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FDIC Federal Register Citations


Federal Deposit Insurance Corporation
Robert E. Feldman,
Executive Secretary
550 17th Street, N.W.
Washington, D.C. 20429

Re: Comments/Legal ESS--Proposed Stored Value Card Guidance

Dear Mr. Feldman:

Evolution Benefits is submitting this letter in comment on proposed rulemaking ("Proposed Rule") to clarify when funds at insured depository institutions underlying stored value cards would constitute "deposits" under the Federal Deposit Insurance Act.

We believe that the Proposed Rule is flawed in that it essentially treats all stored value programs in a similar fashion. As a result, the Proposed Rule does not focus on the special policy issues that may arise from particular types of stored value cards, such as those issued in connection with employee benefit programs. In addition, we believe that the Proposed Rule will have material adverse impact on many stored value programs. This would have a chilling effect on the growth of such programs, thereby denying their benefits to millions of employees and their families across the nation. As a result, we strongly oppose going forward with a final rule.

Due to the significant implications that the Proposed Rule will have on the development and regulation of stored value products, we urge the FDIC to conduct a comprehensive study of stored value cards and the Proposed Rule's implications on other regulatory issues, and to issue a revised proposal that reflects the different ways in which stored value products may be structured.

Background on Evolution Benefits And Its Programs

Evolution Benefits markets and manages a card program that enables employees and their eligible dependents to pay for qualified goods and services directly from their employee benefit accounts through the use of a stored value card. Examples of the types of accounts that are currently accessed are Flexible Spending Accounts ("FSAs"), Healthcare Reimbursement Arrangements, ("HRAs"), and Qualified Transportation Benefits ("QTBs"). Cards represent an alternative to the traditional method for accessing funds in these accounts, which generally requires that the employee pay out of pocket for the goods or services and apply to an administrator for reimbursement. These card programs have become very popular for the added convenience that they bring to employees and their dependents. The market for these cards is growing rapidly, and it is estimated that there are more than one million employees nationwide who have such a card attached to their benefit program. This represents, however, well under ten percent of the total number of employees participating in such benefit plans, and therefore this market can still be characterized as early-stage.

Policy Implications Ignored

The Proposed Rule ignores the policy implications of deposit insurance coverage. 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 is relying 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, others are more purely payment vehicles that serve as substitutes for cash. However, instead, of focusing on the policy reasons for subjecting certain products to deposit insurance, the FDIC focused 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.

While it may be appropriate to characterize certain stored value cards as insured deposits, such as certain payroll cards, for deposit insurance assessment purposes, we believe that the FDIC should take into account the policy rationale for characterizing the underlying funds contained in certain stored value products as deposits. The structure and design of stored value products vary widely. Stored value products include gift cards, payroll/employee cards, single-purpose prepaid cards, employee benefit cards, telephone cards and promotional/incentive cards. Moreover, the funding and settlement of 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.

For instance, most employee benefit cards fundamentally differ from bank deposits. Employee benefit cards serve as a more efficient substitute for other forms of payment. At the same time, these cards generally are more limited than deposit accounts in terms of the parties to whom payment can be made — payments generally can only be made to providers or retailers of qualified goods and services. For example, a card issued in connection with a healthcare benefit plan can generally only be used at healthcare provider locations and pharmacies. Further, the recipients of employee benefit cards do not choose the financial institution issuing the card, nor is the employee benefit card produced on the assumption that it is backed by the deposit insurance system. Similarly, employee benefit cards are not viewed by the employee as an investment or savings vehicle. Rather, the value underlying these cards is viewed by the employee as being an obligation of the employer, who is liable for making payments under the plan, and not the depository institution. In fact, the employee retains the right and ability to access plan funds through the traditional, paper-based reimbursement method (that is, by means other than the card) should he or she so choose or should it become necessary (e.g. the provider does not accept cards).

Another important point is that federal tax law governing many of the employee benefit accounts currently accessed via a stored value card, such as FSAs and HRAs, provides that the funds underlying these cards belong not to the employee, but to the employer. Federal tax law specifies that the employer funds the plan and defines how the employee can qualify for reimbursement from the plan. The employee/cardholder is responsible for reimbursing the plan for non-qualified expenditures. The card cannot be ATM accessible because the employee has no right to cash out of the plan. Moreover, the significant restrictions that exist in the underlying plan documents give no assurance to the employee that he or she will ever receive all of the benefit provided by the employer in the plan. Upon termination of employment, the employee's right to use the card generally terminates as well.

Proposed Rule Could Affect Other Regulations

While the Proposed Rule is concerned with whether funds backing stored value cards constitute deposits, with all the rights and responsibilities that would follow, the FDIC acknowledges in a footnote that this result could raise "a number of other issues," including reserve requirements, money laundering and application of the electronic fund transfer rules.1 Indeed, the application of many laws to stored value products is not clear, and will likely differ significantly, depending upon the type of product.

Regulation E Requirements—Electronic Fund Transfer Disclosures and Other Requirements

The FRB's Regulation E sets forth the requirements for electronic fund transfers to or from a consumer asset account, such as a deposit account, at a financial institution. The applicability of many Regulation E provisions, including periodic statements, limited liability for unauthorized transactions and error resolution procedures, to certain stored value products is not clear. Section 205.2(b)(1) of Regulation E defines the term "account" as a "demand deposit (checking), savings, or other consumer asset account .. . held directly or indirectly by a financial' institution and established primarily for personal, family, or household purposes." The FRB has refrained from adopting final amendments to Regulation E to specifically cover stored value products out of concern that too much regulation could inhibit the development of these emerging products. If the Proposed Rule is adopted, however, the FDIC's characterization of certain stored value products as deposits could influence an FRB determination that such deposits are consumer asset accounts under Regulation E. This would impose significant additional costs on employee benefit stored value card programs and would drive employers away from this popular and beneficial enhancement. The FDIC should not proceed with the Proposed
Rule until it has determined, as part of its comprehensive study, the resulting Regulation E implications, if any, of the Proposed Rule.

Mandating Disclosures is not Necessary

Although the Proposed Rule does not set forth any new specific disclosure requirements, the FDIC solicits comment on whether the Proposed Rule ought to mandate the clear and conspicuous disclosure, including disclosures on the stored value card itself, of the insured or non-insured status of the stored value card. In the supplemental information accompanying the Proposed Rule the FDIC continued to express concern that some purchasers of stored value cards may not understand whether the funds given to an insured depository institution in exchange for such cards are covered by federal deposit insurance. We urge the FDIC to avoid mandating specific disclosure requirements given the fact that there is little evidence to support a need for these disclosures. For example, employee benefit cards are not purchased by the employee, but rather are provided by the employer as a part of the benefit program. As mentioned previously, the employee recipient does not view the value underlying the card as an obligation of the depository institution, but rather as an obligation of its employer. In addition, pursuant to previously issued guidance on the matter, it is industry practice to provide such disclosures to the extent such disclosures are needed. Institutions should continue to have the ability to independently determine whether disclosures are needed based on the design of the product, consumer confusion regarding the product and other factors that may arise.


Evolution Benefits thanks the FDIC for the opportunity to comment on the Proposed Rule. Because of significant policy implications and the chilling effect it could have on the development of certain beneficial stored value programs, including employee benefit cards, we urge the FDIC not to adopt the Proposed Rule at this time. Rather, we ask that a through study be conducted and a revised proposal be issued which takes into consideration the various ways in which stored value programs can be structured.

Christopher M. Byrd
Executive Vice President
1 69 Fed. Reg. at 20,559 n.2. Not mentioned is the possible application of other requirements, such as those arising under Regulation DD.

Last Updated 07/15/2004

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