[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

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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

[[Page 40496]]

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