Independent
Community Bankers of America
July 15, 2004
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:
The Independent Community
Bankers of America (ICBA)1 appreciates the opportunity to comment on a
proposed
rule by the Federal Deposit Insurance Corporation
(FDIC) concerning stored value cards and the definition of “deposits” under
the Federal Deposit Insurance Act (FDI Act).
Background
The FDIC is proposing a rule that would clarify the meaning of “deposit” as
that term relates to funds at insured depository institutions underlying
stored value cards. The proposed rule would replace General Counsel’s
Opinion No. 8. (GC8), published by the FDIC in 1996. Since the publication
of GC8, the banking industry has developed new types of stored value card
systems. The purpose of the proposed rule is to address new types of systems
and to clarify when the funds in these systems will qualify as insured "deposits” pursuant
to the FDI Act.
Definition of “stored valued card.” The proposed rule defines
a “stored value card” as a device that “enables 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.”
Stored Value Cards Issued by Depository Institutions. In the case of funds
received by an insured depository institution from cardholders, or funds
received from others on behalf of cardholders or for payment to cardholders,
in exchange for stored value cards issued by the depository institution,
the proposed rule states that funds are “deposits” unless (1)
the depository institution records its liabilities for such funds in an
account representing multiple cardholders; and (2) the depository institution
maintains no supplemental records or subaccounts reflecting the amount
owed to each cardholder.
Stored Value Cards Issued by a Sponsoring Company. In the case of funds
received by an insured depository institution from cardholders in exchange
for stored value cards issued by a company (“sponsoring company”),
the proposed rule states that the funds are “deposits” if the
depository institution bears an obligation to forward the funds to the
sponsoring company or to hold the funds for the sponsoring company. However,
if the depository institution bears no obligation to forward or hold the
funds (e.g., the depository institution purchases the cards from the sponsoring
company and then resells the cards to the cardholders), then the funds
are not considered “deposits.”
Funds Placed by Sponsoring Company. In the case of funds placed at an insured
depository institution by a sponsoring company for the purpose of making
payments on stored value cards issued by that company, the proposed rule
says that the funds are considered “deposits.”
Disclosure Requirements. The proposed rule does not mandate disclosure
requirements for stored value cards. However, the FDIC states in the preamble
to the proposed rule that depository institutions must accurately disclose
the insurability of the funds underlying any stored valued product in a
manner that is clear and conspicuous. The preamble also gives some examples.
In cases in which the funds qualify as “deposits,” the preamble
states that the cards should include the following statement: “Member
FDIC—Funds accessible by this card are insured by the Federal Deposit
Insurance Corporation.” On the other hand, in cases in which the
funds do not qualify as “deposits,” the cards should include “NOT
FDIC INSURED—Funds accessible by this card are NOT insured by the
Federal Deposit Insurance Corporation.”
ICBA Believes That The Proposed Rule Is a Reasonable Extension of General
Counsel Opinion No. 8
When GC8 was first issued in 1996, we commended the FDIC for its issuance
and supported the FDIC issuing guidance regarding stored value cards and
whether
they are covered by deposit
insurance.2 However, GC8 did not address all types
of stored value card systems involving insured depository institutions. Furthermore,
the development of new systems has created a need for additional guidance as
to whether the underlying funds qualify as “deposits.” ICBA believes
that the proposed rule retains the principles set forth in GC8 and extends
those principles to new types of stored value card systems.
An example of a type
of system not addressed in GC8 is a system in which (1) consumers place
funds with
a sponsoring company in exchange for stored
value cards and, (2) in order to make payments on the cards, the sponsoring
company maintains an account at an insured depository institution. In this
case, we agree with the FDIC’s legal analysis that the funds placed
at the insured depository institution are “deposits” as defined
under the FDI Act. Section 3(l)(1) defines “deposit” as “the
unpaid balance of money or its equivalent received or held by a bank or
savings association in the usual course of business and for which it has
given or is obligated to give credit, either conditionally or unconditionally,
to a commercial, checking, savings, time, or thrift account.” We
agree with the FDIC that in the case of an account funded by a sponsoring
company for the purpose of making payments on stored value cards, the account
is a “commercial account” under this paragraph. This conclusion
is supported by the case law and by GC8.3
Another example of
a system not addressed in GC8 is where a depository institution maintains
a reserve
account for all cardholders but also maintains
a subaccount for each cardholder either through a third-party processing
agent or at the bank. GC8 did address the example of a depository institution
issuing stored value cards with a reserve account, but did not address
the example of a depository institution using subaccounts in connection
with a reserve account. In the latter example, we also agree with the FDIC
that although the reserve account does not qualify as a “commercial,
checking, savings, time or thrift account” under Section 3(l)(1)
of the FDI Act, the subaccounts do qualify as “commercial, checking,
savings, time or thrift accounts” and therefore the funds are “deposits” under
Section 3(l)(3) of the FDI Act. As long as the depository institution maintains
subaccounts that reflect the amounts owed to each individual cardholder,
then the individual subaccounts should be considered “deposits.”
The Proposed Rule Should Apply Equally to All Stored Value Cards
While ICBA agrees that the proposed rule should apply equally to all types
of stored value cards, including “payroll cards”, “prepaid
cards”, or “check cards,” ICBA thinks it is important that
banks have the ability to offer a “payroll card” program where
the underlying funds qualify as insured “deposits” for the employee.
Payroll cards are likely to have significant value loaded on them representing
a week or two of hard earned wages. Deposit insurance protection for these
funds is an important public policy goal. Under the proposed rule, the funds
underlying all such types of cards issued by depository institutions would
be “deposits” except where the depository institution maintains
a pooled “reserve account” but maintains no subaccounts or other
supplemental records reflecting the amount of money owed to particular cardholders.
As far as determining
whether a “payroll card” qualifies for “pass-through” insurance,
the FDIC would first apply the proposed rule in determining whether the
underlying funds qualify as “deposits.” If a determination
is made that the funds are “deposits,” the FDIC then would
apply the principles set forth in FDIC Advisory Opinion No. 02-03 (August
16, 2002) to determine whether there is “pass-through” insurance.
According to that opinion, if the funds belong to the employer (as in the
case of a traditional corporate payroll account), the funds are insurable
to the employer. On the other hand, if ownership of the funds has passed
to the individual employees (as in the case of direct deposits made by
the employer on behalf of employees), then the funds would be insurable
on a “pass-through” basis to the employees.
ICBA Agrees
with the Proposed Definition of “Stored Value Card”
Under the proposed rule, the term “stored value card” means a device
that “enables 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.” ICBA agrees with that definition. Whether the card is “on-line” (i.e.,
provides direct access to a database for the purpose of obtaining payment authorization)
or ‘off-line” is unimportant. The distinction that matters is whether
the stored value card provides access (directly or indirectly) to funds received
and held by an insured depository institution.
If the funds are held
by an insured bank, the proposed rule would govern the question of whether
the funds qualify as “deposits.” However,
if the funds are not held by an insured bank, the existence of insured “deposits” would
not be possible. Therefore, the proposed rule would not apply to gift cards
issued by a retailer in which the retailer receives prepayment from the
cardholder and funds are neither held by a bank or paid through a bank.
However, if, in conjunction with a gift card program, the retailer places
collected funds into a bank, the funds would be insurable to the retailer
but not to the cardholder.
FDIC Should Study the Implications of the Proposed Rule On Other Regulations
ICBA is concerned about the unintended consequences of the proposed rule and
what effect it will have on other banking regulations, including Regulation
D (reserve requirements) and the USA PATRIOT Act Customer Identification
Rules. For instance, if the proposed rule is adopted, will financial institutions
have to comply with the Customer Identification Rules for individual cardholders
when they issue stored value cards that are considered “deposits”?
Will they have to reserve for them under Regulation D?
Another example of
ICBA’c concerns about unintended consequence
is respect to the Federal Reserve’s interpretation of “account” under
Regulation E. Section 205.2(b)(1) of Regulation E defines the term “account” as
a “demand deposit, savings or other consumer asset account…held
directly or indirectly by a financial institution and established primarily
for personal, family, or household purposes.” If the proposed rule
is adopted, the FDIC’s characterization of certain stored value products
as deposits could influence a determination by the Federal Reserve that
such deposits are consumer asset accounts under Regulation E. ICBA believes
that extending coverage of Regulation E to stored value cards would be
inappropriate, resulting in unnecessary cost and regulatory burden, without
commensurate value to the cardholder.
In a footnote to its
release, the FDIC acknowledges that there a number of issues which may
be impacted
by this proposed rule and that it plans
to “monitor” these issues. ICBA recommends that the FDIC study
the implications of the proposed rule with the other banking agencies.
Disclosures Should Not be Mandated
We agree with the FDIC that to avoid confusion on the part of customers, depository
institutions should accurately disclose the insurability of the funds underlying
any stored value product in a manner that is clear and conspicuous. We also
agree that the examples provided in the preamble adequately address consumer
confusion about the insurability of funds underlying stored value products.
However, there is no reason for the FDIC to adopt mandated disclosure requirements
as part of the proposed rules since this would become a regulatory burden
for banks. Financial institutions should continue to have the ability to
independently determine whether disclosures are necessary based on the type
of product, the potential for consumer confusion regarding the product, and
other factors.
Conclusion
Although the proposed rule will not resolve all questions concerning the definition
of “deposit” as that term relates to funds underlying stored
value cards, it is a step in the right direction and a reasonable extension
of General Counsel Opinion No. 8. The process of defining “deposit” in
response to all the new developments will be an evolutionary process. While
we agree with the proposed definition of “stored value card” and
with the FDIC’s approach under the proposed rule, we do recommend that
the FDIC study the implications of the proposed rule on other regulations
in conjunction with the other banking agencies. Furthermore, we would recommend
that the FDIC not adopt mandated disclosure requirements on banks that offer
stored value cards.
If you have questions or need any additional information, please do not hesitate
to contact me at 202-659-8111 or at Chris.Cole@icba.org.
Sincerely,
Christopher Cole
Regulatory Counsel
________________________________
1 The Independent Community Bankers of America represents the largest
constituency of community banks of all sizes and charter types in the nation,
and is dedicated exclusively to protecting the interests of the community banking
industry. ICBA aggregates the power of its members to provide a voice for community
banking interests in Washington, resources to enhance community bank education
and marketability, and profitability options to help community banks compete
in an ever-changing marketplace. For more information, visit ICBA's website
at www.icba.org.
2 October 30, 1996, ICBA (then the Independent Bankers
Association of America),
filed a comment letter with the FDIC supporting GC8.
3See
Seattle-First National Bank v. FDIC, 619 F. Supp. 1351 (W.D.
Okla. 1985)
and FDIC v. European American Bank & Trust Co., 576 F. Supp. 950 (S.D.N.Y.
1983).
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