VISA
July 12, 2004 Robert E. Feldman
Executive Secretary
Federal Deposit Insurance Corporation
55017th Street, NW
Washington, DC 20429
Attention: Comments/Legal ESS Re: Proposed Stored Value Card Guidance Dear Mr. Feldman: This comment letter is submitted on behalf of Visa U.S.A. Inc. in response to the notice of proposed rulemaking ("Proposed Rule"), published by the Federal Deposit Insurance Corporation ("FDIC") on April 16, 2004 to clarify when funds at insured depository institutions underlying stored value cards would constitute "deposits" under the Federal Deposit Insurance Act ("FDIA").1 Visa appreciates the opportunity to comment on these important topics. The Visa Payment System, of which Visa U.S.A.2 is a part, is the largest consumer payment system, and the leading consumer e-commerce payment system, in the world, with more volume than all other major payment cards combined. Visa plays a pivotal role in advancing new payment products and technologies, including technology initiatives for protecting personal information and preventing identity theft and other fraud, for the benefit of its member financial institutions and their hundreds of millions of cardholders. 1996 FDIC Stored Value Guidance In 1996, the Federal Deposit Insurance Corporation's ("FDIC") General Counsel issued an opinion that set forth a framework for determining whether and under what circumstances funds underlying stored value products would be considered deposits ("GC8") .3 GC8 described several variations of stored value products sponsored by insured depository institutions. Most bank-issued stored value programs fell into the category of "Bank Primary— Reserve Systems." In Bank Primary—Reserve Systems the value is downloaded onto a card and funds are paid into a reserve or general liability account held at the institution to pay merchants and other payees as they make claims for payments. The General Counsel concluded that funds underlying these systems are not deposits because such funds are not held for one or more specific transactions.4 Given the developments in stored value card systems since the issuance of GC8, the FDIC believes that there is "a need for additional guidance" because the classification scheme of GC8 "is at a minimum incomplete, and may be obsolete."5 Accordingly, the FDIC issued a Proposed Rule concerning the funds underlying stored value products. While the Proposed Rule, if adopted, would replace GC8, the FDIC believes that the Proposed Rule "retain[s] the basic principles set forth in GC8 and extend[s] these principles to new types of stored value card systems."6 Recognizing that new types of stored value card systems may be developed in the future, the FDIC explains that "[t]he process of defining 'deposit' ... may be evolutionary," potentially indicating the possibility of future regulations clarifying the meaning of the term "deposit" as it relates to stored value cards.7 2004 FDIC Proposed Guidance Under the Proposed Rule, "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 such cards, would constitute deposits, unless the institution records its liabilities for such funds in an account representing multiple cardholders and the institution does not maintain "supplemental records or subaccounts reflecting the amount owed to each cardholder."8 This position appears to reverse the general understanding of GC8. The Proposed Rule would define "stored value card" as a "device that enables the cardholder to transfer the [card's] 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."9 The Proposed Rule would be the sole determining factor as to whether the funds underlying a stored value card qualify as a deposit. The FDIC did not focus on the type of stored value card. It viewed as "unimportant" whether transactions using the card were on-line transactions or off-line transactions.10 Instead, what "matters to the FDIC is whether the stored value card provides access (directly or indirectly) to money received and held by an insured depository institution." 11 As a result, the Proposed Rule would apply to any and all stored value cards, regardless of whether it is a gift card, a payroll card or a rewards card or new combinations of these and other types. The Proposed Rule looks only at whether the funds underlying the card pass through a clearing process and where the card's value is dependent on "whether a bank holds sufficient funds to back-up the card."12 More specifically, under the Proposed Rule for stored value cards issued by a depository institution, "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 such cards, would constitute deposits, unless two conditions applied, namely, the institution "records its liabilities for such funds in an account representing multiple cardholders" and the institution does not maintain "supplemental records or subaccounts reflecting the amount owed to each cardholder."13 As a result, the Proposed Rule does not focus on the special policy issues that may arise from particular types of stored value cards. Instead, it asks only (1) whether an insured depository institution received funds in exchange for stored value cards and (2) whether that institution uses a subaccount accounting methodology to track the value remaining with respect to each cardholder. If so, such funds would constitute deposits. We believe the Proposed Rule is flawed in its perceived simplicity and strongly oppose going forward with a final rule. The Proposed Rule will significantly impede market innovation and dramatically affect the regulation of stored value products. Therefore, we urge the FDIC to conduct a comprehensive study of stored value cards and the Proposed Rule's implications on other regulatory issues. It should then issue a revised proposal that reflects the different ways in which diverse stored value products may be structured to provide appropriate consumer and banking system protection. Policy Implications Ignored The Proposed Rule ignores the policy implications of deposit insurance coverage. The purpose of deposit insurance is to protect the banking system by reducing the incentives for retail product bank runs and to protect depositors' savings and liquid funds. Implicit in both of these policies is that the depositor is relying on the security of the banking system, including the deposit insurance system, to protect his or her funds. Some stored value products may have these characteristics. However, others are more purely payment vehicles that substitute for cash. The FDIC should focus on the policy reasons for subjecting certain products to deposit insurance. It should not focus, as it has in the Proposed Rule, on the pure mechanics of whether funds are received in exchange for stored value cards and whether that institution uses a subaccount accounting methodology. It may be appropriate to characterize certain stored value cards as insured deposits for deposit insurance assessment purposes. However, the FDIC should take into account the policy rationale for characterizing the underlying funds contained in certain stored value products as deposits. The structure and design of these products vary widely. Stored value products include gift cards, payroll/employee cards, single-purpose prepaid cards, electronic benefit transfer cards, telephone cards and promotional/incentive cards. Moreover, the funding and settlement of stored value products also vary. Some stored value products are funded by consumer credit or debit cards or ACH transfers, while other products are funded by companies through a batch process. For instance, most gift cards are fundamentally different from bank deposits, even though banks hold the proceeds of both. Gift cards serve as a more flexible substitute for traditional store gift certificates by providing broader transaction capabilities. In turn, gift card transaction capabilities generally are more limited than the capabilities of deposit accounts. For example, in terms of the parties to whom payment can be made, gift card payments generally cannot be made to individuals and cash withdrawals may not be available. Further, the recipients of gift cards do not choose the financial institution issuing the card, nor is the gift card purchased on the assumption that it is backed by the deposit insurance system. Similarly, gift cards are not viewed by either the producers or recipients as an investment or savings vehicle. Proposed Rule Could Affect Other Regulations The Proposed Rule is concerned with whether funds backing stored value cards constitute deposits, with all the rights and responsibilities that would follow. However, the FDIC acknowledges in a footnote that this result could raise "a number of other issues," including reserve requirements, money laundering and application of the electronic fund transfer rules.14 Indeed, the application of these laws—and many more—to stored value products is far from clear, and will likely differ significantly, depending upon the type of product. Regulation D Requirements - Reserve Requirements of Depository Institutions Regulation D establishes requirements for depository institutions to hold reserves in the form of either vault cash or non-interest earning balances held at a Federal Reserve Bank against transaction accounts that are held by banks on behalf of their customers. The reserve requirement is 10% of the amount of net transaction accounts over $45.4 million, 3% for net transaction accounts over $6.6 million up to $45.4 million and 0% for net transaction accounts below $6.6 million. To the extent that prepaid cards give rise to insured deposits, they also may be viewed as giving rise to transaction accounts. The marginal reserve that would apply to the amounts on the cards would depend on the current level of transaction accounts held by the bank, but in most cases would be 10%. This reserve requirement would affect the cost of providing gift cards. Those increased costs likely would be reflected in the fees charged for gift cards. These increased costs could also dissuade financial institutions from innovating or offering certain types or features of gift cards. Moreover, the opportunities to reduce reserve requirements that are available for conventional bank deposits, such as sweep arrangements, may not be available for gift cards. The FDIC should not proceed with the Proposed Rule until it has determined, as part of its comprehensive study, the resulting reserve requirement implications, if any, of the Proposed Rule. Regulation E Requirements Electronic Fund Transfer Disclosures and Other Requirements The Federal Reserve Board's ("FRB's") Regulation E sets forth the requirements for electronic fund transfers to or from a consumer asset account, such as a deposit account, at a financial institution. The applicability of many Regulation E provisions, including periodic statements, limited liability for unauthorized transactions and error resolution procedures, to certain stored value products is not clear. Section 205.2(b)(1) of Regulation E defines the term "account" as a "demand deposit (checking), savings, or other consumer asset account . . . held directly or indirectly by a financial institution and established primarily for personal, family, or household purposes." The FRB has refrained from adopting final amendments to Regulation E to specifically cover stored value products out of concern that too much regulation could inhibit the development of these emerging products. If the Proposed Rule is adopted, however, the FDIC's characterization of certain stored value products as deposits could influence an FRB determination that such deposits are consumer asset accounts under Regulation E. The FDIC should not proceed with the Proposed Rule until it has determined, as part of its comprehensive study, the resulting Regulation E implications, if any, of the Proposed Rule. USA PATRIOT Act Customer Identification Rules—Customer Identification Programs Financial institutions are required to gather specified information about customers and to verify the identity of customers. In addition, financial institutions must establish risk-based procedures for verifying the identity of each customer to the extent reasonable and practicable. Also, a Customer Identification Program ("CIP") must have procedures in place for opening an account that specify the identifying information that will be obtained from each customer. Further, at a minimum, a financial institution must obtain the customer's name, date of birth, address and identification number. It is simply not feasible for financial institutions to comply with CIP requirements for the recipients of gift cards. It is the very nature of the product the giver of a gift has the sole relationship with both the seller and recipient of the gift. At best, a financial institution may send the card to the recipient at the purchaser's request. The FDIC should not proceed with the Proposed Rule until it has determined, as part of its comprehensive study, the resulting USA PATRIOT Act implications, if any, of the Proposed Rule. Branch Banking National bank branching is governed by the McFadden Act ("Act"), which provides that a national bank may, with the approval of the Office of the Comptroller of the Currency, operate branches at such locations as are authorized for state banks under state law where the national bank is located.15 A branch is defined under the Act as including "any branch bank, branch office, branch agency, additional office, or any branch place of business located in any State or Territory of the United States or in the District of Columbia at which deposits are received, or checks paid, or money lent. The term `branch' ... does not include an automated teller machine or a remote service unit."16 Given these considerations, if the Proposed Rule is adopted, the FDIC's characterization of certain stored value products as deposits could trigger the geographic restrictions and related approval requirements under the Act. Gift cards and other stored value cards issued by banks may be sold at retail outlets or other facilities that are neither bank branches nor automated teller machines ("ATMs"). To the extent that the sale of stored value cards is determined to result in deposits, the sale of those cards might be viewed as the taking of deposits. Therefore, the Proposed Rule could raise issues as to whether the sale of those cards must be conducted through bank branches, ATMs or remote service units. This would significantly restrict the availability of certain stored value products to the detriment of consumers. The FDIC should not proceed with the Proposed Rule until it has determined, as part of its comprehensive study, the resulting implications of the Proposed Rule on branch banking. Other Issues Finally, treating gift cards and other stored value products as insured deposits may have other implications. For example, it may affect the deposit calculations necessary to determine whether interstate mergers may be approved under section 44 of the FDIA. The FDIC should not proceed with the Proposed Rule without evaluating all of the direct and indirect effects that the Proposed Rule would have on other statutory and regulatory requirements. Mandating Disclosures is not Necessary Although the Proposed Rule does not set forth any new specific disclosure requirements, the FDIC solicits comment on whether the Proposed Rule ought to mandate the clear and conspicuous disclosure, including disclosures on the stored value card itself, of the insured or non-insured status of the stored value card. In the supplemental information accompanying the Proposed Rule the FDIC continued to express concern that some purchasers of stored value cards may not understand whether the funds given to an insured depository institution in exchange for such cards are covered by federal deposit insurance. We urge the FDIC to avoid mandating specific disclosure requirements; there is little evidence to support a need for these disclosures. In addition, pursuant to previously issued guidance on the matter, it is industry practice to provide such disclosures to the extent they are needed. Institutions should continue to have the ability to independently determine whether disclosures are needed based on the design of the product, consumer confusion regarding the product and other factors that may arise. Visa appreciates the opportunity to comment on this important topic. If you have any questions concerning these comments, or if we may otherwise be of assistance in connection with this matter, please do not hesitate to contact me, at (415) 932-2178. Sincerely,
Russell W. Schrader
Senior Vice President and
Assistant General Counsel
VISA U.S.A. Inc.
P.O. Box 194607
San Francisco, CA 94119-4607
1 The authority of the FDIC to define the term "deposit" is found in the FDIA definition of "deposit," which, in part, defines a "deposit" as "such other obligations of a bank or savings association" as the FDIC Board of Directors prescribes by regulation, after consultation with specific financial regulatory agencies. 12 U.S.C. § 1813(1)(5).
2 Visa U.S.A. is a membership organization comprised of U.S. financial institutions licensed to use the Visa service marks in connection with payment systems.
3 61 Fed. Reg. 40,490 (Aug. 2, 1996).
4 Id at 40,494.
5 69 Fed. Reg. 20,558, 20,560 (Apr. 16, 2004).
6 Id. at 20,558.
7 Id. at 20,559.
8 Id. at 20,565.
9 Id. at 20,566.
10Id. at 20,563.
11 Id
12 Id. at 20,558 n.l.
13 Id. at 20,565. Although the term "supplemental record" is not defined, it appears to be meant to apply broadly so that any record maintained by, or on behalf of, a depository institution that enables a depository institution to determine the amount due a particular cardholder would constitute a supplemental record. Accordingly, the only stored value cards issued by a depository institution and supported by a general liability account that do not lead to the creation of an insured deposit may be stored value cards where the only record of the amount due the cardholder is on the card itself. The Proposed Rule also states that it does not suggest that insured depository institutions can "ignore" a law or regulation that would require such institutions to maintain records on amounts owed to cardholders.
14 69 Fed. Reg. at 20,559 n.2. Not mentioned is the possible application of other requirements, such as those arising under Regulation DD.
15 12 U.S.C. § 36(c).
16 12 U.S.C. § 36(j). Importantly, section 2204 of the Economic Growth and Regulatory Paperwork Reduction Act amended the Act's definition of "branch" to not include "an automated teller machine or a remote service unit."
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