KEYCORP
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 Definition of “Deposit”; Stored
Value Cards RIN 3064-AC80
To Whom It May Concern:
KeyCorp, a financial
services company, is pleased to comment on the Proposed Rules (“Proposal”) issued by the Federal Deposit
Insurance Corporation (the “FDIC”) that would clarify the
meaning of “deposit” as that term relates to funds at insured
depository institutions underlying stored value cards. Section I of this
letter provides our general comments on the topic and Section II addresses
issues regarding specific issues in the proposal and our specific concerns.
About KeyCorp
Cleveland-based KeyCorp is one of the nation's largest bank-based financial
services companies, with assets of approximately $84 billion. Key companies
provide investment management, retail and commercial banking, consumer
finance, and investment banking products and services to individuals
and companies throughout the United States and, for certain businesses,
internationally. The company's businesses deliver their products and
services through branches, offices, online banking services, telebanking
centers and a network of approximately 2,200 ATMs.
I. General Comments
Although Key understands
the FDIC’s decision to review stored
value cards and the issue of coverage under the FDI Act, Key opposes
the adoption of these proposed regulations for all of the following reasons:
• There does
not appear to be any advantage in offering a stored value card that
carries FDIC
insurance protection for the benefit of
a cardholder.
• The regulatory risk presented by this proposal is the potential
for the creation of a deposit account relationship where none exists
for purposes of federal law (i.e. the FDI Act). However, if the rules
are adopted as proposed, this may influence interpretations of many other
banking laws and regulations. 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(l),
and the Customer Identification Program rules, 31 C.F.R. § 103.121,
and the Gramm-Leach-Bliley Act and Regulation P. 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 enacting a final rule because of the effect that it may have
on these other regulatory questions. The cost of compliance will far
outweigh the benefits of offering stored value cards and will drive many
of the small member service providers (MSPs) in the networks and other
sales promoters or processors out of business.
•
Bankcards represent only 25% (source 2004 Gift Certificate FACT Report)
of the current card market, and any additional regulations will put financial
institutions at a competitive disadvantage with merchants that issue
cards in a closed system environment, (i.e. limited to a merchant’s
stores or a group of stores at a shopping mall), which are excluded from
this proposal.
• FDIC insurance adds little benefit to cardholders from the perspective
of potential loss to a cardholder. The average initial balance on prepaid
debit cards (stored value cards) issued by KeyBank is less than $800.
Also, according to a Value Link survey in August 2003, 54% of the consumers
spend the initial card balance within one month; 61% spend the value
in the first use of the card.
• The consumer does not perceive FDIC insurance as an advantage when purchasing
a card.
• Adding additional regulatory requirements and associated costs may discourage
new competitors from entering this card industry, severely curtail future
continuation or development of stored value card products by financial
institutions. This will reduce competition and lessen downward pressure
on pricing to cardholders.
• The role of a financial institution, in most instances, is service
provider for third party promoters which market and support the card
issuance, and customer service provider for the cards. A financial institution
primarily operates in an open system as a sublicensor of the service
marks of the bankcard networks, serve as the operator of the card program
for purposes of access to the card network and participating merchants,
and is responsible for performance of the promoter’s duties under
the card network rules, including settlement of card transactions.
• The profitability
of a stored value card would not cover the costs of sending periodic
statements under Regulation E; deposit account
disclosures under Regulation DD or meeting other regulatory requirements.
• The average
balance on a payroll card is not large and is generally consumed within
two
weeks (i.e. by the next payday). Therefore, the risk
of loss to a card holder is low and FDIC insurance does not provide a
meaningful benefit that outweighs the added cost of regulatory compliance.
• The risk of money laundering appears low, because card network
rules “self regulate” this product (except for payroll cards)
by placing requirements to limit the dollar amount of value that may
be purchased or reloaded to a card initially, the value that may be added
daily or monthly, the aggregate available balance, and limits on daily
card transactions.
II. Proposal Comments
Key would like to ask that the FDIC strongly consider the following
comments on the proposed rules.
Stored Value Card Issuer
A bank card issuer
may not hold funds for settlement purposes and the face amount of outstanding
card balances should not be considered "deposits".
Also, settlement liabilities of a bank card issuer under network rules
should not be classified as a deposit. Under applicable network rules,
for purposes of settlement of card transactions, a card issuer carries
the liability for settlement of card transactions in the network. This
would be true, whether or not the card is marketed (i) directly by a
bank card issuer to its own deposit customers or branch customers, (ii)
by correspondent banks to their respective local customers, under an "Agent
bank" program, or (iii) by a third party sales promoter/service
provider to its local commercial customer who redistribute the cards.
Finally, when a merchant accepts a card transaction, the merchant does
not know if the underlying account (as the ultimate source of funds)
is a credit account, stored value account, or a traditional deposit (debit)
account. In each scenario, the bank card issuer will be the contracting
party under the card terms and conditions distributed to the cardholder.
Funds paid by a cardholder
to the sales promoter or distributor may be held by the promoter at
any card issuing bank or any other financial
institution. As card transactions occur daily, the issuer's card processor
makes payment settlement to participants in the network on behalf of
the issuer, and the issuer is then required to pay the processor same
day. At this time, the card issuer looks to reimbursement of the settlement
expense by repayment from the card promoter/distributor that has the
funds (somewhere). For this purpose, the promoter is required to keep
a "funding account" at the card issuer, in an internal account
at which there may be a zero balance at end of day. Separately, a card
issuer will require a promoter to establish a "reserve account" or "escrow
account" as cash collateral to secure or fund this repayment obligation.
This reserve account balance may be based on an average daily settlement
amount of card transactions over the preceding 30 days, multiplied by
a factor (i.e. xxx number) to cover the risk of nonpayment over several
(xxx) days for the time period estimated as needed to shut down the ICA
# or BIN # for the promoters program and to stop future card transactions.
In the summary above,
the actual "funds" held by the bank
card issuer may be in an amount vastly smaller than the face value of
the aggregate purchase price paid for (or reloaded to) the prepaid debit
cards. However, for credit reasons a promoter may be required by an issuer
to keep larger balances.
Key suggests 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.
Stored Value Card Exemptions
Key also recommends that there should be an exemption for stored value
cards issued flexible spending accounts (FSA) under employer benefit
plans. For example on medical reimbursement cards under most employer
benefit plans, an employee must make an election prior to each calendar
year for the dollar amount to be allocated for the following calendar
year for qualified medical expenses. Under a paper system (without a
stored value card), the employee has to submit paper work and medical
expense receipts for reimbursement by the benefit plan.
A medical reimbursement card works in the same manner, with the card
account balance being deducted for eligible medical payments, and without
any paper work or receipts. While the card can be used with any merchant
that accepts a network branded card in an open system, authorization
processing is limited to eligible medical purchases. The card balance
on day of issuance is for the full amount allocated by the employee,
but the employee funds this account by a payroll deduction plan during
the entire calendar year. If the funds are not used during the year,
the funds are forfeited. If the employee terminates employment, the unused
funds are forfeited. However, the employee can use the entire balance
during the first month of the calendar year, and then immediately terminate
employment. In this case, the employee is not obligated to repay the
full amount, and the employer takes the loss (due to stoppage of payroll
deduction) without deducting this amount from the severance or termination
pay to the employee. In this scenario, the primary obligation to fund
repayment of card transactions is on the employer. The funds to cover
reimbursement of card transactions are not held by the card issuer or
by the processing company for the employer benefit plan. Since a bank
issuer does not control the funds, a cardholder should not have any confusion
and should not expect that the card balance would be and FDIC insured
deposit.
Key believes that Section 303.16(b) should be expanded to include a
new subsection that describes what types of accounts are not subject
to this regulation -- similar to the concept of exclusions set forth
in Section 303.16(c). For example, there would be significant benefit
for compliance purposes (assuming some type of regulation is adopted)
if there were an exclusion expressly provided for bona fide trust accounts
(i.e. card issued to trustee) or for cards issued under an employer's
benefit plan for employees, subject to IRS regulations (i.e. a medical
reimbursement account card), where the cardholder's ownership rights
are controlled by the employer's benefit plan and an independent plan
administrator.
Hybrid System
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(l) of
the FDI Act. The Proposal indicates that the individual subaccounts would
be considered deposits under paragraph 3(l)(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(l)(3)
is not consistent with the FDIC’s prior interpretations of paragraph
3(l)(3).1 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(l)(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(l)(3) “because such funds are not held for a special
or specific purpose.” See FDIC Advisory Opinion No. 97-4 (May 12,
1997).2
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(l)(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(l)(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 “the 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.”
Advertising and Disclosures
Key does not believe that the final rule should mandate the use of the
specific disclosures set forth by the FDIC or similar disclosures. Rather,
once the FDIC has given more clarity to the circumstances when insurance
applies through a final rule, issuers can determine appropriate disclosures
given the guidance provided.
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. Thus, the Board of Governors should be
consulted regarding the effect of the FDIC proposal.
***************************************
We thank the FDIC for the opportunity to provide our comments and thoughts
on the Proposal. If you have any questions concerning our comments, or
if we may provide further assistance, please contact me at 216-813-8439
or Greg Poore, Vice President and Senior Counsel, KeyBank NA at 216-689-5105.
Sincerely,
Carl Stauffeneger
Senior Vice President
Payment Services
________________________________
1 Such an intrerpretation 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.
2 The FDIC reached the contrary conclusion--and held that paragraph
3(1)(3) did apply--to "funds underlying EcashMint individual accounts."
However, the 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 paragrarph 3(1)(3). It was not enough that the Ecash Mint funds
were held for a single customer, as the Proposal suggests.
3 The Proposal noted that reserve requirements "are of great importance
to the FDIC" but are "not addressed in this proposed rulemaking." 69
Fed. Reg. at 20559, n.2. However, the Proposal may very well have an
effect, whether direct or indirect, on reserve requirements.
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