with debits and credits flowing through the card. To the extent the FDIC adopts any Proposed Rule, the payroll card is more similar to a "deposit" than other types of cards.
5. Will the proposed rule affect the operation of the deposit limitations in section 3(d) of the Bank Holding Company Act or section 44(b) of the FDI Act? To the extent the Proposed Rule is adopted, indeed it may affect certain interstate bank acquisitions, due to the expansion of the term "deposits." 6. Should the FDIC adopt the proposed definition of "stored value card"? Can this definition be improved? What are the differences (if any) between "stored value cards" and other types of bank cards such as "prepaid cards," "debit cards," "check cards" and "payroll cards"? To the extent any Proposed Rule is adopted, Wells Fargo notes that the use of the term "stored value card" is more commonly associated historically with cards with a computer chip embedded therein, similarly to the Mondex card. The term "prepaid card" is used more generically in the banking industry to describe the various types of cards in the marketplace (e.g., gift card). The term "debit card" is used to describe a mere access device with no inherent value directly associated with the card (in comparison to a gift card). The debit card does not independently function on its own, but is viewed merely as one of many ways to access a deposit account. The term "check card" is used synonymously with debit card. Finally, the term "payroll card" is used to denote a subgroup within prepaid cards, a prepaid card used exclusively for payroll purposes. In sum, I would suggest the use of the term "prepaid card" in lieu of "stored value card." To an extent, the multiple offerings of terms ostensibly synonymous with "stored value cards" illustrate the complexity of the subject at hand. The FDIC is endeavoring to issue a simple final rule to apply to a complex product line, with a variety of cards in the marketplace. Further the public's perception of some cards, such as the gift card, is materially different than other cards, such as the payroll card. The gift card is not viewed as a necessity, a source of livelihood; the payroll card, however, is viewed as a true necessity, similarly to a paycheck. The gift card is treated more like cash, not an investment; it is merely a payment vehicle. The Proposed Rule does not take into account these significant differences in developing the definition of "deposits." 7. Should the FDIC adopt specific disclosure requirements? If so, do the disclosures provided as examples in the preamble adequately address consumer confusion about the insurability of funds underlying stored value products? Are there ways to reduce the costs or burdens associated with providing disclosures about the insurability of such funds? As shown by the gift card example detailed above, if the FDIC's Proposed Rule were adopted, some types of gift cards would be deemed "deposits" and other types would not be so deemed. This could result in market confusion among consumers. For example, in advertising gift cards such as those described above, the issuer would have to provide "Member FDIC" as to some types, but would be enjoined from using that statement in other instances, depending on the gift card to be advertised and the content of the advertisement. If the bank promoted its online gift cards, it would need to show "Member FDIC"12 but if the bank promoted branch sales of gift cards, it would be prohibited form using that FDIC membership statement. This is an unsatisfactory result for the industry. 8. Should the FDIC adopt any special rules governing the insurance coverage of any "deposits" underlying stored value cards? Wells Fargo strongly believes that it is premature to issue any special rule involving insurance coverage for stored value cards. The banking agencies are encouraged to confer closely and provide consistent, uniform rules regarding stored value cards as they may impact a number of federal laws and regulations. 9. Are insured depository institutions offering stored value products or systems that are not addressed in this notice of proposed rulemaking? Please explain. Please see the comments above regarding differing types of cards within the same product category in response to this question. 10. In the case of a stored value card system in which the cards are issued by an insured depository institution, and the depository institution maintains a pooled "reserve account" reflecting its liabilities for all cards but does not maintain individual accounts or subaccounts reflecting its liabilities to individual cardholders, how does the institution keep track of its liabilities? What technology is used? How does the institution know when and whether to make payments to merchants?
Wells Fargo is puzzled by this inquiry. If a depository institution maintains a pooled "reserve account" reflecting its liabilities for all cards but does not maintain individual accounts or subaccounts reflecting its liabilities to individual cardholders, the depository institution could not keep track of its liabilities as to individual account cardholders. The depository institution would not know when and whether to make payments to merchants. III. Conclusion. Wells Fargo wishes to express its appreciation for the opportunity to offer its comments to the Proposed Rule. If you have any questions to the foregoing, please do not hesitate to contact me. Sincerely, Ted Teruo Kitada
Vice President & Senior Counsel
Wells Fargo
633 Folsom Street
San Francisco, CA 94107
1 See 69 FR 20558 (April 16, 2004).
2 See 61 FR 40490 (August 2, 1996).
3 12 CFR Part 204. Is the value of a stored value card a "deposit" for purposes of Regulation D? 12 CFR § 204.2(a)(1). Regulation D establishes requirements for depository institutions to hold reserves in the form of either vault cash or noninterest earning balances held at a Federal Reserve Bank against transaction accounts that are held by such institutions on behalf of their customers. If the Board were to address the status of prepaid cards as "transaction accounts," there is some likelihood that it would find that prepaid cards, such as gift cards, would be considered transaction accounts, and thus subject to reserve requirements as such. To the extent that prepaid cards give rise to insured deposits, they may also be viewed as giving rise to transaction accounts. For Wells Fargo and most other banks, the marginal reserve requirements would be 10%. This reserve requirement would affect the cost of all covered stored value cards and would need to be reflected in the fees charged to the users, thus increasing the cost of this product.
4 On May 2, 1996, the Board issued proposed amendments to Regulation E (12 CFR Part 205). The proposed amendments, among other amendments, related to the treatment of stored value cards under Regulation E. These proposed amendments were never adopted and the impact of Regulation E on stored value cards remains unclear. Is the value associated with stored value cards an "account" for purposes of Regulation E? Will the adoption of the Proposed Rule prompt the Board to so determine? 12 CFR § 205.2(b)(1). Note also that if the Board expands the definition of "deposits," it may also have an unintended impact on state law. For example, California law governing debit cards may similarly be expanded, covering new banking products and services, e.g., gift cards, through the expansion of the term "deposits" at the federal level. See California Civil Code § 1748.30, et seq.
5 12 CFR Part 216.
6 12 CFR Part 229.
7 12 CFR Part 230.
8 Pub.L. 107-56.
9 Financial institutions are required to gather specified information about customers and to verify the identity of customers under the USA Patriot Act. In addition, financial institutions must establish risk-based procedures for verifying the identity of each customer to the extent reasonable and practicable. More, a customer identification program ("CIP") must have procedures in place for opening an account that specify the identifying information that a financial institution must obtain from each customer. Further, at a minimum, a financial institution must obtain a customer's name, date of birth, address, and identification number prior to opening an account. Is a stored value card an "account" as defined in 31 CFR 103.121(a)(1)? If the FDIC under the Proposed Rule were to determine that a prepaid card is an "account," for purposes of the USA Patriot Act § 326 CIP requirements, as to some prepaid products, it would be highly burdensome. It is simply not feasible for financial institutions to make CIP requirements apply to recipients of gift cards because they have no interaction with the recipients other than perhaps the sending of the card.
10 As you know, under 12 USC 1813(1)(5) the FDIC may in consultation with other financial regulatory agencies define "deposit" through regulation. Indeed, the FDIC has apparently invited comments from the Board and the OCC in connection with this proposed rulemaking. Mere invitation may be inadequate; the FDIC is encouraged to engage the other financial regulatory agencies in frank and open discussions to achieve reasonable regulatory harmony relative to the regulatory management of stored value cards.
11 In this regard, Wells Fargo is puzzled by the timing of the Proposed Rule. As you know, the FDIC, at 61 FR 40494, solicited comment on the following: whether and under what circumstances the FDIC should take regulatory action with respect to findings that the funds underlying stored value cards or other similar electronic payment systems are deposit liabilities for purposes of the FDI Act. The FDIC did not act formally pursuant to this solicitation for comment, despite holding public hearings, and GC8 remained unchanged. This solicitation was issued by the FDIC on August 2, 1996. What is prompting the timing of this Proposed Rule now?
12 12 CFR Part 328; 12 CFR § 328.2.
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