| 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) 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. The current proposal replaces the FDIC’s April
2004 proposal.
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:
- The account records of the depository institution reflect the fact that
the party depositing the funds is not the owner of the funds; and
- 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 [email protected].
Sincerely,
Krista Shonk
Regulatory Counsel
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