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FDIC Federal Register Citations

Association for Financial Professionals

July 15, 2004

Mr. Robert E. Feldman
Executive Secretary
[Attention: Comments/Legal ESS]
Federal Deposit Insurance Corporation
550 17th Street, N.W.
Washington, DC 20429

Re: 12 CFR Part 303
Definition of “Deposit”; Stored Value Cards

Dear Mr. Feldman:

The Association for Financial Professionals (AFP) welcomes the opportunity to comment on the rule proposed by the Federal Deposit Insurance Corporation (FDIC) to clarify the meaning of “deposit” as that term relates to funds at insured depository institutions underlying stored value cards.

AFP represents about 14,000 finance and treasury professionals who, on behalf of over 5,000 corporations and other organizations, are significant participants in the nation’s payments system. Organizations represented by its members are drawn generally from the Fortune 1,000 and the largest of the middle market companies. AFP members’ companies use stored value cards for a variety of purposes, most commonly for payroll and related functions such as bonuses, commissions and expense reimbursements. Payroll cards are a valuable corporate tool for migrating from check to electronic payments and achieving an all-electronic payroll. They have proven to be effective in reaching the unbanked and those who do not enroll in direct deposit of payroll. Many of AFP’s members play a significant role in implementing payroll cards at their companies. They thus have a sizeable stake in FDIC regulations governing payroll cards.

AFP’s comment letter will address payroll cards, and will not deal with other types of stored value cards. AFP agrees with the general premise that the funds underlying payroll cards should be considered “deposits.” AFP’s comments will cover four related issues:

• Status of dual-branded cards
• Definition of stored value cards
• Disclosures about the insurability of funds
• Regulatory burden

Status of Dual-Branded Cards
The FDIC’s rule makes a distinction between two categories of stored value cards: cards issued by sponsoring companies and cards issued by insured depository institutions. However, in the payroll card area, dual-branded cards are not uncommon. Payroll cards may carry the logos of both the employer company and the financial institution. It is unclear in the proposed rule how such payroll cards would be categorized. AFP recommends that the FDIC clarify the status of dual-branded payroll cards in its final regulation.

Definition of Stored Value Cards
The proposed rule defines the term “stored value card” to mean “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.” The FDIC asks if this definition should be adopted in the new rule and if it can be improved.

The funds underlying payroll cards are frequently accessible through automated teller machines (ATMs) operated by banks or third parties as well as at merchants’ point of sale terminals. Sometimes the funds are accessible only through ATMs. AFP recommends that the definition of stored value cards not be limited to those usable at a merchant’s point of sale terminal. The definition should be expanded to include those usable at a merchant’s point of sale terminal and at an ATM, as well as those usable at an ATM only.

The proposed definition of stored value cards includes references to “merchant,” but it does not define that term. This leaves unanswered the question of whether the term covers sellers of services in addition to sellers of goods. Payroll cards may, in the future, be used to pay for a wide array of services, for example, medical services. The FDIC is advised to clarify and define the scope of the term, “merchant.”

Disclosures about Insurability
The FDIC states that it is concerned that some purchasers of stored value cards may not understand whether the funds given to an insured depository institution in exchange for such cards are covered by federal deposit insurance. The FDIC’s current guidance states that it “expects insured depository institutions to clearly and conspicuously disclose to customers the insured or non-insured status of the stored value cards they offer to the public.”

In the case of cards issued by sponsoring companies, the FDIC states that the company should not suggest that the holder will be protected by FDIC insurance. The proposed rule notes that in such cases the insured party may be the sponsoring company unless the requirements for pass-through insurance have been met. The FDIC requests comments as to whether any particular disclosures should be mandated.

Payroll cards may be the first introduction to the financial system for employees who are unbanked and who may distrust financial institutions. When the regulatory requirements for pass-through insurance for cardholders have been met, statements as to the availability of federal deposit insurance may encourage acceptance. AFP believes it may be appropriate to mandate disclosure of FDIC coverage when the issuer is a financial institution, since such issuers, as FDIC members, have sufficient knowledge and expertise to determine the exact nature of the coverage.

In the case of cards issued by sponsoring companies, however, disclosure should be permissive, but not mandatory. For example, in an effort to foster wider acceptance of payroll cards, an employer who is a “sponsoring company” under the FDIC’s proposed rule may work closely with a financial institution to achieve pass-through insurance coverage for cardholders. In such cases, it would be appropriate to allow the employer to make accurate disclosures about such coverage. On the other hand, when a sponsoring company is uncertain about the coverage, it would be appropriate to remain silent.

In the proposed rule, the FDIC seems to imply that the sponsoring company should make no statement about FDIC coverage. However, companies that understand the regulations governing “deposits” and pass-through insurance should be able to make a statement regarding FDIC coverage. As noted by the FDIC, existing criminal law discourages sponsoring companies from making false representations about FDIC insurance coverage.

Regulatory burden
AFP understands that there are other unsettled regulatory issues involving payroll cards, including the application of Regulation E governing electronic funds transfers, Regulation CC governing availability of funds, verification of new customers under the Patriot Act, and money-laundering controls. The FDIC’s rule on when stored value cards are considered “deposits” will also impact the level of financial institution reserves that are required to be held at the Federal Reserve.

Increasing numbers of consumers are receiving stored value cards for a growing number of applications. AFP understands that the federal government will be called upon to update consumer protection and anti-money laundering regulations to reflect the changed environment. The costs of complying with these regulations will undoubtedly be passed on by financial institutions to the companies issuing payroll cards and other types of stored value cards. AFP recommends that the level of regulation not be made so burdensome as to discourage companies from offering the cards to their employees.

Summary of AFP Recommendations
AFP members’ companies view payroll cards as an efficient electronic funds distribution mechanism for payroll and related functions. AFP recommends that the FDIC’s proposed rule clarifying the meaning of “deposit” as it applies to the funds at depository financial institutions underlying payroll cards would be strengthened by:
• Clarifying the status of dual-branded payroll cards.
• Expanding the scope of the definition of stored value cards to encompass cards usable at ATMs as well as those usable at a merchant’s point of sale terminal, and clarifying the meaning of “merchant.”
• Mandatory disclosure of FDIC coverage or non-coverage for payroll cards issued by financial institutions and permissive disclosure for those issued by sponsoring companies.
• Avoiding undue regulatory burdens on financial institutions and sponsoring companies that would inhibit the growth of payroll cards.

AFP thanks the FDIC for the opportunity to comment on its proposed rules for stored value cards. If you have any questions about this comment letter, please call Arlene Chapman of AFP at 301-961-8825.


Alvin C. Rodack, CTP
Associate Treasurer
The Ohio State University
AFP Government Relations Committee


Last Updated 07/19/2004

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