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FDIC Federal Register Citations


July 27, 2004

Robert E. Feldman
Executive Secretary
Federal Deposit Insurance Corporation
550 17th Street, NW
Washington, DC 20429
ATTN: Comments/ Legal ESS

Re: FIL-44-2004: Proposed Rule on Determining When Funds Underlying Stored Value Cards Qualify as "Deposits"

Dear Mr. Feldman:

This comment letter is submitted on behalf of the Electronic Funds Transfer Association (EFTA) in response to the request for comment recently issued by the Federal Deposit Insurance Corporation (FDIC) on a proposed rule to clarify when funds underlying stored value cards qualify as "deposits" for purposes of deposit insurance.

EFTA is the nation's leading non-profit, inter-industry trade association dedicated to the advancement of electronic payment systems and electronic commerce. The Association's nearly 900 members represent a broad spectrum of perspectives that engender accurate and effective analysis of electronic payments and electronic commerce issues. Members include the nation's leading financial institutions, electronic payment networks, card associations, retailers, information processors, equipment, card and software manufactures and vendors, Internet providers, telecommunications companies, state governments and Federal agencies. A list of EFTA Board Members is attached. Please note that none of the governmental members of EFTA were involved in the development of this comment letter.

EFTA supports adoption of a rule that will clarify deposit insurance coverage of funds related to prepaid, payroll, gift and stored value cards (collectively, in this letter, prepaid cards) because such clarification will enable our members to introduce new programs that will better serve their constituencies. As the electronic revolution unfolds, the explosion of prepaid cards is considerably altering the nature of consumer payments. To your agency's credit, the FDIC has been acutely aware of such changes and consciously dedicated to studying the effects of technological advances on the financial community. We believe that your patience in allowing the prepaid card industry to expand and grow, without extensive regulation, was an integral factor to its swift development. Because prepaid cards are becoming more and more commonplace, a need to refine the pertinent issues surrounding them presently exists. We therefore support rulemaking efforts to clarify the meaning of "deposit" as it relates to the insurance of funds held by depository institutions. We are not, however, able to support the proposal in its current form.

We have the following specific comments about the proposal:

Need for Agency Coordination in Rulemaking

A major concern of EFTA's members is the need for greater uniformity and collaboration among government agencies with jurisdiction to regulate prepaid cards. The FDIC's proposal is merely one of the building blocks in the regulatory structure that will inevitably surround the prepaid card industry. The Board of Governors of the Federal Reserve System, the Office of the Comptroller of the Currency (which has already weighed in on the subject of payroll cards), FINCen, the Office of Foreign Asset Controls, the Federal Trade Commission and the other bank regulatory agencies all have an interest in the development and regulation of prepaid cards. Our members are deeply concerned that the development of prepaid card programs will be hampered by piecemeal regulation that is counter-productive, costly, and confusing. Regulations adopted by the FDIC relating to insurable deposits will inevitably have an effect on the regulatory action of other agencies, such as the Federal Reserve Board. We urge the FDIC to work together with its sister agencies on a coordinated basis when promulgating rules affecting prepaid cards. A coordinated study of prepaid card applications and the consequences of regulatory action should be undertaken prior to adoption of rules by the FDIC or any other agency.

Repeal of General Counsel's Opinion Number 8

While we acknowledge that the proposed rule seeks to replace General Counsel's Opinion Number 8 (the Opinion), we respectfully request that the FDIC repeal the Opinion when it promulgates any prepaid card regulation. The analysis in .the Opinion, while useful at the time it was issued, is now outdated and will only serve as a source of confusion to the industry if left in place. The issues addressed in the Opinion can be more simply and easily addressed in the final rule.

Replacement of Term "Stored Value Card"

We request that the FDIC consider replacing the term "stored value card" with more precise and commonly-used terms. The term "prepaid card" is more commonly used in the industry, and provides less opportunity for confusion among consumers and affected industries. If the FDIC wants to use a single term to generally describe the cards used for stored value-like applications, we suggest that the term "prepaid card" be used. In addition, we urge the FDIC to differentiate among the different types of prepaid cards and to describe them in simpler and more universal terms when addressing the issue of whether funds underlying them constitute deposits for purposes of federal deposit insurance. For example, we suggest that the rules should differentiate among some or all of the following: single merchant gift cards (e.g., a Starbucks card); multiple merchant gift cards (e.g., a mall card); branded prepaid cards (e.g., a VISA or MasterCard-branded card) that can be used wherever branded cards are accepted; closed-system prepaid cards (e.g., college or university cards); payroll cards (e.g., card used by employers to pay employees wages).

Need to Clarify the Meaning of Deposit

While we support in principle the FDIC's proposal to adopt a new section of part 303 to clarify the meaning of "deposit" as it relates to funds at insured depository institutions underlying prepaid cards, we suggest that the rule be more specific and clear about what is and what is not covered under the deposit definition. A list as to what is explicitly encompassed in the definition would ameliorate the confusion as to exactly what is subject to the regulatory scheme.

We strongly urge the FDIC to reconsider the basic premise of the proposed rule that funds underlying prepaid cards are deposits, depending on the record-keeping associated with the cards. Consumer and industry expectations regarding prepaid cards vary from product to product and the insurability of the funds underlying such cards should be based on policy considerations regarding their use, rather than a mechanistic formula that does not address consumer needs or industry practice. Merchants, processors, and financial institutions can accurately identify the value on a prepaid card at any time regardless of the form or style of record keeping.

For example, the FDIC should specifically address payroll cards in any final rule and provide that the funds underlying such cards be considered deposits that are eligible for "pass-through" insurance. There should also be a requirement that adequate records be kept to ensure that consumer funds are safeguarded. Payroll cards should be insurable to the individual, as these are analogous to cash and represent the money that employees have themselves earned.

On the other hand, consumers have very different expectations and experience with gift cards, which are cash substitutes and viewed as such by consumers. There is no logical policy or consumer protection basis for treating funds underlying such cards as deposits.

Disclosure Requirements

We do not support the adoption of specific disclosure requirements relating to the insured status of prepaid card funds at this time. There does not appear to be a consumer problem that would justify such disclosures. If a disclosure rule is adopted, disclosure should (a) be mandatory only if a deposit is FDIC insured, (b) not be adopted until clarity is reached on what exactly qualifies as a "deposit," and (c) be capable of being produced in a very abbreviated fashion. Certainly no other disclosures should be mandated by the FDIC, especially given the Federal Reserve Board's jurisdiction regarding the Electronic Fund Transfer Act and Regulation E.

We appreciate the opportunity to comment on the proposed rulemaking. We believe that a straightforward, clear, and concise definition of "deposit" represents an important step in the furtherance of technological advances in e-commerce and the delivery of financial products to consumers, but urge the FDIC to address the serious policy considerations in a new proposal before final adoption of regulations and to coordinate any actions with other concerned agencies.


H. Kurt Helwig

Last Updated 08/10/2004

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