[Federal Register Volume 61, Number 150 (Friday, August 2, 1996)]
[Notices]
[Pages 40494-40497]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 96-19698]
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FEDERAL DEPOSIT INSURANCE CORPORATION
Stored Value Cards and Other Electronic Payment Systems
AGENCY: Federal Deposit Insurance Corporation (FDIC or Corporation).
ACTION: Notice; request for comment; public hearing.
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SUMMARY: The FDIC is seeking comment on whether and under what
circumstances the FDIC should take regulatory action with respect to
finding that the funds underlying stored value cards or other similar
electronic payment systems are deposit liabilities for purposes of the
Federal Deposit Insurance Act. The FDIC is also seeking comment on
types of proposed or existing stored value card systems, similar
electronic payment systems, and the safety and soundness concerns
raised by the emergence of these new technologies. This notice also
sets forth the time and other particulars concerning a public hearing
that the FDIC will conduct on this topic.
DATES: Written comments must be received by the FDIC on or before
October 31, 1996. Requests to participate in the public hearing must be
received by August 26, 1996. Each participant must submit a summary of
his or her written testimony by September 3, 1996. The public hearing
will be held on September 12, 1996 and possibly also on September 13,
1996, and other dates, depending upon the number of requests received
to participate in the public hearing.
ADDRESSES: Written comments, requests to participate in the public
hearing, and summaries of testimony are to be addressed to the Office
of the Executive Secretary, Federal Deposit Insurance Corporation, 550
17th Street, N.W., Washington, D.C. 20429. Comments may be hand-
delivered to Room F-400, 1776 F Street N.W., Washington, D.C. 20429, on
business days between 8:30 a.m. and 5:00 p.m. (FAX number (202) 898-
3838; Internet address: [email protected]). Comments will be available
for inspection and photocopying in Room 100, 801 17th Street, N.W.,
Washington, D.C. 20429, between 9:00 a.m. and 5:00 p.m. on business
days.
Hearing location. Federal Deposit Insurance Corporation, Board of
Directors' Room (6th Floor), 550 17th Street N.W., Washington, D.C.
20429
FOR FURTHER INFORMATION CONTACT: Sharon Powers Sivertsen, Director,
Office of Policy Development, (202) 898-8710; Cary Hiner, Assistant
Director, Policy Branch, Division of
[[Page 40495]]
Supervision (202) 898-6814; Marc J. Goldstrom, Counsel, Legal Division,
(202) 898-8807, Federal Deposit Insurance Corporation, 550 17th Street,
N.W., Washington, D.C., 20429.
SUPPLEMENTARY INFORMATION:
Background
Insured depository institutions are increasingly utilizing new
technology to offer novel and innovative products to customers. One
such product is the stored-value card. A stored value card stores
information electronically on a magnetic stripe or computer chip and
can be used to purchase goods or services. From the FDIC's perspective,
the primary legal issue raised by the development of stored value card
systems is whether and to what extent the funds, or obligations,
underlying stored value cards constitute ``deposits'' within the
meaning of section 3(l) of the Federal Deposit Insurance Act (FDIA) and
are therefore assessable and qualify for deposit insurance. There has
been a need for the FDIC to provide guidance on this issue. The FDIC
has provided guidance with respect to this matter in General Counsel
Opinion No. 8, published elsewhere in this issue of the Federal
Register.
General Counsel Opinion No. 8 sets forth the Legal Division's views
on whether and under what circumstances the funds underlying stored
value cards may be considered deposits under sections 3(l)(1) through
(4) of the FDIA, 12 U.S.C. 1813(l)(1)-(4). Notwithstanding the question
of whether and under what circumstances the funds underlying stored
value cards meet this statutory definition of deposit, the FDIC has the
authority to find and prescribe by regulation that some or all stored
value card obligations of a depository institution are deposit
liabilities by general usage. 12 U.S.C. 1813(l)(5). The FDIC has not
promulgated such a regulation and there are no current plans to propose
a regulation on this matter. However, the FDIC wishes to solicit
comments from the public as to the policy considerations concerning
whether it should consider proposing such a rule at some point in the
future. This request for comments is independent of and will in no way
effect or undermine the analysis or conclusions in General Counsel
Opinion No. 8.
In addition, General Counsel Opinion No. 8 is based generally on
systems and technologies that have come to the attention of the staff.
The FDIC is also soliciting comment with respect to whether there are
other types of stored value card systems in which depository
institutions are involved.
Types of Stored Value Card Systems Discussed in General Counsel Opinion
No. 8
General Counsel Opinion No. 8 identifies four types of stored value
systems: (1) Bank Primary--Customer Account Systems; (2) Bank Primary--
Reserve Systems; (3) Bank Secondary--Advance Systems; and (4) Bank
Secondary--Pre-Acquisition Systems. These systems, as described below,
represent a mechanism to generalize the circumstances under which the
funds underlying stored value cards may or may not be considered
deposits within the meaning of the FDIA.1 The FDIC is soliciting
comment with respect to whether there are other types of stored value
card systems in which depository institutions are involved.
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\1\ We would also note that in its proposed amendment to
Regulation E, 61 FR 19696 (May 2, 1996), the Board of Governors of
the Federal Reserve System has distinguished between ``off-line
accountable'', ``off-line unaccountable'', and ``on-line'' stored
value systems in determining whether the regulation applies to
various types of stored value systems. General Counsel Opinion No. 8
does not use these distinctions. This is not intended as a criticism
or rejection of the Federal Reserve Board's classification system.
Rather, it is indicative of the fact that these particular
distinctions are not necessarily germane as to whether and under
what circumstances the funds underlying a stored value card are
``deposits'' under the Federal Deposit Insurance Act (FDIA).
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In Bank Primary--Customer Account Systems the funds underlying the
stored value card could remain in a customer's account until the value
is transferred to a merchant or other third party, who in turn collects
the funds from the customer's bank.2 In Bank Primary--Reserve
Systems, as value is downloaded onto a card, funds are withdrawn from a
customer's account (or paid directly by the customer) and paid into a
reserve or general liability account held at the institution to pay
merchants and other payees as they make claims for payments.
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\2\ Such a system would be similar to debit card systems,
except that unlike a debit card, the information or value is on the
card itself. The staff is not aware of any such system currently in
development. It is our understanding, however, that such a system
could be developed.
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In the two types of Bank Secondary Systems, the electronic value is
created by a third party and the funds underlying the electronic value
are ultimately held by such third party. In such systems, depository
institutions act as intermediaries in collecting funds from customers
in exchange for electronic value. In Bank Secondary--Advance Systems,
the electronic value is provided to the institution to have available
for its customers. As customers exchange funds for electronic value,
the funds are held for a short period of time and then forwarded to the
third party. In Bank Secondary--Pre-Acquisition Systems, the depository
institution will exchange its own funds for electronic value from the
third party and in turn exchange electronic value for funds with its
customers.
In some Bank Secondary Systems, the depository institution may have
a contingent liability to redeem the electronic value from consumers
and merchants. As such electronic value is redeemed, the institution
may in turn exchange the electronic value for funds with the third
party.
Authority of the FDIC To Promulgate a Regulation Finding That Funds
Underlying Stored Value Cards are Deposits
General Counsel Opinion No. 8 addresses the question of whether and
under what circumstances stored value card obligations are deposits
within the meaning of sections 3(l) (1)-(4) of the FDIA, 12 U.S.C.
1813(l) (1)-(4). Section 3(l)(5) of the FDIA, 12 U.S.C. 1813(l)(5),
gives the Board of Directors the authority, after consultation with the
Comptroller of the Currency, Director of the Office of Thrift
Supervision, and the Board of Governors of the Federal Reserve System,
to find and prescribe by regulation other obligations of an insured
depository institution to be deposit liabilities by general usage.
In considering whether to promulgate such a regulation, the FDIC
may wish to consider a number of policy issues. Through this notice and
request for comment, and the related public hearing, the FDIC is
inviting comment on any policy issues the FDIC should consider in
determining whether to promulgate such a regulation. Some of these
policy issues are discussed below. This discussion is intended to
highlight the issues and does not represent the positions of either the
Board of Directors or the staff.
While the discussion of policy considerations below focuses on
stored value cards, the FDIC staff believes that such policy analysis
would in general apply to a variety of electronic payment system
issues, including concerns raised by Internet banking and the use of
electronic cash. The FDIC is therefore also inviting comment on policy
issues in connection with electronic payment systems.
Policy Considerations in Determining Whether To Promulgate a Regulation
Many industry participants are of the view that stored value cards
and related products will eventually become a
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significant element of the payment system and stream of commerce. By
such reports, a significant portion of the payment system could be
represented by stored value systems. As a result of the potential
widespread use of such systems, it may be that the FDIC should
determine that public confidence in these payment systems is critical
to the safety and soundness of the banking system, such that deposit
insurance is warranted.
Alternatively, it may be argued that the development of stored
value technologies is in its very early stages. As such, stored value
systems do not presently pose a threat to public confidence or the
banking system, and therefore do not warrant deposit insurance coverage
today.
Related to the public confidence issue are the expectations of
depository institution customers. Consumers presently understand that
if they open a checking or savings account with an institution, such
accounts are insured up to applicable limits by the FDIC. It is
possible that consumers could reasonably expect that deposit insurance
protection is being obtained when they obtain stored value cards from
institutions. The failure to provide deposit insurance in an instance
where protection is reasonably expected by a consumer could, in the
event of failure of an issuer, result in a loss of public confidence in
these developing payment mechanisms.
Conversely, the staff would expect the relationship between a
stored value card customer and the institution to be clearly and
conspicuously stated on the disclosures and agreements accompanying the
card. It is the staff's understanding that many of the stored value
card systems in development intend to clearly and conspicuously inform
customers that the card is to be treated like cash, and that if lost or
stolen, it will not be replaced. Moreover, to the extent that stored
value obligations do not otherwise constitute a deposit under sections
3(l)(1)-(4) of the FDIA, 12 U.S.C. 1813(l)(1)-(4), such disclosures and
agreements should provide that the card does not constitute an account
or deposit with the institution and that the funds underlying the card
are not insured by the FDIC. Agreements and disclosures of this nature
could influence consumer expectations as to deposit insurance with
respect to stored value products.
It is also possible that consumer expectations regarding the
existence of deposit insurance may differ depending upon the type of
stored value card provided to the customer. Currently in development
are both disposable and reloadable stored value cards. The staff
believes that this distinction is in large part irrelevant with respect
to whether the funds underlying such cards constitute deposits within
the meaning of sections 3(l)(1)-(4) of the FDIA, 12 U.S.C. 1813(l)(1)-
(4). Nonetheless, such distinctions may be relevant with respect to
consumer expectations and whether the FDIC should distinguish between
the two if it decides to promulgate a regulation with respect to stored
value cards.
A consumer may be more likely to believe that a reloadable card
gives rise to an insured deposit. We understand that reloadable cards
may contain information about the customer and may contain information
about accounts the customer maintains with the institution. The
customer may be required to provide name, address, and social security
number to establish such a relationship. In addition, such stored value
cards may allow the customer to transfer funds from existing insured
accounts to a stored value component of the card.
On the other hand, if a consumer transfers funds in exchange for a
disposable stored value card (which necessarily contemplates a transfer
of value to an anonymous individual or entity, the only identifier
being the card serial number), then a consumer could reasonably
conclude that no deposit relationship has been established with the
institution. Indeed, the consumer may not have been required to provide
his name, address, telephone number, social security number, driver's
license or other form of identification. After the transfer of funds by
the customer, the institution may have no further relationship with him
or her.
Another factor that may influence consumer expectations with
respect to deposit insurance is whether the value on the card which has
not been transferred is redeemable. If the value on the card is not
redeemable, consumers may be less likely to expect deposit insurance
associated with the product.
In addition to the issue of consumer expectations, the FDIC must
consider whether insuring disposable/anonymous stored value cards is
consistent with the statutory requirement that no more than $100,000 in
insurance coverage shall be provided to any one individual or entity.
12 U.S.C. 1821(a). Disposable/anonymous cards pose the possibility that
an institution depositor, with $100,000 in covered deposits, could
transfer a disposable stored value card to another person in order to
avoid the limit on deposit insurance coverage. In such a case, the FDIC
could have essentially unlimited liability for the total amount of
stored value outstanding.
Another policy consideration is whether the FDIC should find that
Bank Primary--Reserve System stored value cards are deposits based upon
their similarity to cashier's checks, money orders, and traveler's
checks on which an institution is primarily liable. As discussed in
General Counsel Opinion No. 8, the differences between stored value
cards and money orders, cashier's checks, and other drafts drawn on an
institution, are such that they may not be included as one of the
instruments listed in section 3(l)(4) of the FDIA, 12 U.S.C.
1813(l)(4). Similarly, inasmuch as stored value cards are not
traveler's checks on which the institution is primarily liable, they
may not come under this provision of section 3(l)(1) of the FDIA, 12
U.S.C. 1813(l)(1). Nonetheless, Bank Primary--Reserve System stored
value cards resemble cashier's checks and money orders. The primary
obligation of the institution reflected by a cashier's check, created
in exchange for cash deposited in the general funds of the institution
or transferred from a checking account, bears a resemblance to the
obligation which appears to be established by stored value cards. Based
upon the similarities, the FDIC could, by regulation, find that Bank
Primary--Reserve System stored value card obligations are deposit
liabilities.
In considering whether to promulgate a regulation, the FDIC is also
concerned about competitive equity between depository institution
issuers and other issuers of stored value products. If institutions pay
deposit insurance assessments on the funds held in support of stored
value, and non-banks do not, depository institutions could possibly be
placed at a competitive disadvantage. If so, the question arises as to
whether this disadvantage would be of such a magnitude that depository
institutions would be prohibited entry into this new market for
services. On the other hand, insurability could be a desirable feature
of bank issued cards, such that consumers may be willing to pay a
higher price for stored value products that are FDIC insured.
Finally, it is our understanding that, at least at the outset, many
stored value cards will limit the amounts that may be loaded onto the
cards to $100 or $200. Thus, it would appear that consumers will not be
entrusting any significant or meaningful amount of money in exchange
for the stored value card. Conversely, there is nothing preventing
consumers from obtaining many stored value cards. Moreover, issuers may
soon
[[Page 40497]]
allow cards to be loaded or issued in larger denominations. This issue
may be considered by the FDIC in determining whether to find, by
regulation, that certain stored value obligations are deposits.
In sum, notwithstanding the question of whether and under what
circumstances stored value card obligations are deposits within the
meaning of section 3(l) (1)-(4) of the FDIA, 12 U.S.C. 1813(l) (1)-(4),
section 3(l)(5) of the FDIA, 12 U.S.C. 1813(l)(5), gives the Board of
Directors the authority to find and prescribe by regulation that other
obligations of an insured depository institution are deposit
liabilities by general usage. In considering whether to promulgate such
a regulation with respect to the stored value cards, the FDIC must
consider a number of competing policy issues. Such policy issues
include, but are not limited to, the level of public confidence in
these new payment systems, consumer expectations, statutory limits with
respect to ``bearer'' instruments, the similarities of stored value
cards to other payment mechanisms which are deposits, competitive
equity with non-bank issuers of stored value products, and the low
denominations under which stored value cards will be issued.
Safety and Soundness Issues
The emergence of stored value cards and other electronic payment
systems raises certain safety and soundness concerns for depository
institutions and regulators. For example, institutions must take steps
to ensure that the stored value or similar system in which they are
participating has adequate safeguards to prevent counterfeiting or
other fraudulent activities which could harm the institution, its
customers, or other participants in the system. The FDIC is soliciting
public comment on this and other safety and soundness issues in
connection with stored value cards and other electronic payment
systems.
Request for Comment
The FDIC is hereby requesting comment during a 90-day comment
period on all aspects of this notice, including the following specific
issues:
(1) General Counsel Opinion No. 8 is based generally on systems and
technologies that have come to the attention of the staff. Are there
other stored value systems or technologies of which the staff may not
be aware?
(2) Funds held by depository institutions to meet obligations
arising under stored value card systems have been compared to funds
held by an institution to meet letters of credit, which are deposits
under section 3(l)(3) of the FDIA, 12 U.S.C. 1813(l)(3). In determining
whether to promulgate a regulation, should funds held to meet
obligations underlying stored value cards be distinguished from, or
analogized to, funds held to meet letters of credit?
(3) Similarly, stored value cards have been compared to money
orders or cashiers' checks drawn on an institution, which are
considered deposits under section 3(l)(4) of the FDIA, 12 U.S.C.
1813(l)(4). In determining whether to promulgate a regulation, should
stored value cards be distinguished from, or analogized to, such
instruments?
(4) What are the expectations of consumers with respect to whether
stored value cards are insured products? To what extent should consumer
expectations be a factor in whether the FDIC finds by regulation that
certain stored value products represent deposits?
(5) In determining whether to promulgate a regulation, should the
FDIC distinguish between reloadable and disposable stored value cards
or between single function and multiple function cards?
(6) Should the projected low dollar denominations for stored value
cards be considered by the FDIC in determining whether to promulgate a
regulation?
(7) What types of disclosure should the FDIC require with respect
to the insured or non-insured status of these products? What types of
disclosure would be most beneficial to consumers, while not
overburdening depository institutions?
(8) If the funds underlying some or all stored value products
issued by depository institutions are deemed by regulation to be
deposits, to what extent would depository institutions be placed at a
competitive advantage or disadvantage with respect to other issuers of
stored value products?
(9) Should the FDIC ask Congress to amend section 3(l) of the FDIA,
12 U.S.C. 1813(l) to either include or exempt stored value cards from
the definition of deposit?
(10) What safety and soundness concerns are raised by the
development of stored value cards and other electronic payment systems?
Public Hearing
The FDIC will hold a public hearing on all aspects of this notice
on September 12, 1996 from 9:00 a.m. until 4:30 p.m. and possibly also
on September 13, 1996, and other dates, depending upon the number of
requests received to participate in the public hearing. The hearing
will be held in the FDIC's Board of Directors' room which is located on
the sixth floor of the FDIC's main building (550 17th Street NW,
Washington, D.C.). At that hearing one or more members of the Board of
Directors of the FDIC and other representatives of the FDIC will
receive oral comments from all interested persons, who have been
scheduled in advance to appear, on all aspects of this notice.
Persons wishing to participate in the hearing must send, or hand-
deliver, a written request to participate in the hearing, so that it is
received no later than August 26, 1996, to the Office of the Executive
Secretary, 550 17th Street NW, Washington, DC 20429. All requests will
be time and date stamped upon receipt. Participants will be limited to
a 15 minute oral presentation and will be advised in writing of the
time scheduled for their presentation. This procedure is necessary so
that the hearing officers may adjust their schedules accordingly and so
that alternative arrangements for the hearing may be made if more
persons are expected to attend than the Board of Directors' room will
accommodate. This deadline will also provide sufficient time to
acknowledge receipt of the notices and inform participants of
scheduling.
In addition, each participant must send, or hand-deliver, so that
it is received no later than September 3, 1996 a written summary of his
or her testimony to be given at the hearing, to the Office of the
Executive Secretary, Federal Deposit Insurance Corporation, 550 17th
Street NW, Washington, D.C. 20429.
By order of the Board of Directors, dated at Washington, D.C.,
this 16th day of July, 1996.
Federal Deposit Insurance Corporation
Jerry L. Langley,
Executive Secretary.
[FR Doc. 96-19698 Filed 8-1-96; 8:45 am]
BILLING CODE 6714-01-P
