CENTER FOR FINANCIAL SERVICES INNOVATION
July 15, 2004
Mr. Robert E. Feldman Executive Secretary
Attention: Comments / Legal ESS
Federal Deposit Insurance Corporation
550 17th Street, NW
Washington, DC 20429
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 FDICfunds 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
Director
Center for Financial Services Innovation
2230 South Michigan Ave., Suite 200
Chicago, IL 60616