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Letters to Regulators
Proposed Stored Value Card Guidance
July 15, 2004
Federal Deposit Insurance Corporation
Re: Comments/Legal ESS-Proposed Stored Value Card Guidance
Dear Mr. Feldman:
The Independent Community Bankers of America (ICBA)1 appreciates the opportunity to comment on a proposed rule by the Federal Deposit Insurance Corporation (FDIC) concerning stored value cards and the definition of "deposits" under the Federal Deposit Insurance Act (FDI Act).
The FDIC is proposing a rule that would clarify the meaning of "deposit" as that term relates to funds at insured depository institutions underlying stored value cards. The proposed rule would replace General Counsel's Opinion No. 8. (GC8), published by the FDIC in 1996. Since the publication of GC8, the banking industry has developed new types of stored value card systems. The purpose of the proposed rule is to address new types of systems and to clarify when the funds in these systems will qualify as insured "deposits" pursuant to the FDI Act.
Definition of "stored valued card." The proposed rule defines a "stored value card" as 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."
Stored Value Cards Issued by Depository Institutions. In the case of 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 stored value cards issued by the depository institution, the proposed rule states that funds are "deposits" unless (1) the depository institution records its liabilities for such funds in an account representing multiple cardholders; and (2) the depository institution maintains no supplemental records or subaccounts reflecting the amount owed to each cardholder.
Stored Value Cards Issued by a Sponsoring Company. In the case of funds received by an insured depository institution from cardholders in exchange for stored value cards issued by a company ("sponsoring company"), the proposed rule states that the funds are "deposits" if the depository institution bears an obligation to forward the funds to the sponsoring company or to hold the funds for the sponsoring company. However, if the depository institution bears no obligation to forward or hold the funds (e.g., the depository institution purchases the cards from the sponsoring company and then resells the cards to the cardholders), then the funds are not considered "deposits."
Funds Placed by Sponsoring Company. In the case of funds placed at an insured depository institution by a sponsoring company for the purpose of making payments on stored value cards issued by that company, the proposed rule says that the funds are considered "deposits."
Disclosure Requirements. The proposed rule does not mandate disclosure requirements for stored value cards. However, the FDIC states in the preamble to the proposed rule that depository institutions must accurately disclose the insurability of the funds underlying any stored valued product in a manner that is clear and conspicuous. The preamble also gives some examples. In cases in which the funds qualify as "deposits," the preamble states that the cards should include the following statement: "Member FDIC-Funds accessible by this card are insured by the Federal Deposit Insurance Corporation." On the other hand, in cases in which the funds do not qualify as "deposits," the cards should include "NOT FDIC INSURED-Funds accessible by this card are NOT insured by the Federal Deposit Insurance Corporation."
ICBA Believes That The Proposed Rule Is a Reasonable Extension of General Counsel Opinion No. 8
When GC8 was first issued in 1996, we commended the FDIC for its issuance and supported the FDIC issuing guidance regarding stored value cards and whether they are covered by deposit insurance. 2 However, GC8 did not address all types of stored value card systems involving insured depository institutions. Furthermore, the development of new systems has created a need for additional guidance as to whether the underlying funds qualify as "deposits." ICBA believes that the proposed rule retains the principles set forth in GC8 and extends those principles to new types of stored value card systems.
An example of a type of system not addressed in GC8 is a system in which (1) consumers place funds with a sponsoring company in exchange for stored value cards and, (2) in order to make payments on the cards, the sponsoring company maintains an account at an insured depository institution. In this case, we agree with the FDIC's legal analysis that the funds placed at the insured depository institution are "deposits" as defined under the FDI Act. Section 3(l)(1) defines "deposit" as "the unpaid balance of money or its equivalent received or held by a bank or savings association in the usual course of business and for which it has given or is obligated to give credit, either conditionally or unconditionally, to a commercial, checking, savings, time, or thrift account." We agree with the FDIC that in the case of an account funded by a sponsoring company for the purpose of making payments on stored value cards, the account is a "commercial account" under this paragraph. This conclusion is supported by the case law and by GC8.3
Another example of a system not addressed in GC8 is where a depository institution maintains a reserve account for all cardholders but also maintains a subaccount for each cardholder either through a third-party processing agent or at the bank. GC8 did address the example of a depository institution issuing stored value cards with a reserve account, but did not address the example of a depository institution using subaccounts in connection with a reserve account. In the latter example, we also agree with the FDIC that although the reserve account does not qualify as a "commercial, checking, savings, time or thrift account" under Section 3(l)(1) of the FDI Act, the subaccounts do qualify as "commercial, checking, savings, time or thrift accounts" and therefore the funds are "deposits" under Section 3(l)(3) of the FDI Act. As long as the depository institution maintains subaccounts that reflect the amounts owed to each individual cardholder, then the individual subaccounts should be considered "deposits."
The Proposed Rule Should Apply Equally to All Stored Value Cards
While ICBA agrees that the proposed rule should apply equally to all types of stored value cards, including "payroll cards", "prepaid cards", or "check cards," ICBA thinks it is important that banks have the ability to offer a "payroll card" program where the underlying funds qualify as insured "deposits" for the employee. Payroll cards are likely to have significant value loaded on them representing a week or two of hard earned wages. Deposit insurance protection for these funds is an important public policy goal. Under the proposed rule, the funds underlying all such types of cards issued by depository institutions would be "deposits" except where the depository institution maintains a pooled "reserve account" but maintains no subaccounts or other supplemental records reflecting the amount of money owed to particular cardholders.
As far as determining whether a "payroll card" qualifies for "pass-through" insurance, the FDIC would first apply the proposed rule in determining whether the underlying funds qualify as "deposits." If a determination is made that the funds are "deposits," the FDIC then would apply the principles set forth in FDIC Advisory Opinion No. 02-03 (August 16, 2002) to determine whether there is "pass-through" insurance. According to that opinion, if the funds belong to the employer (as in the case of a traditional corporate payroll account), the funds are insurable to the employer. On the other hand, if ownership of the funds has passed to the individual employees (as in the case of direct deposits made by the employer on behalf of employees), then the funds would be insurable on a "pass-through" basis to the employees.
ICBA Agrees with the Proposed Definition of "Stored Value Card"
Under the proposed rule, the term "stored value card" means 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." ICBA agrees with that definition. Whether the card is "on-line" (i.e., provides direct access to a database for the purpose of obtaining payment authorization) or 'off-line" is unimportant. The distinction that matters is whether the stored value card provides access (directly or indirectly) to funds received and held by an insured depository institution.
If the funds are held by an insured bank, the proposed rule would govern the question of whether the funds qualify as "deposits." However, if the funds are not held by an insured bank, the existence of insured "deposits" would not be possible. Therefore, the proposed rule would not apply to gift cards issued by a retailer in which the retailer receives prepayment from the cardholder and funds are neither held by a bank or paid through a bank. However, if, in conjunction with a gift card program, the retailer places collected funds into a bank, the funds would be insurable to the retailer but not to the cardholder.
FDIC Should Study the Implications of the Proposed Rule On Other Regulations
ICBA is concerned about the unintended consequences of the proposed rule and what effect it will have on other banking regulations, including Regulation D (reserve requirements) and the USA PATRIOT Act Customer Identification Rules. For instance, if the proposed rule is adopted, will financial institutions have to comply with the Customer Identification Rules for individual cardholders when they issue stored value cards that are considered "deposits"? Will they have to reserve for them under Regulation D?
Another example of ICBA'c concerns about unintended consequence is respect to the Federal Reserve's interpretation of "account" under Regulation E. Section 205.2(b)(1) of Regulation E defines the term "account" as a "demand deposit, savings or other consumer asset account…held directly or indirectly by a financial institution and established primarily for personal, family, or household purposes." If the proposed rule is adopted, the FDIC's characterization of certain stored value products as deposits could influence a determination by the Federal Reserve that such deposits are consumer asset accounts under Regulation E. ICBA believes that extending coverage of Regulation E to stored value cards would be inappropriate, resulting in unnecessary cost and regulatory burden, without commensurate value to the cardholder.
In a footnote to its release, the FDIC acknowledges that there a number of issues which may be impacted by this proposed rule and that it plans to "monitor" these issues. ICBA recommends that the FDIC study the implications of the proposed rule with the other banking agencies.
Disclosures Should Not be Mandated
We agree with the FDIC that to avoid confusion on the part of customers, depository institutions should accurately disclose the insurability of the funds underlying any stored value product in a manner that is clear and conspicuous. We also agree that the examples provided in the preamble adequately address consumer confusion about the insurability of funds underlying stored value products. However, there is no reason for the FDIC to adopt mandated disclosure requirements as part of the proposed rules since this would become a regulatory burden for banks. Financial institutions should continue to have the ability to independently determine whether disclosures are necessary based on the type of product, the potential for consumer confusion regarding the product, and other factors.
Although the proposed rule will not resolve all questions concerning the definition of "deposit" as that term relates to funds underlying stored value cards, it is a step in the right direction and a reasonable extension of General Counsel Opinion No. 8. The process of defining "deposit" in response to all the new developments will be an evolutionary process. While we agree with the proposed definition of "stored value card" and with the FDIC's approach under the proposed rule, we do recommend that the FDIC study the implications of the proposed rule on other regulations in conjunction with the other banking agencies. Furthermore, we would recommend that the FDIC not adopt mandated disclosure requirements on banks that offer stored value cards.
If you have questions or need any additional information, please do not hesitate to contact me at 202-659-8111 or at Chris.Cole@icba.org.
1 The Independent Community Bankers of America represents the largest constituency of community banks of all sizes and charter types in the nation, and is dedicated exclusively to protecting the interests of the community banking industry. ICBA aggregates the power of its members to provide a voice for community banking interests in Washington, resources to enhance community bank education and marketability, and profitability options to help community banks compete in an ever-changing marketplace. For more information, visit ICBA's website at www.icba.org.
2 On October 30, 1996, ICBA (then the Independent Bankers Association of America), filed a comment letter with the FDIC supporting GC8.
3 See Seattle-First National Bank v. FDIC, 619 F. Supp. 1351 (W.D. Okla. 1985) and FDIC v. European American Bank & Trust Co., 576 F. Supp. 950 (S.D.N.Y. 1983).