Federal Deposit
Insurance Corporation

November 7, 2005

Robert E. Feldman
Executive Secretary
Attention: Comments/Legal ESS
Federal Deposit Insurance Corporation
Washington, DC 20429

Re: Part 330 – Stored Value Cards

Dear Mr. Feldman:

I am a lawyer that practices in the field of e-commerce and electronic payment systems and am familiar with prepaid debit Cards and stored value Card networks. I am pleased to provide my comments below on the FDIC’s Second Proposed Rule (the ”Proposed Rule”) on FDIC insurance coverage for stored value Cards (“Cards”).

I continue to urge the FDIC to proceed with caution here for many of the reasons stated by comments on the FDIC’s First Proposed Rule and for my reasons stated below in order to avoid inhibiting the growth and development of new uses for the Cards, which can have a significant benefit to the general public.

I respectively disagree with the FDIC’s interpretation that use of the Cards, and retention and use by an FDIC insured depositary financial institution (“Bank”) of funds, constitute a special purpose under paragraph 3(l)(3). Funding for a Card may arise from different parties at different times (in the case of a reloadable Card) with different intended or actual uses by a Cardholder. In addition, a single Card may contain more than one type of Card product or function in order to avoid the cost of issuance of multiple single purpose Cards.

I support the concept of an exception for a “de minimis” rule for Cards, but urge you to apply this exclusion to all types of Cards, whether a payroll Card, award Card, loyalty Card, promotional Card, charitable Card, et cetera. I consider a value for a de minimis Card exception in the area of $250 as a starting put, and would even consider a higher figure such as $500.

I encourage you to consider a new exception for employer benefit plan Cards, such as medical reimbursement Cards, child care Cards, et cetera, that are offered by employers to employee’s under a pretax or post tax cafeteria style benefit program, and benefit related Cards offered by federal, state, or local governmental agencies. The record keeping for these programs are processed generally by third party processors that are not vendors for a Card Issuer, and Issuers are unlikely, for operational reasons, to have access to customer information on a Cardholder. Also these programs are not covered by the USAPATRIOT Act requirements for gathering customer information and a Card Issuer is not compelled to collect this Cardholder data under governmental agency programs.

I support an exception for an anonymous Card, because these Cards are freely transferable from one Cardholder to another. Notwithstanding the comments by the FDIC, Cardholders do in fact view these Cards as the equivalent as cash, and Cardholders have no or little expectation that these Cards’ values are FDIC insured deposits.

My experience is that most Banks give substantial written disclosures with Card carriers and terms and conditions delivered with a Card (the “Cardholder Agreement”). These Cards in many instances currently disclose that a Card’s monetary balance is not an FDIC insured deposit. Additional disclosures on the face of a Card are not necessary and there is little space on a Card to carry such a disclosure. Many Bank Issuers do not provide “Card Balance” statements to Cardholders. Rather, Card balances are available via calls to generic customer service centers or over the internet at generic websites. The specific name of a Bank Issuer is seldom disclosed to a Cardholder in connection with any inquiry regarding Card balances. In most respects a Bank Issuer may remain transparent or almost anonymous to the Cardholder. However, pursuant to operating rules of the Networks, the identity of the Bank Issuer is listed on the reverse side of the Card in fine print, and the name of the Bank Issuer is usually listed in the Cardholder Agreement. In many respect, a Cardholder Agreement today is a complex and through agreement that explains the use of a Card. Additional disclosures are unlikely to benefit the Cardholder, particulary when a Card may be transferred to a third party, and it is unknown whether the Cardholder Agreement is also delivered to the transferee. I do not recommend adding the phrase “FDIC Insured” on the face or back of a Card, because the Card may be used for multiple Card products, some of which may be insured while other Card programs may be uninsured.

I believe the preferred approach is to allow the market place to development best practices to meet the expectations of Cardholders. Some third parties that provide funding for Cards, such as employer benefit plans or payroll Cards, may want a Card Issuer to take the steps to assure FDIC pass through insurance. However, competition and market practices should support such requirement rather than having mandatory regulatory requirements, because the record keeping for FDIC pass-through insurance is difficult, burdensome and costly.

My experience with Cards suggests that many Banks issue Cards with a national payment network brand, such as Visa or MasterCard (“ Networks”) in order to support the use of the Cards with multiple, unaffiliated merchants in an open system. This is similar to the “Bank Primary-Reserve System”. In this context, Banks under rules of the Networks have the primary obligation to settle payment through these networks to merchants participating in the National Card Networks. These four party payment systems in many respects are similar to commercial letter of credit arrangements. Thus, as soon as a Card is issued and activated, an Issuer has a payment obligation or settlement risk to the Networks and participating merchants irrespective of whether or not the Issuer has received funds to reimburse the issuer for payments. In fact a Cardholder on a reloadable Card may use the reload value within minutes – yet the Issuer may not receive funds for several days after the Card issuance or Card reload. Here the payment obligation is not to the Cardholder but to the merchant that has accepted a Card as payment. The merchant does not care, or know, whether the underlying account is a credit account or deposit account owned by a cardholder, or a general ledger account maintained by the Issuer. For this reason Banks often take the monetary funds into a pooled general reserve (or internal general ledger account) in order to protect the Bank’s access and use of the funds for reimbursement of this payment obligation (i.e. similar to a Bank’s sale of a cashier check or official check by the Bank) in the case of a bankruptcy filing by a marketer, promoter, seller or reseller of the Cards. In these scenarios, it is likely that the third party promoter, seller or reseller of the Cards will maintain the data authorization file record that shows the Card numbers, and related Card balances, in order to process and approve a Cardholder’s request for authorization on a requested Card transaction. Under the Network rules in an open system, the Issuer will only settle Card transactions on a daily net settlement basis for all Card transactions occurring in a single day for credit Cards, traditional ATM/POS Cards, and stored value Cards with a single Network brand, plus related daily returns and other adjustments. In this context, it is quite possible that an Issuer does not have a sub account set up for a particular Cardholder, but relies on the data file maintained by a third party processor who may have a processing agreement with a promoter for the Card program.

The Second Proposal seems to focus on whether or not the consumer/Cardholder purchased a Card and simultaneously provided funding for the Card balance directly to the Bank that issued the Card. This may occur when a Bank sells a Card to the public via a teller window, Internet, or customer service telephone operated by the Bank. However, many Cards issued by Banks are distributed through unaffiliated third parties that may develop a special Card program for competing in the marketplace, and these third parties become marketing promoters for the Cards. These promoters will in turn have customer contracts with retail merchants who act as resellers of the Cards carrying a national service mark of a national Card network. While these Cards are likely to be classified as award, loyalty, promotional, gift, or general spend Cards, in all cases the funds may be provided by a consumer that purchases the Card or by a third party. Funds are physically delivered to the “Reseller” who then remits the funds either directly to the Card Issuer or indirectly to the Promoter, who in turn remits the funds to the Card Issuer. I believe your Second Proposal puts too much emphasis on who delivers funds to the Issuer. Rather, the party providing the source of funds is a better test. For example, if an employer requests a Card Issuer to supply Cards in bulk with an aggregate Card Balance or value, the employer may elect to use the Cards as gift Cards to employees, vendors/suppliers/ customers. If given to employees, the purpose may be an ad hoc informal employee bonus, or an award under a formal incentive compensation plan. In this context, the Cardholder may or may not have full ownership to the Card Balance, and the employer, if the Card expires with an unused Card balance, may require a return of unused funds from the Cards. In these programs, the Cardholder has no, or little expectation, that the Card Balance is an FDIC insured deposit.

Whenever a Bank sells a Card directly, such as by the Internet or through a bank branching network, banking regulations and Treasury Department regulations mandate that a Bank “know its customer”. In addition, for reloadable Cards, a Bank must have a customer identification program (“CIP) and procedures in place. Finally, federal anti-money laundering laws and regulations, including Section 326 of the USAPATRIOT Act and OFAC regulations, mandate gathering and maintaining personal information on a customer of a Bank. For these reasons, a Bank Issuer will have access to the original purchaser of a Card, but is not required to track subsequent transfers of a Card from one Cardholder to another Cardholder. Per the terms of a Cardholder Agreement, the initial purchaser of a Gift Card may be entitled to a refund, but in the context of an employer award card, the Cardholder has no right to refund in the event of a lost, stolen or expired card. Ownership rights of a Cardholder will vary depending on the terms of the Card Program.

Imposition of FDIC insurance on Cards issued by Banks will not, in my opinion, provide any meaningful protection to consumers, because the value of Cards are often exhausted rapidly by Cardholders. However, the added cost to Bank Issuers will place them at a competitive disadvantage versus Card issuers that are not financial institutions, because these non-bank Card issuers will have less costs and expenses for regulatory compliance. In the long term, there is the risk that stored value Cards will be promoted and marketing primarily via proprietary payment networks, either under private brands or national brands such as American Express or Discover. This scenario may tend to move this financial product away from Banks (and other depositary financial institutions) in order to avoid regulatory compliance. In the long term, such a movement may not be in the best interest of consumers or the banking industry.

I summary, I recommend the scope of the Second Proposal be limited at this time to issuance of payroll Cards. This would be consistent with the approach being considered by the FRB’s proposed amendment to Regulation E, and it would allow the FDIC and FRB to continue to monitor development of this financial product. I consider comprehensive regulation of all types of Cards is premature at this time.

Sincerely,

Gregory R. Poore
Attorney-at-Law
Westlake, Ohio