CENTER FOR FINANCIAL SERVICES INNOVATION July 15, 2004 Mr. Robert E. Feldman Executive Secretary Dear Mr. Feldman: The Center for Financial Services Innovation (CFSI) appreciates this opportunity to comment on the FDIC's Proposed Rules on Stored Value Cards (12 CFR Part 303, RIN 3064-AC80). CFSI, an initiative of ShoreBank Advisory Services with support from the Ford Foundation, was launched in 2004 to help industry leaders find effective ways of linking transactional products with broader asset-building opportunities for low-wealth consumers. CFSI sees stored value cards (SVCs) as potential alternatives to bank accounts--especially for lower-income consumers or those who are concerned about their ability to manage traditional checking accounts--provided certain consumer protections are guaranteed. In preparing these comments, CFSI consulted with several regulated financial institutions. However, all comments herein reflect CFSI's opinions alone. In response to the FDIC's question #6, regarding the definition of stored value cards, CFSI believes that the definition can be improved. The FDIC's proposed language defines stored value cards as devices "that enable 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 merchant's point of sale terminal." In the rare case when an SVC provider limits usage to ATMs only (rather than point of sale), this definition is insufficient. Moreover, we feel that the FDIC should not differentiate, for regulatory purposes, between payroll cards and other types of stored value cards (see question #4). Thus, payroll cards should be included as a subset of SVCs. However, the current definition of SVCs does not appear to cover cards that are used primarily to handle paychecks, especially if the employing company, rather than a bank, is the issuer. The definition should thus be amended to include payroll functionality and it should be broadened to include cards that can only be used at ATM machines. CFSI supports disclosure of FDIC insurance for SVCs. Bank-issued cards should only include affirmation of insurance if FDIC insurance is indeed "passed through" directly to the end-use consumer. FDIC's proposed language "Member FDIC—funds accessible by this card are insured by the Federal Deposit Insurance Corporation" should suffice. A more difficult problem arises with respect to cards issued by entities other than banks and bank-issued cards where the underlying funds are an insured deposit, but the insurance does not pass through to the card-holder. We suggest that, in large part because consumers probably do not expect that a card not issued by a bank will have insurance, such cards carry no insurance notice. In the event our suggestion, with respect to question 8 below regarding bank-issued cards without pass-through insurance, is not adopted, a notice that "Funds accessible by this card are not insured for the benefit of the cardholder" would seem to be an appropriate warning to counter legitimate consumer expectations. CFSI notes that the FDIC has stated that if "the sponsoring company retains the right to recover the funds under certain circumstances (e.g., upon the expiration of a card)" (emphasis added), "such a right would indicate that the funds in the account actually belong to the sponsoring company, not the cardholders" and that "pass through coverage will be unavailable." While this position has a logical basis, we believe it is highly impractical given the economics of stored value cards. Because these cards are meant to be used for — often small — transactions, the revenues that enable banks and others to issue them come from transactional use. If a card remains outstanding for a long period of time with no use, the issuer must continue to pay certain processing fees to third parties, but receives no revenues to support those fees. Therefore, many issuers have begun putting expiration dates on cards or — with virtually the same effect — charging dormancy or non-usage fees. Although it might be possible to consider solutions (e.g., escheat) other than retention by the sponsoring company, these are likely to be impractical given the small amounts involved. Thus, we believe that a reasonable expiration date with retention of funds by the issuer should not preclude pass through insurance coverage. However, to protect consumers and avoid confusion, we suggest that stored value cards not be allowed to offer pass-through insurance unless (i) the expiration date is at least a year from the date of issuance and (ii) consumers are notified when they receive a card of any dormancy or non-usage fees or expiration date (if, at expiration, the sponsoring company retains the funds). In response to question #8, CFSI believes that there is very little benefit to anyone in allowing banks to issue SVCs without sufficient sub-accounting to enable insurance to pass through to the card holder. CFSI believes that insured depositories should take responsibility for record keeping for SVC programs, either directly or through records kept at a sponsoring company. Banks should be able to structure SVC programs in such a way that they can link transaction activity to a specific person and account number; in fact, banks are already doing this. This is a somewhat more expensive alternative to a pooled reserve account with only a single insured party. But given the purpose of SVCs as providing ready funds to consumers who own those funds, we believe such a limitation would be appropriate. This accounting structure would also enable all bank issuers of SVCs to disclose that the funds represented by their cards are insured. Thank you for the opportunity to comment on the FDIC's proposed changes to regulations covering stored value cards. Please feel free to contact me if you require further information. Sincerely, Jennifer Tescher |
| Last Updated 07/19/2004 | regs@fdic.gov |