CUNA Regulatory Comment Call


May 27, 2004

Definition of "Deposit" with regards to
Stored Value Cards

(NOT A MAJOR PROPOSAL)

EXECUTIVE SUMMARY

Please feel free to fax your responses to CUNA at 202-638-7052; e-mail them to Associate General Counsel Mary Dunn at mdunn@cuna.com and to Assistant General Counsel Michelle Profit at mprofit@cuna.com; or mail them to Mary and Michelle c/o CUNA’s Regulatory Advocacy Department, 601 Pennsylvania Avenue, NW, South Building, Suite 600, Washington, D.C. 20004. You may also access the proposed rule at

http://www.fdic.gov/news/news/financial/2004/fil4404.html

DISCUSSION

Previously, the FDIC identified several types of stored value card systems involving banks. And, the FDIC described a mechanism or framework for determining when the funds underlying stored value cards may or may not qualify as "deposits." Although the proposed rule would provide additional guidance, it would retain the basic principles set forth in the Opinion and extend these principles to new types of stored value card systems, including payroll cards. Under this proposal, the funds underlying all such types of cards – old and new cards- would be "deposits" except under the following circumstances: (1) The issuer of the cards (i.e., the party that promises to make payments on the cards) is the insured bank (and not the employer or other sponsoring company); and (2) the bank maintains a pooled "reserve account" but maintains no sub-accounts or other supplemental records reflecting the amount of money owed to particular cardholders.

In the past, the FDIC has identified four types of stored value cards and explained their rationale regarding whether the funds underlying those cards qualify as "deposits." These four types are enumerated and described below.

First, in a "Bank Primary–Reserve System," the insured bank issues stored value cards in exchange for cash from the cardholders. The bank does not maintain an individual account for each cardholder; but maintains a pooled "reserve account" for all cardholders. In making payments to merchants or other payees (as the cardholders use their cards to purchase goods or services), the bank disburses funds from this "reserve account." The FDIC determined that such funds held by the bank do not satisfy the statutory definition of deposit because the funds do not accrue to a conventional commercial, checking, savings, time or thrift account.

Second, in a "Bank Primary-Customer Account System," the bank does not maintain a pooled "reserve account" for all cardholders. Rather, the bank maintains an individual account for each cardholder. The FDIC determined that funds in these individual accounts are deposits.

Third, in a "Bank Secondary-Advance System," the bank acts as an intermediary in collecting funds from cardholders in exchange for store value cards issued by a third party or sponsoring company. The funds are held by the bank for a short period of time, and then forwarded to the third party. Later, when the cardholder uses the stored value card to make a purchase from a merchant, the third party (and not the depository Institution) sends the appropriate amount of money to the merchant. The FDIC determined that the funds collected by the bank are "deposits" belonging to the third party for the brief period before the funds are forwarded to the third party. The funds are not "deposits" belonging to the cardholders because the bank’s liability for these funds is owed to the third party for whom the bank is temporarily holding the funds.

Fourth, in a "Bank Secondary-Pre-Acquisition System," the bank provides cardholders with cards issued by a third party or sponsoring company. Prior to selling the cards to the cardholders, however, the bank purchases the cards from the third party. When the bank resells the cards to the cardholders, no money is owed to the third party. For this reason, the bank is free to retain the funds collected from the cardholders. Later, when a cardholder uses his/her stored value card to make a purchase from a merchant, the third party and not the depository institution sends the appropriate amount of funds to the merchant. The FDIC determined that the funds collected by the depository institution in a "Bank Secondary-Pre-Acquisition System" are not "deposits." The FDIC reasoned that the bank, in collecting funds from cardholders, does not assume a responsibility to return or disburse the funds to the cardholders or the third party or any other party. Rather, the bank merely sells the right to collect funds from the third party, not the bank.

This proposal would keep in place the rules that the FDIC has already established above for what does or does not constitute a "deposit" in a stored value system. The proposal also identifies new stored value systems and establishes what constitutes a "deposit" for them. These systems are described below:

One such system is one 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 stored value cards, the sponsoring company maintains an account at a bank. The questions is whether the funds placed at the bank, in this type of system, are "deposits" as defined at section 3(1) of the FDI Act. For the reasons explained below, the FDIC believes that the funds are "deposits." 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 because the account is owned for a commercial purpose by a commercial enterprise (i.e., the sponsoring company). The account is not a non-deposit "general liability account" maintained by the depository institution. In the case of an account funded by a sponsoring company, however, paragraph 3(1)(3) is satisfied because the single intended purpose is to hold the funds for the sponsoring company. By law, this "special or specific purpose" means that the liabilities represented by the account at the insured depository institution (whether or not the account is described as a "reserve account") are "deposits."

A separate question is whether the "deposits" in such a system can be insured on a "pass-through" basis to the cardholders (as opposed to being insured to the sponsoring company).

Under the rules, an account funded by a sponsoring company for the purpose of making payments to cardholders cannot be insured on a "pass-through" basis to the cardholders unless (1) the account records reflect a custodial relationship between the sponsoring company and the cardholders (e.g., "Sponsoring Company as Custodian for Cardholders"); (2) the depository institution or the sponsoring company or some other party maintains records reflecting the interest of each cardholder; and (3) the deposit is owned in fact by the cardholders. Whether this third requirement is satisfied will depend on the agreements between the sponsoring company and the cardholders. One factor would be whether the sponsoring company retains the right to recover the funds under certain circumstances (e.g., upon the expiration of a card). Such a right would indicate that the funds in the account actually belong to the cardholders. If the funds belong to the sponsoring company, "pass-through" coverage will be unavailable.

Some banks have a hybrid system that maintains a pooled self-described "reserve account" for all cardholders. On the other hand, the bank maintains a sub-account for each cardholder. In some cases, the bank maintains the sub-accounts through a processing agent. In this notice of proposed rulemaking, the term "sub-account" is used to mean any supplemental records maintained by the bank (directly or through an agent) that enable the institution to determine the amounts of money owed to particular persons (i.e., that enable the institution to calculate a balance for each of the persons who holds a card). In this notice, the FDIC is proposing to treat the funds in a hybrid system (i.e., a system in which a "reserve account" is supplemented by sub-accounts) as "deposits."

Another new type of stored value card is the "payroll card." In paying wages, some employers are distributing "payroll cards" to their employees in lieu of checks. Prior to the distribution of the cards, the employer places funds at an insured depository institution. After the distribution of the cards, the employees may withdraw the funds by using their cards. Specifically, the employees may withdraw the funds at automated teller machines or transfer the funds to merchants through the merchants’ point of sale terminals.

In a case involving "payroll cards," the FDIC would apply the proposed rule in determining whether the underlying funds qualify as "deposits." If a determination were made that the funds are "deposits," the FDIC then would apply certain principles in determining whether the deposits are entitled to "pass-through" insurance coverage. In that Opinion, the staff addressed the question of whether the funds placed at the insured depository institution by the employer are insurable on a "pass-through" to the employees. The issue depends upon the actual ownership of the funds. If the funds belong to the employer (as in the case of a traditional corporate payroll account), the funds are insurable to the employer. In other words, in the event of the failure of the insured depository institution, the funds would be aggregated with the employer’s other funds (if any) at the same insured depository institution and insured up to $100,000. On the other hand, the funds would be insurable on a "pass- through" basis to the employees (assuming the satisfaction of the FDIC’s requirements for "pass-through" insurance coverage as previously explained) if ownership of the funds has passed to the employees (as in the case of direct deposits made by an employer on behalf of the employees) prior to the failure of the insured depository institution.

The FDIC would define a "stored value card" as follows: "A stored value card stores information electronically on a magnetic stripe or computer chip and can be used to purchase goods or services. The balance recorded on the card is debited at a merchant’s point of sale terminal when the consumer makes a purchase." 61 FR 40490.

The proposed regulation does not set forth any special rules regarding the insurance coverage of any "deposits" underlying stored value cards. Rather, the proposed regulation merely states that the insurance coverage of any such "deposits" shall be governed by the FDIC’s insurance regulations.

Under the FDI Act and the insurance regulations, the FDIC must aggregate all "deposits" owned by a particular depositor in a particular ownership capacity in applying the $100,000 insurance limit. The application of these basic principles may be difficult in the case of "deposits" underlying certain stored value cards. For example, an insured depository institution might offer a type of stored value card that can be transferred from the original purchaser to some other person. Assuming the existence of such transferable cards, the depository institution might keep records as to the identities of the original purchasers but no records as to the ultimate cardholders. In the absence of such records, the FDIC may be unable to identify the ultimate cardholder in the event of the failure of the institution. In light of such possibilities, comments are requested as to whether the FDIC should adopt any special rules governing the insurance coverage of any "deposits" underlying stored value cards or other stored value products.

The FDIC remains concerned about the transparency of the insurances rules on stored value cards for the consumers. The FDIC has stated that it expects banks to clearly and conspicuously disclose to customers the insured or non-insured status of the stored value cards they offer to the public. The FDIC continues to be concerned that some purchasers of stored value cards may not understand whether the funds given to a bank in exchange for such cards are covered by federal deposit insurance.

In order to avoid confusion on the part of customers, banks must accurately disclose the insurability of the funds underlying any stored value product in a manner that is clear and conspicuous. For example, in cases in which the funds qualify as "deposits," the cards might 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 might include this statement: "NOT FDIC INSURED-Funds accessible by this card are NOT insured by the Federal Deposit Insurance Corporation." In addition, any advertisements for the stored value product (including written materials provided by the depository institution when a card is delivered to a consumer) must state whether the underlying funds are insured by the FDIC. Also, any advertisements for insured "deposit" products must comply with the membership advertisement requirements.

In the case of cards issued by sponsoring companies (and not issued by an insured depository institution), the company should not suggest that the customer will be protected by the FDIC. Even if the sponsoring company maintains an account at an FDIC-insured depository institution for the purpose of making payments on its cards, the company should make no representations about FDIC insurance to the customer because the insured depositor will be the company and not the customer (unless the FDIC’s requirements for "pass-through" insurance coverage have been satisfied as previously explained).

QUESTIONS REGARDING THE PROPOSAL

  1. Should the FDIC adopt the proposed rule? This proposed rule would clarify the meaning of the term "deposit" as that term relates to the funds at insured banks that underlies stored value cards. Under the proposed regulation, the funds would be "deposits" unless (1) the bank itself has issued the cards against a pooled "reserve account" representing multiple cardholders; and (2) the bank maintains no supplemental records or sub-accounts reflecting the amount owed to each cardholder. Please explain.
















  2. In the alternative, should the FDIC adopt some other rule? Under what circumstances should funds received by an insured depository institution not be insurable as deposits? Please explain.
















  3. What should be the treatment of funds underlying "payroll cards"? Please explain.
















  4. Should the FDIC adopt the proposed definition of "stored value card"? Can this definition be improved? In the Opinion, the FDIC defines a "stored value card" as follows: "A stored value card stores information electronically on a magnetic stripe or computer chip and can be used to purchase goods or services. The balance recorded on the card is debited at a merchant’s point of sale terminal when the consumer makes a purchase." What are the differences (if any) between "stored value cards" and other types of bankcards such as "prepaid cards," "debit cards," "check cards," and "payroll cards"? Please explain.
















  5. Should the FDIC adopt specific disclosure requirements? Please explain.
















  6. If so, do the disclosures provided as examples in the preamble adequately address consumer confusion about the insurability of funds underlying stored value products? The preamble proposes the following language when cards qualify: "Member FDIC-Funds accessible by this card are insured by the Federal Deposit Insurance Corporation." When the funds do not qualify as "deposits," the cards might include this statement: "NOT FDIC INSURED-Funds accessible by this card are NOT insured by the Federal Deposit Insurance Corporation." Should these disclosures be required? Please explain.
















  7. Are there ways to reduce the costs or burdens associated with providing disclosures about the insurability of such funds? Please explain.
















  8. Should the FDIC adopt any special rules governing the insurance coverage of any "deposits" underlying stored value cards? Please explain.
















  9. Are insured depository institutions offering stored value products or systems that are not addressed in this notice of proposed rulemaking? Please explain.
















  10. In the case of a stored value card system in which the cards are issued by an insured depository institution, and the depository institution maintains a pooled "reserve account" reflecting its liabilities for all cards but does not maintain individual accounts or sub-accounts reflecting its liabilities to individual cardholders, how does the institution keep track of its liabilities? What technology is used? How does the institution know when and whether to make payments to merchants? Please explain.
















  11. Do you have any additional comments on this proposal?
















  12. Please submit your name, address, and phone number.
















Eric Richard • General Counsel • (202) 508-6742 • erichard@cuna.com
Mary Mitchell Dunn • SVP & Associate General Counsel • (202) 508-6736 • mdunn@cuna.com
Jeffrey Bloch • Assistant General Counsel • (202) 508-6732 • jbloch@cuna.com
Catherine Orr • Senior Regulatory Counsel • (202) 508-6743 • corr@cuna.com