VISA
July 12, 2004Robert E. Feldman
Executive Secretary
Federal Deposit Insurance Corporation
55017th Street, NW
Washington, DC 20429
Attention: Comments/Legal ESS
Re: Proposed Stored Value Card Guidance
Dear Mr. Feldman:
This comment letter is submitted on behalf of Visa U.S.A. Inc. in
response to the notice of proposed rulemaking ("Proposed Rule"), published
by the Federal Deposit Insurance Corporation ("FDIC") on April 16, 2004 to
clarify when funds at insured depository institutions underlying stored
value cards would constitute "deposits" under the Federal Deposit Insurance
Act ("FDIA").1 Visa appreciates the opportunity to comment on
these important topics.
The Visa Payment System, of which Visa U.S.A.2 is a part, is
the largest consumer payment system, and the leading consumer e-commerce
payment system, in the world, with more volume than all other major payment
cards combined. Visa plays a pivotal role in advancing new payment products
and technologies, including technology initiatives for protecting personal
information and preventing identity theft and other fraud, for the benefit
of its member financial institutions and their hundreds of millions of
cardholders.
1996 FDIC Stored Value Guidance
In 1996, the Federal Deposit Insurance Corporation's ("FDIC") General
Counsel issued an opinion that set forth a framework for determining whether
and under what circumstances funds underlying stored value products would be
considered deposits ("GC8") .3 GC8 described several variations
of stored value products sponsored by insured depository institutions. Most
bank-issued stored value programs fell into the category of "Bank Primary
Reserve Systems." In Bank PrimaryReserve Systems the value is downloaded
onto a card and funds are paid into a reserve or general liability account
held at the institution to pay merchants and other payees as they make
claims for payments. The General Counsel concluded that funds underlying
these systems are not deposits because such funds are not held for one or
more specific transactions.4 Given the developments in stored
value card systems since the issuance of GC8, the FDIC believes that there
is "a need for additional guidance" because the classification scheme of GC8
"is at a minimum incomplete, and may be obsolete."5 Accordingly,
the FDIC issued a Proposed Rule concerning the funds underlying stored value
products. While the Proposed Rule, if adopted, would replace GC8, the FDIC
believes that the Proposed Rule "retain[s] the basic principles set forth
in GC8 and extend[s] these principles to new types of stored value card
systems."6 Recognizing that new types of stored value card
systems may be developed in the future, the FDIC explains that "[t]he
process of defining 'deposit' ... may be evolutionary," potentially
indicating the possibility of future regulations clarifying the meaning of
the term "deposit" as it relates to stored value cards.7
2004 FDIC Proposed Guidance
Under the Proposed Rule, "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 such cards,
would constitute deposits, unless the institution records its liabilities
for such funds in an account representing multiple cardholders and the
institution does not maintain "supplemental records or subaccounts
reflecting the amount owed to each cardholder."8 This position
appears to reverse the general understanding of GC8.
The Proposed Rule would define "stored value card" as a "device that
enables the cardholder to transfer the [card's] 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."9 The Proposed Rule would be the sole determining
factor as to whether the funds underlying a stored value card qualify as a
deposit. The FDIC did not focus on the type of stored value card. It viewed
as "unimportant" whether transactions using the card were on-line
transactions or off-line transactions.10 Instead, what "matters
to the FDIC is whether the stored value card provides access (directly or
indirectly) to money received and held by an insured depository
institution." 11 As a result, the Proposed Rule would apply to
any and all stored value cards, regardless of whether it is a gift card, a
payroll card or a rewards card or new combinations of these and other types.
The Proposed Rule looks only at 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."12
More specifically, under the Proposed Rule for stored value cards issued
by a depository institution, "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 such cards,
would constitute deposits, unless two conditions applied, namely, the
institution "records its liabilities for such funds in an account
representing multiple cardholders" and the institution does not maintain
"supplemental records or subaccounts reflecting the amount owed to each
cardholder."13
As a result, the Proposed Rule does not focus on the special policy
issues that may arise from particular types of stored value cards. Instead,
it asks only (1) whether an insured depository institution received funds in
exchange for stored value cards and (2) whether that institution uses a
subaccount accounting methodology to track the value remaining with respect
to each cardholder. If so, such funds would constitute deposits. We believe
the Proposed Rule is flawed in its perceived simplicity and strongly oppose
going forward with a final rule.
The Proposed Rule will significantly impede market innovation and
dramatically affect the regulation of stored value products. Therefore, we
urge the FDIC to conduct a comprehensive study of stored value cards and the
Proposed Rule's implications on other regulatory issues. It should then
issue a revised proposal that reflects the different ways in which diverse
stored value products may be structured to provide appropriate consumer and
banking system protection.
Policy Implications Ignored
The Proposed Rule ignores the policy implications of deposit insurance
coverage. The purpose of deposit insurance is to protect the banking system
by reducing the incentives for retail product bank runs and to protect
depositors' savings and liquid funds. Implicit in both of these policies is
that the depositor is relying on the security of the banking system,
including the deposit insurance system, to protect his or her funds. Some
stored value products may have these characteristics. However, others are
more purely payment vehicles that substitute for cash. The FDIC should focus
on the policy reasons for subjecting certain products to deposit insurance.
It should not focus, as it has in the Proposed Rule, on the pure mechanics
of whether funds are received in exchange for stored value cards and whether
that institution uses a subaccount accounting methodology.
It may be appropriate to characterize certain stored value cards as
insured deposits for deposit insurance assessment purposes. However, the
FDIC should take into account the policy rationale for characterizing the
underlying funds contained in certain stored value products as deposits. The
structure and design of these products vary widely. Stored value products
include gift cards, payroll/employee cards, single-purpose prepaid cards,
electronic benefit transfer cards, telephone cards and promotional/incentive
cards. Moreover, the funding and settlement of stored value products also
vary. Some stored value products are funded by consumer credit or debit
cards or ACH transfers, while other products are funded by companies through
a batch process.
For instance, most gift cards are fundamentally different from bank
deposits, even though banks hold the proceeds of both. Gift cards serve as a
more flexible substitute for traditional store gift certificates by
providing broader transaction capabilities. In turn, gift card transaction
capabilities generally are more limited than the capabilities of deposit
accounts. For example, in terms of the parties to whom payment can be made,
gift card payments generally cannot be made to individuals and cash
withdrawals may not be available. Further, the recipients of gift cards do
not choose the financial institution issuing the card, nor is the gift card
purchased on the assumption that it is backed by the deposit insurance
system. Similarly, gift cards are not viewed by either the producers or
recipients as an investment or savings vehicle.
Proposed Rule Could Affect Other Regulations
The Proposed Rule is concerned with whether funds backing stored value
cards constitute deposits, with all the rights and responsibilities that
would follow. However, the FDIC acknowledges in a footnote that this result
could raise "a number of other issues," including reserve requirements,
money laundering and application of the electronic fund transfer rules.14
Indeed, the application of these lawsand many moreto stored value products
is far from clear, and will likely differ significantly, depending upon the
type of product.
Regulation D Requirements - Reserve Requirements of Depository
Institutions
Regulation D establishes requirements for depository institutions to hold
reserves in the form of either vault cash or non-interest earning balances
held at a Federal Reserve Bank against transaction accounts that are held by
banks on behalf of their customers.
The reserve requirement is 10% of the amount of net transaction accounts
over $45.4 million, 3% for net transaction accounts over $6.6 million up to
$45.4 million and 0% for net transaction accounts below $6.6 million. To the
extent that prepaid cards give rise to insured deposits, they also may be
viewed as giving rise to transaction accounts. The marginal reserve that
would apply to the amounts on the cards would depend on the current level of
transaction accounts held by the bank, but in most cases would be 10%. This
reserve requirement would affect the cost of providing gift cards. Those
increased costs likely would be reflected in the fees charged for gift
cards. These increased costs could also dissuade financial institutions from
innovating or offering certain types or features of gift cards. Moreover,
the opportunities to reduce reserve requirements that are available for
conventional bank deposits, such as sweep arrangements, may not be available
for gift cards. The FDIC should not proceed with the Proposed Rule until it
has determined, as part of its comprehensive study, the resulting reserve
requirement implications, if any, of the Proposed Rule.
Regulation E Requirements Electronic Fund Transfer Disclosures and
Other Requirements
The Federal Reserve Board's ("FRB's") Regulation E sets forth the
requirements for electronic fund transfers to or from a consumer asset
account, such as a deposit account, at a financial institution. The
applicability of many Regulation E provisions, including periodic
statements, limited liability for unauthorized transactions and error
resolution procedures, to certain stored value products is not clear.
Section 205.2(b)(1) of Regulation E defines the term "account" as a "demand
deposit (checking), savings, or other consumer asset account . . . held
directly or indirectly by a financial institution and established primarily
for personal, family, or household purposes." The FRB has refrained from
adopting final amendments to Regulation E to specifically cover stored value
products out of concern that too much regulation could inhibit the
development of these emerging products. If the Proposed Rule is adopted,
however, the FDIC's characterization of certain stored value products as
deposits could influence an FRB determination that such deposits are
consumer asset accounts under Regulation E. The FDIC should not proceed with
the Proposed Rule until it has determined, as part of its comprehensive
study, the resulting Regulation E implications, if any, of the Proposed
Rule.
USA PATRIOT Act Customer Identification RulesCustomer
Identification Programs
Financial institutions are required to gather specified information about
customers and to verify the identity of customers. In addition, financial
institutions must establish risk-based procedures for verifying the identity
of each customer to the extent reasonable and practicable. Also, a Customer
Identification Program ("CIP") must have procedures in place for opening an
account that specify the identifying information that will be obtained from
each customer. Further, at a minimum, a financial institution must obtain
the customer's name, date of birth, address and identification number. It is
simply not feasible for financial institutions to comply with CIP
requirements for the recipients of gift cards. It is the very nature of the
product the giver of a gift has the sole relationship with both the seller
and recipient of the gift. At best, a financial institution may send the
card to the recipient at the purchaser's request. The FDIC should not
proceed with the Proposed Rule until it has determined, as part of its
comprehensive study, the resulting USA PATRIOT Act implications, if any, of
the Proposed Rule.
Branch Banking
National bank branching is governed by the McFadden Act ("Act"), which
provides that a national bank may, with the approval of the Office of the
Comptroller of the Currency, operate branches at such locations as are
authorized for state banks under state law where the national bank is
located.15 A branch is defined under the Act as including "any
branch bank, branch office, branch agency, additional office, or any branch
place of business located in any State or Territory of the United States or
in the District of Columbia at which deposits are received, or checks paid,
or money lent. The term `branch' ... does not include an automated teller
machine or a remote service unit."16
Given these considerations, if the Proposed Rule is adopted, the FDIC's
characterization of certain stored value products as deposits could trigger
the geographic restrictions and related approval requirements under the Act.
Gift cards and other stored value cards issued by banks may be sold at
retail outlets or other facilities that are neither bank branches nor
automated teller machines ("ATMs"). To the extent that the sale of stored
value cards is determined to result in deposits, the sale of those cards
might be viewed as the taking of deposits. Therefore, the Proposed Rule
could raise issues as to whether the sale of those cards must be conducted
through bank branches, ATMs or remote service units. This would
significantly restrict the availability of certain stored value products to
the detriment of consumers. The FDIC should not proceed with the Proposed
Rule until it has determined, as part of its comprehensive study, the
resulting implications of the Proposed Rule on branch banking.
Other Issues
Finally, treating gift cards and other stored value products as insured
deposits may have other implications. For example, it may affect the deposit
calculations necessary to determine whether interstate mergers may be
approved under section 44 of the FDIA. The FDIC should not proceed with the
Proposed Rule without evaluating all of the direct and indirect effects that
the Proposed Rule would have on other statutory and regulatory requirements.
Mandating Disclosures is not Necessary
Although the Proposed Rule does not set forth any new specific disclosure
requirements, the FDIC solicits comment on whether the Proposed Rule ought
to mandate the clear and conspicuous disclosure, including disclosures on
the stored value card itself, of the insured or non-insured status of the
stored value card. In the supplemental information accompanying the Proposed
Rule the FDIC continued to express concern 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. We urge the FDIC to avoid mandating specific disclosure
requirements; there is little evidence to support a need for these
disclosures. In addition, pursuant to previously issued guidance on the
matter, it is industry practice to provide such disclosures to the extent
they are needed. Institutions should continue to have the ability to
independently determine whether disclosures are needed based on the design
of the product, consumer confusion regarding the product and other factors
that may arise.
Visa appreciates the opportunity to comment on this important topic. If
you have any questions concerning these comments, or if we may otherwise be
of assistance in connection with this matter, please do not hesitate to
contact me, at (415) 932-2178.
Sincerely,
Russell W. Schrader
Senior Vice President and
Assistant General Counsel
VISA U.S.A. Inc.
P.O. Box 194607
San Francisco, CA 94119-4607
1 The authority of the FDIC to define the term "deposit" is
found in the FDIA definition of "deposit," which, in part, defines a
"deposit" as "such other obligations of a bank or savings association" as
the FDIC Board of Directors prescribes by regulation, after consultation
with specific financial regulatory agencies. 12 U.S.C. § 1813(1)(5).
2 Visa U.S.A. is a membership organization comprised of U.S.
financial institutions licensed to use the Visa service marks in connection
with payment systems.
3 61 Fed. Reg. 40,490 (Aug. 2, 1996).
4 Id at 40,494.
5 69 Fed. Reg. 20,558, 20,560 (Apr. 16, 2004).
6 Id. at 20,558.
7 Id. at 20,559.
8 Id. at 20,565.
9 Id. at 20,566.
10Id. at 20,563.
11 Id
12 Id. at 20,558 n.l.
13 Id. at 20,565. Although the term "supplemental record" is
not defined, it appears to be meant to apply broadly so that any record
maintained by, or on behalf of, a depository institution that enables a
depository institution to determine the amount due a particular cardholder
would constitute a supplemental record. Accordingly, the only stored value
cards issued by a depository institution and supported by a general
liability account that do not lead to the creation of an insured deposit may
be stored value cards where the only record of the amount due the cardholder
is on the card itself. The Proposed Rule also states that it does not
suggest that insured depository institutions can "ignore" a law or
regulation that would require such institutions to maintain records on
amounts owed to cardholders.
14 69 Fed. Reg. at 20,559 n.2. Not mentioned is the possible
application of other requirements, such as those arising under Regulation
DD.
15 12 U.S.C. § 36(c).
16 12 U.S.C. § 36(j). Importantly, section 2204 of the Economic
Growth and Regulatory Paperwork Reduction Act amended the Act's definition
of "branch" to not include "an automated teller machine or a remote service
unit."