AMERICAN
BANKERS ASSOCIATION
July 15, 2004
Robert E. Feldman
Executive Secretary
Federal Deposit Insurance Corporation
550 17th Street N.W.
Washington, D.C. 20429
Attention: Comments/Legal ESS
Re: Definition of “Deposit”—Stored
Value Cards
69 Federal Register 20558, April 16, 2004
The American Bankers
Association (“ABA”) is responding to
the request of the Federal Deposit Insurance Corporation (“FDIC”)
for comments on its proposed definition of “deposit” as it
relates to funds at insured depository institutions underlying stored
value cards.1 Many of our members offer various types of stored value
or debit cards and, accordingly, are extremely concerned about the potential
impact of this proposal on this emerging market.
Although ABA appreciates
FDIC’s careful efforts to determine which
stored value structures give rise to “deposits” for purposes
of the Federal Deposit Insurance Act (“FDIA”), we believe
that, given the developing state of this market, the proposal is premature
and could have unintended consequences. Rather, we believe that a broad
survey of the types and structures of stored value products currently
available, including the potential application of numerous federal and
state laws and customer expectations, is a necessary first step before
rulemaking is considered.
BACKGROUND
The proposal classifies
stored value products2 based on whether the cards are issued
by the insured
institution or a third party (“sponsoring
company”).
Insured institution
issues cards. With respect to stored value cards issued by an insured
institution,
the underlying funds will be “deposits” for
purposes of the FDIA if:
• The institution holds the funds in a pooled “reserve account;” and
• Maintains directly or indirectly, records or subaccounts reflecting the
amount owed to each cardholder.
Under the proposal, the only time funds underlying insured institution-issued
cards would not be deposits is when the institution has no records of
the amount of available funds on each card.
Sponsoring
company issues cards. With respect to stored value cards
issued by a sponsoring company such as an employer, the underlying funds
held in an account at an insured institution will be deposits if the
insured institution is obligated to:
• Forward the
funds to the sponsoring company; or
• Hold the funds for the sponsoring company, however briefly.
Once the funds are
forwarded to or withdrawn by the sponsoring company, they would no
longer be “deposits.”
Under the proposal, the only time funds underlying sponsoring company-issued
cards would not be deposits is when the insured institution actually
purchases the cards from the sponsoring company and resells them to the
cardholders.
DISCUSSION
ABA believes that
a determination by FDIC that funds underlying virtually all bank-issued
stored value
cards are “deposits” (1) may
not be appropriate depending upon the purpose for which the cards were
issued and (2) would add costs that competitors do not incur and which
could make many of the products financially unfeasible. In addition,
the classification of these funds as “deposits” could trigger
the applicability of other federal laws, compounding the adverse consequences.
Participants in the
developing market for stored value products need the flexibility to
adjust card
features as consumers become more aware
and accepting of these products, and as technology continues to evolve
rapidly. The regulatory implications and related costs, including those
related to funds being classified as “deposits,” may stifle
development of these cards or the features valuable to consumers. Although
FDIC’s proposal applies only to the FDIA, ABA believes there is
a significant risk that classifying a stored value product as a “deposit” could
be the first step on a slippery slope to the application of other regulations.
Moreover, from a
policy perspective, the purposes for which the cards are issued may
dictate the imposition
of consumer protection or other
legal requirements. For example, payroll cards that provide a means for
the unbanked to access their wages provide significant benefits to employers,
employees, and society as a whole. Employees benefit from having a safe
and less expensive means of receiving their wages, and employers benefit
from the cost savings of eliminating paper checks and reducing check
fraud. For this type of stored value product, employers may want the
funds underlying the cards to be eligible for deposit insurance. Insured
institutions should have the flexibility to structure the program based
on the market’s demand and the costs of the insurance. Employers
may also want these products to have other beneficial features such as
being reloadable or the ability to have additional cards to transfer
funds to other persons.
By contrast, gift
cards, analogous in many respects to paper gift certificates, do not
carry the same
kinds of customer expectations. Typically, customers
expect to treat such cards just like cash. If they lose the card, they
don’t expect it to be replaced, even if it is reloadable. They
don’t expect to provide identifying information when purchasing
a gift card, whether buying it from Starbucks, Borders Books, or a bank.
And they may likely give it to an individual completely unknown to the
card issuer. Because the profit margins on this type of stored value
product are so thin, the added costs to the banking industry of complying
with the additional regulations would likely drive insured institutions
from this business.
In its earlier reviews of whether funds underlying stored value cards
were “deposits” in 1996,4 FDIC considered a number of policy
issues including whether public confidence in these products was critical
to the safety and soundness of the banking system such that deposit
insurance was warranted. The agency also expressed concern about the
competitive equity between depository institution issuers and other
issuers if only depository institutions must pay assessments on the
underlying funds and comply with other consumer regulations.
These concerns are
no less important now than they were in 1996. If anything, they have
become
more important because of the significant
increase in the use of stored value products. Yet, because the proposal
focuses only on whether the funds underlying the card pass through a
clearing process and where the card’s value is dependent on whether
a bank holds sufficient funds to back up the card, it would apply to
all types of stored value cards regardless of their purpose and regardless
of the competitive impact on issuers. ABA believes that as this market
develops, some issuers and their customers may wish to have the card
values insured, while others may not. To remain viable, market participants
need the flexibility to accommodate a variety of card features while
controlling costs so that the products remain economically feasible.
CONCLUSION
ABA strongly urges FDIC to hold this proposal in abeyance until such
time as a comprehensive study of the market for stored value products,
including a review of both public policy and competitive implications,
is completed. This market is too important to have its development potentially
impeded by regulatory restrictions until the need for such regulation
is grounded on a thorough consideration of all relevant issues.
If you have any questions about the foregoing comments, please contact
the undersigned.
Sincerely,
Cristeena G. Naser
________________________________
1 The ABA brings together all categories
of banking institutions to best represent the interests of
this rapidly changing industry. Its membership—which includes
community,
regional andmoney center banks and holding companies, as well as savings associations,
trust companies and
savings banks—makes ABA the largest banking trade association in the country.
2 The proposal 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.”
3 It may not be realistic to assume that there would be a situation
in which the insured institution would have no records, either directly or indirectly,
reflecting the amount owed to each cardholder.
4 See, Request for Comments on Stored Value Cards and Other
Electronic Payment Systems, 61 Federal Register 40494 (August 2, 1996) and General
Counsel Opinion No. 8.
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