MASTERCARD
INTERNATIONAL 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.
4 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.
5 The
term "account" is used under Regulation E, 12 C.F.R.§ 205.2(b),
Regulation CC, 12 C.F.R.§229.2(a), Regulation DD,12 C.F.R. §230.2(a),
and the CIP Rules, 31 C.F.R. § 103.121(a)(1).
However, each regulation defines the term differently, and none of those
definitions is the same as the definition of a deposit under the FDI Act.
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