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FDIC Federal Register Citations

Center for Financial Services Innovation


From: Katy Jacob [mailto:KJacob@cfsinnovation.com]
Sent: Thursday, October 20, 2005 4:06 PM
To: Comments
Subject: Deposit Insurance Coverage; Stored Value Cards and Other Nontraditional Access Mechanisms (12 CFS Part 330)

October 20, 2005

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

Dear Mr. Feldman:

The Center for Financial Services Innovation (CFSI), an initiative of ShoreBank, appreciates the opportunity to comment on Deposit Insurance Coverage; Stored Value Cards and Other Nontraditional Access Mechanisms (12 CFS Part 330). CFSI works with the financial services industry, broadly defined, to promote products and strategies that are profitable for the company and encourage asset-building opportunities for the consumer. The Center has been very involved in monitoring the stored value card (SVC) industry as it relates to the underbanked market. We are especially interested in how SVCs can enable credit and asset-building opportunities for these consumers. CFSI thinks that this is a promising product set, provided that important consumer protections are guaranteed.

CFSI supports the FDIC’s decision to equate funds on stored value cards with funds maintained via other electronic means, ensuring that these funds are treated as deposits. However, we are concerned that the example given in subsection 330.5c2 appears to be contradictory to this principle.  The example says that funds transferred by a customer via the internet would be treated differently from funds in an ordinary checking account. The proliferation of electronic-only payments methods, including checkless checking accounts, makes this an inappropriate and confusing distinction.

The FDIC has requested additional comments on whether it should recognize a distinction between the funds underlying payroll cards and the funds underlying gift cards. CFSI strongly urges the FDIC not to define regulatory results in this area based on categories (payroll cards, gift cards, general spend cards, benefits cards) that are almost certain to lose meaning in the near future as the market settles and cards continue to take on multiple functionalities.

CFSI suggests that rather than relying on product categories, the FDIC should base regulatory distinctions relating to insurance coverage on functionality for the FDIC and clarity for the end-use consumer. In order for FDIC insurance to be effectively administered, the FDIC must have the means to understand to whom the funds belong. Thus, the applicability of FDIC insurance, particularly pass-through insurance, to funds related to SVCs and other nontraditional  payment vehicles, should directly relate to the end-user’s ownership of the funds, and the financial institution-issuer’s (and, potentially, the FDIC’s) ability to access information about the end-use consumer.

Thus, CFSI suggests that insurance coverage be passed through to the end-use consumer when information about the end user, including the current balance, is reasonably accessible to the financial institution, and the end user owns the funds.  Information on consumers should be available to financial institutions even if a third party manages that information. This would suggest that almost all reloadable cards, as well as payroll cards, would have pass through insurance, but few gift cards would have pass-through insurance.  But the distinction would be based on the cards’ functionality, not their name.  Although we believe this would likely deal with the de minimus issue on which the FDIC has requested comment, a carve-out for non-reloadable cards with an initial balance below $100 would seem an appropriate balance between the costs and benefits of deposit insurance.[1]

Ownership of funds is a critical question in determining the beneficiary of deposit insurance.  In the context of SVCs, however, ownership raises the question of whether and how the capture of the funds by the account holder due to an expiration of the card should affect pass-through insurance.  As with credit cards, it is common industry practice for gift, payroll, and other SVCs to carry expiration dates; often cards are automatically renewed prior to expiration. Unlike debit cards that are tied to bank accounts, however, expiration dates on SVCs raise the possibility that once a card has expired, the end-use consumer will no longer have access to the funds underlying the card, and will have lost ownership of those funds.  Expiration dates are, however, fixed and certain; even if there could be ambiguity as to the ownership of the funds after the expiration date, there is no ambiguity prior to that date.  In our opinion, pass-through insurance should be provided to the end-use consumer during the period prior to the expiration date, if the expiration date is clearly noted on the sub-account register that the FDIC relies on for pass through insurance.  An example in the regulations to make this clear would be very helpful. 

Pertaining to disclosures, CFSI believes that a standard sentence on a card, stating that pass-through insurance is available, would suffice. Further disclosure is unnecessary.

Finally, CFSI is concerned about the following language in the proposed regulation.  Section 330.5 c (3) states that… “If both of the conditions are satisfied, then the funds may (emphasis added) be insured to the persons holding the access devices.” This language implies that FDIC insurance coverage is optional, when it should be definite if these conditions are met.

Thank you for the opportunity to comment on these regulations, and please feel free to contact me if you require further information.

Sincerely,

Jennifer Tescher
Director

[1]  CFSI notes that while pass-through deposit insurance is an important consumer protection, given the infrequency of bank failures, assurance that a customer’s money actually gets into a depository institution may be a more important safeguard.  For more information, see http://www.cfsinnovation.com/managed_documents/retailpaper.pdf

 


Last Updated 10/24/2005 Regs@fdic.gov

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