Federal Deposit
Insurance Corporation

America's Community Bankers

November 7, 2005

Mr. Robert E. Feldman
Executive Secretary
Federal Deposit Insurance Corporation
550 17th Street, N.W.
Washington, D.C. 20429

Attention: Comments/Legal ESS

Re: Deposit Insurance Coverage; Stored Value Cards and Other Nontraditional Access Mechanisms -
70 FR 45571 (August 8, 2005)

Dear Sir or Madam:

America’s Community Bankers (ACB)¹ is pleased to comment on the Federal Deposit Insurance Corporation’s (FDIC) proposed rule that would clarify the deposit insurance coverage of funds underlying stored value cards and other nontraditional access mechanisms.² The current proposal replaces the FDIC’s April 2004 proposal.³

In 1996, the FDIC’s General Counsel’s Opinion No. 8 created a general framework for determining whether the funds underlying stored value cards are considered insurable “deposits.” Since that time, new stored value systems have been introduced into the marketplace. In many cases, the new products have outgrown the existing regulatory structure for determining deposit insurance coverage. As a result, ACB believes additional clarification is needed regarding which party associated with a stored value product is eligible for deposit insurance coverage – the party placing funds in a deposit account or the party holding a stored value card or other access mechanism for the account.

ACB Position

ACB is pleased that the FDIC issued a re-proposal that is simpler and more flexible than the April 2004 proposal. We believe it is helpful to set forth the specific recordkeeping requirements necessary for pass-through insurance coverage to be provided to holders of stored value cards. This approach will enable stored value products to freely evolve without requiring that each one be placed into one of four categories identified in the original proposal.

Importantly, the revised proposal appropriately distinguishes between stored value products that have characteristics of a traditional deposit account and products for which information about individual cardholders is not retained. ACB believes that if records indicate a stored value cardholder owns funds on deposit at an insured institution, then pass-through deposit insurance should be provided to that person.

Background

The stored value card market has grown dramatically in the last decade. Payroll cards have become a popular method of paying employees, particularly unbanked persons. Parents often provide spending money to their children in the form of a stored value card, and gift cards are the holiday gift of choice for many Americans.

Many community banks have expressed interest in providing stored value products, but are hesitant to enter the stored value market. Regulatory uncertainties persist regarding the application of Regulation CC, Regulation D, Regulation DD, Regulation E, Regulation P, the USA Patriot Act, and state escheat laws. Moreover, community banks must partner with third party vendors to make stored value products economically feasible. Many community banks are monitoring the stored value market, and we expect additional product development as the regulatory treatment of these products is addressed.

The revised proposal has three key provisions regarding the deposit insurance coverage provided to stored value products. First, it would revise the term “deposit” to include nontraditional access mechanisms, including cards, codes, computers or other electronic means that are used to provide access to funds held by an insured depository institution. Unlike the initial proposal, the revised proposal does not designate specific categories of stored value card systems.

Second, the proposal addresses situations where the party placing funds on deposit and the party holding a stored value access device are the same person. The proposal would clarify that in this situation, the depositing party, the accessing party, and the insured party are the same person. Whether the institution maintains individual accounts or a pooled account with subaccounts would no longer be relevant to the determination of insurance coverage.

Third, the funds underlying stored value cards and other nontraditional access mechanisms would be eligible for pass-through deposit insurance coverage, provided that the following recordkeeping
requirements are met:⁴

1. The account records of the depository institution reflect the fact that the party depositing the funds is not the owner of the funds; and

2. Either the party depositing the funds (e.g. the employer for a payroll card) or the depository institution maintains records reflecting the identities of the persons holding the access mechanisms and the amount payable to such person.

The FDIC has also inquired whether insured depositories should be required to provide deposit insurance disclosures for stored value products and whether payroll cards and government benefit cards (e.g. cards used to distribute welfare or medical benefits) should be required to meet the regulatory requirements for pass-through deposit insurance coverage.

It is Good Public Policy to Provide Deposit Insurance to Stored Value Products That Meet Basic Recordkeeping Requirements.

There are many strong public policy arguments in favor of providing pass-through deposit insurance coverage when records identify individual stored value cardholders and their ownership interest in an account. However, ACB does not believe it is appropriate to provide deposit insurance to all stored value cardholders. Basic recordkeeping requirements are necessary for the deposit insurance coverage of traditional deposit accounts, and the insurance of stored value products should be no different.

The case for providing pass-through deposit insurance for properly structured payroll accounts is particularly strong. An increasing number of employers use payroll cards to disburse wages to employees that do not have a bank account that can accept direct deposit. Distributing payroll cards can be more cost efficient than issuing a paper check. Other employers are interested in promoting financial literacy and have worked with their depository institution to provide payroll cards that mimic debit cards and provide employees with many options for accessing their wages. For example, issuing banks maintain account ledgers that relate to the institution’s deposit taking function as well as records of the funds that belong to each cardholder. In addition, a cardholder’s name may be printed on the face of the card, the card may have a PIN or signature based security feature, the cardholder may be able to make additional deposits to the card, use the card at an ATM, or use the card to pay for goods at merchants that accept traditional credit and debit cards.

Payroll cards have the potential to provide cardholder benefits that go beyond providing increased accessibility to wages. Providing pass-through deposit insurance to properly structured stored value accounts may help facilitate trust between payroll card recipients and the banking industry. Those unbanked individuals may someday become conventional bank customers that are not susceptible to unscrupulous organizations or check cashers that charge exorbitant fees. Providing pass-through coverage in appropriate circumstances would also protect the hard earned wages of the unbanked in the unlikely event of a bank failure.

While there are merits to providing pass-through coverage to certain stored value cardholders, we do not believe it would be appropriate for all cardholders to receive pass-through insurance. Specifically, there is little to no public policy reason for providing pass-through insurance to holders of a merchant gift card.

Gift cards are typically issued in small denominations and they are not designed to be viewed as a deposit that is FDIC insured. More importantly, it is our understanding that most gift card relationships would not meet the proposed rule’s recordkeeping requirements. Cardholders may purchase gift cards from a retail store or even a bank that does not maintain records as to the identity of a cardholder. In the event of a bank failure, it does not seem possible or appropriate to disburse insurance proceeds on a pass-through basis to holders of stored value mechanisms without basic records that indicate funds ownership.

We believe the proposed rule addresses the issue presented by the anonymity of certain cardholders and we request the FDIC to adopt a final rule for stored value cards that is consistent with the pass-through requirements for other types of deposit accounts.

It is Reasonable to Require Disclosure Regarding FDIC Insurance of Stored Value Cards.

Community banks face mounting regulatory burden requirements, and ACB strongly opposes unnecessary regulation that would stifle product development. Because technology will evolve and market forces will change, the stored value arena should be permitted to develop without unnecessary regulatory interference.

ACB believes that it is reasonable to require disclosure with respect to whether a stored value card is federally insured. It is important for depository institutions to have the option of offering both insured and uninsured stored value products. Likewise, it is vital that customers understand whether the value underlying a stored value card is insured. We believe that disclosing whether a stored value card FDIC insured is a quid pro quo for the ability to offer a variety of insured and uninsured products.

Studies have shown that consumers do not read the documents financial institutions are already required to provide with respect to privacy, funds availability, and other consumer issues. As a result, we suggest that any disclosure requirement pertaining to stored value cards could be met by printing “treat this the same as you would cash” or “this product is not FDIC insured” or “FDIC insured” on the card.

Only stored value products that meet the requirement for pass-through deposit insurance should include a printed statement indicating that the funds are insured. For example, a disclosure affirming deposit insurance coverage of a payroll card would be misleading if that card is not structured for pass-through insurance and insurance funds are aggregated and disbursed to the employer.

Furthermore, in the event of a bank failure, this kind of deceptive information would severely damage any trust the unbanked population and the recently banked population have in the banking system.

In addition, requiring a basic disclosure would be consistent with existing regulatory expectations. The OCC already expects national banks to take adequate steps to adequately inform consumers of their rights and responsibilities when using stored value cards, including whether the card is insured by the FDIC. Similarly, the federal banking agencies expect financial institutions to inform customers that nondeposit investment products such as stocks, bonds, mutual funds, and annuities, are not FDIC insured.

Should the FDIC require a notice about deposit insurance coverage to be printed on a stored value card, the name of the issuing institution should also be included. This would enable a cardholder to readily know which depository institution is holding his or her funds. Furthermore, most community banks would prefer that cardholders contact the institution with questions or concerns about the card as opposed to contacting the employer first. Finally, including the name of the issuing bank and basic contact information on a stored value card may provide additional opportunities for financial education when talking to cardholders.

Payroll Cards Should Not Be Required to Satisfy Deposit Insurance Requirements.

Not all employers using payroll cards have elected to provide stored value products with deposit account features. Some payroll cards are not reloadable and funds may only be accessed at an ATM machine. In many cases, the employer has elected a stored value option that requires only limited recordkeeping obligations. This is often a business decision of the employer that is driven by cost considerations. Accordingly, ACB does not believe that all payroll cards should be required to be structured to meet the requirements for pass-through deposit insurance.

We believe that such a requirement would stifle innovation and the development of new stored value products that would help depository institutions best meet the needs of their business customers. Furthermore, by requiring that all payroll cards have pass-through deposit insurance, the FDIC would be imposing regulatory burden and limiting choices for business entities that it does not regulate.

ACB understands that some state labor laws require payroll cards to meet the requirements for pass-through deposit insurance coverage. ACB believes that any such requirement is best left to legislatures and regulatory bodies charged with making or implementing labor and employment laws. We support those employers that recognize the importance of financial literacy and who want to offer more options for their unbanked employees beyond carrying cash and paying check cashing fees.

Conclusion

ACB believes it is good public policy for the FDIC to structure its regulations in a way that encourages employers to work with their depository institution to structure payroll card accounts to provide deposit insurance coverage to cardholder employees.

We look forward to working with the FDIC as important policy considerations regarding stored value products are explored. We reiterate our position that any deposit insurance regulation pertaining to stored value products should distinguish between those products that are designed to function as a “cash substitute” and those that satisfy basic recordkeeping requirements.

Should you have any questions, please contact the undersigned at 202-857-3187 or via email at kshonk@acbankers.org.

Sincerely,

Krista Shonk
Regulatory Counsel
____________________________

¹ America's Community Bankers is the member driven national trade association representing community banks that pursue progressive, entrepreneurial and service-oriented strategies to benefit their customers and communities. To learn more about ACB, visit www.AmericasCommunityBankers.com.

² 70 Fed. Reg. 45571 (Aug. 8, 2005).

³ See 69 FR 20558 (April 16, 2004).

⁴ With pass-through coverage, funds in a stored value account would be insured to each cardholder and not the party that deposited the funds on the cardholder’s behalf.