Federal Deposit
Insurance Corporation

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:

MasterCard International Incorporated ("MasterCard")¹ submits this comment letter in response to the Proposed Rule ("Proposal") issued by the Federal Deposit Insurance Corporation (the "FDIC") regarding the definition of "deposit" under section 3(1) of the Federal Deposit Insurance Act, 12 U.S.C. § 1813(1) (the "FDI Act" or the "Act"), as it relates to funds at an insured depository institution underlying "stored value cards." See 69 Fed. Reg. 20558 (Apr. 16, 2004). MasterCard appreciates the opportunity to comment on the Proposal.

Expansion of Stored Value Cards

Since the publication of FDIC General Counsel's Opinion No. 8 ("GC 8"), in 1996, the issuance and acceptance of stored value cards has expanded greatly in the marketplace. Many financial institutions have started issuing stored value cards, and increasingly those cards provide cardholders with access to established networks of merchants and ATMs, such as via the MasterCard, Cirrus, and Maestro networks.

The uses of stored value cards have also expanded. In particular, stored value cards have become an important tool by which financial institutions can serve the needs of the "unbanked," i.e., people without traditional banking relationships. For example, as the FDIC recognized, payroll cards are an increasingly popular type of stored value card. Payroll cards permit an employee to receive his or her wages by direct deposit to the card on a recurring basis, and thus give the employee a safe, reliable way of receiving and accessing wages. The cards eliminate the need for, and expense of, visiting a check casher to cash a weekly or biweekly paycheck. Payroll cards also result in savings to employers, who can reduce the expense of issuing and monitoring paper payroll checks.

Stored value cards that access widespread networks such as the MasterCard network, including payroll cards, provide cardholders ready access to their funds. They are also more secure than carrying cash. Using a network stored value card generally requires a signature or PIN from the cardholder. Cards can also be deactivated and unused funds transferred to a new card.

Given these benefits and the increasing issuance and use of stored value cards, we welcome the FDIC's decision to address stored value cards and the important issue of coverage under the FDI Act. At the same time, we urge the FDIC to exercise caution and restraint in this area. The past few years have demonstrated the benefits that stored value cards can bring to the marketplace, and it would be unfortunate for regulatory burdens to inhibit the growth of this important product.

We believe that there are significant questions as to whether the Proposal is necessary or beneficial and that careful consideration should be given to its broader implications. If the Proposal is adopted, we believe the FDIC must ensure that it does not impede the development of stored value products. Furthermore, if the Proposal is adopted, we believe that several changes should be made to the Proposal. In particular, we believe that the treatment of cards in the so-called "hybrid system" is not properly addressed under the Proposal.

Definition of Issuer

As an initial matter, we suggest 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.

We believe that the second part of this definition—the making of a promise to the cardholder to honor the value on the card—should define who "issues" a card for purposes of the Proposal. Thus, if a non-bank company promotes a stored value card program and coordinates the distribution of cards, but a financial institution promises to cardholders to provide funds when the card is used, the financial institution should be considered to be the "issuer" for these purposes. In this regard, the definition should be limited to those circumstances in which the entity is liable to the cardholder for the amount on the card. However, the fact that the bank agrees to honor settlement obligations for use of the card should not make the bank an "issuer." We also note that the definition is easier to apply than determining who "distributes" the cards, and would clarify that a card would not have multiple "issuers" because more than one party may be involved in its distribution.

Consideration of the FDIC's Examples

The Proposal presents a series of three examples of stored value card programs, noting that the examples are not exclusive, and presents the rationale for deeming such programs to be covered by the definition of "deposit" under the FDI Act. The examples are helpful in considering the Proposal, and we address each in turn.

Example A. The first example given by the FDIC in the Proposal involves a sponsoring company that issues stored value cards to cardholders for cash, and then places the cash into an account at an insured depository institution. The company uses the funds in the account to make payments to merchants as cardholders use the cards. Under the Proposal, such funds would be considered "deposits" for purposes of the FDI Act.

We believe that this conclusion is correct, because the account is a "commercial account" under paragraph 3(1)(1) of the Act and "money received or held ... for a special or specific purpose" under paragraph 3(1)(3) of the Act (i.e., the specific purpose of satisfying the depositor's liability for the cards issued by it). We also agree that it is appropriate to allow the availability of pass-through insurance to be governed by the existing rules in 12 C.F.R. § 330.5. However, we think that pass-through insurance is unlikely to apply to most stored value card systems.

Example B. 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(1) of the FDI Act. The Proposal 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(l)(3).² 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(1)(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(1)(3) "because such funds are not held for a special or specific purpose." See FDIC Advisory Opinion No. 97-4 (May 12, 1997).³

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 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(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 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 "[t]he 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."

Example C. The third example set forth in the Proposal is a payroll card. We agree with the FDIC that payroll cards need not be specially addressed, but should be covered by rules generally applicable to stored value cards. We also note that, in many cases, the issue of ownership of the funds for payroll cards may be effected or determined by state wage payment laws.

Advertising and Disclosures

We understand the FDIC's concern that depository institutions that issue stored value cards must accurately disclose whether funds are covered by FDIC insurance. The guidance provided by the FDIC regarding disclosures is helpful. However, we do not believe that the formal rule should mandate the use of the specific disclosures set forth by the FDIC or similar disclosures.

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.⁴

Effect on Other Regulatory Issues

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(1), and the Customer Identification Program rules, 31 C.F.R. § 103.121. 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 adopting a final rule because of the effect that it may unintentionally have on these other regulatory questions.

For example, a stored value card generally does not meet the definition of an "account" under Regulation E, 12 C.F.R. § 205.2(b). Moreover, the provisions under Regulation E logically should not apply to stored value cards. In that regard, many stored value cards are used over a short period of time and in a limited number of transactions. Periodic statements, as contemplated by Regulation E, 12 C.F.R. § 205.10, do not serve the needs of such cardholders. A requirement to provide such statements, however, would, at a minimum, impose a substantial cost on issuers that would have to be passed on to cardholders.

We welcome the FDIC's recognition, in the Proposal, that a stored value card is not necessarily an "account." ⁵ Thus, the Proposal recognizes that the issuer may maintain a reserve account for its collective liabilities under the stored value card program, along with "supplemental records ... that enable the institution to determine the amounts of money owed to particular persons...." 69 Fed. Reg. at 20562. We agree that any rule adopted by the FDIC should not depend on characterization of such supplemental records as giving rise to an "account."

We strongly urge the FDIC to avoid enacting a final rule that, either directly or indirectly, could impact the treatment of stored value cards under other federal statutes and regulations. Stored value cards have developed significantly over the past few years, and will likely continue to do so. They also serve important and growing uses in the marketplace. Careful consideration must be given to each potentially relevant federal regulation and its costs and burdens before applying it to stored value cards.

Once again, we appreciate the opportunity to comment on the Proposal. If you have any questions concerning our comments, or if we may otherwise be of assistance in connection with this issue, please do not hesitate to call me, at the number indicated above, or Michael F. McEneney at Sidley Austin Brown & Wood LLP, at (202) 736-8368, our counsel in connection with this matter.

Sincerely,
Jodi Golinsky
Vice President and
Senior Regulatory Counsel

______________________

¹ MasterCard is an SEC-registered private share corporation that licenses financial institutions to use the MasterCard service marks in connection with a variety of payments systems, including stored value cards.

² Such an interpretation 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.

³ The FDIC reached the contrary conclusion—and held that paragraph 3(1)(3) did apply—to "funds underlying Ecash Mint individual accounts." However, that 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 paragraph 3(1)(3). It was not enough that the Ecash Mint funds were held for a single customer, as the Proposal suggests.