[Federal Register Volume 61, Number 150 (Friday, August 2, 1996)]
[Notices]
[Pages 40490-40494]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 96-19697]
[[Page 40489]]
_______________________________________________________________________
Part III
Federal Deposit Insurance Corporation
_______________________________________________________________________
General Counsel's Opinion No. 8; Stored Value Cards and Other
Electronic Payment Systems; Notices
Federal Register / Vol. 61, No. 150 / Friday, August 2, 1996 /
Notices
[[Page 40490]]
FEDERAL DEPOSIT INSURANCE CORPORATION
General Counsel's Opinion No. 8; Stored Value Cards
AGENCY: Federal Deposit Insurance Corporation (FDIC or Corporation).
ACTION: Notice of FDIC General Counsel's Opinion No. 8.
-----------------------------------------------------------------------
SUMMARY: The FDIC has received inquiries on whether and under what
circumstances funds underlying stored value cards may be considered
deposits under the Federal Deposit Insurance Act. This General Counsel
Opinion sets forth the Legal Division's conclusions on this issue.
FOR FURTHER INFORMATION CONTACT: Marc J. Goldstrom, Counsel, Legal
Division, (202) 898-8807, Federal Deposit Insurance Corporation, 550
17th Street, NW., Washington, DC 20429.
Text of General Counsel's Opinion
General Counsel's Opinion No. 8--Stored Value Cards
By: William F. Kroener, III, General Counsel, FDIC
Introduction
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. The balance recorded on the
card is debited at a merchant's point of sale terminal when the
consumer makes a purchase. Generally, stored value cards contain all
the information necessary to identify the card and its value. This has
enabled point of sale terminals in most systems to be ``off
line''.1 In other words, it is unnecessary to contact a depository
institution or database for transaction authorization.
---------------------------------------------------------------------------
\1\ While most stored value card systems are ``off line'', we
understand that there are ``on line'' stored value card systems
(i.e., the primary record of the balance of funds available to the
consumer is not maintained on the card itself, but at the depository
institution or a central data facility). Such cards are similar to
debit cards except that the cardholder specifically designates the
amount of money that may be accessed through the card and once so
designated, such funds may only be accessed through the card. So far
as we are aware, the systems of this type are not currently being
utilized by depository institutions.
In its proposed amendment to Regulation E, 61 FR 19,696 (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. This opinion does not use these distinctions. This is not
intended as a criticism or rejection of the 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).
---------------------------------------------------------------------------
Some stored value cards are designed to be used until their value
is exhausted and then are disposed. Other more sophisticated stored
value cards may be ``reloadable''. The cards may have multiple uses,
such as credit and debit features, in addition to the stored value
component. Also, a particular stored value card system may have
multiple card issuers and multiple card-accepting merchants. Some cards
(or the stored value component of some cards) may be utilized by
whomever may be in possession of such card, while others require a
personal identification number to use.
Consumers may typically load value 2 onto a card in a number
of ways. A customer without a pre-existing depositor relationship with
an insured institution may purchase a stored value card from that
institution. A deposit account holder may load value onto the card by
withdrawing from an account through a teller, via an ATM, or,
potentially, via a specially equipped telephone or personal computer.
At least one system would allow the consumer to transfer the stored
value to another person's card.
---------------------------------------------------------------------------
\2\ The use of the phrase ``load value onto a card'',
``electronic value'', or any similar terms used in this opinion, is
not meant to imply that the information loaded on stored value cards
is legal tender or anything similar to legal tender. See 12 U.S.C.
5103. Rather, as discussed in the text below, such information is
more in the nature of a right to be paid a sum of money.
---------------------------------------------------------------------------
Typically, stored value cards are touted as substitutes for cash.
Technically, however, they are not cash, and they do not have the
finality of cash. Although it may not be apparent to the consumer, a
stored value card transaction must typically move through a complex
payment system before a payment is completed. Moreover, what is
actually stored on stored value cards is information that, through the
use of programmed terminals, advises a prospective payee that rights to
a sum of money can be transferred to the payee, who in turn can
exercise such right and be paid.
In addition to the development of stored value cards, stored value
systems are being developed for making payments over computer networks
such as the Internet. In such systems funds may be accessed using a
personal computer, and transferred to individuals, merchants, or
companies. While this opinion addresses stored value cards, the Legal
Division believes that in general the principles discussed herein would
apply equally to stored value computer network payment products.
Types of Stored Value Systems 3
---------------------------------------------------------------------------
\3\ The classification of stored value systems described below
is not intended to encompass all of the possible ways that stored
value card systems may be structured. Rather, this classification
system represents 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.
---------------------------------------------------------------------------
In some 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 (``Bank Primary--Customer Account Systems'').4 In
other 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 (``Bank
Primary--Reserve Systems'').
---------------------------------------------------------------------------
\4\ 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.
---------------------------------------------------------------------------
In still other systems, the electronic value is created by a third
party and the funds underlying the electronic value are ultimately held
by such third party (``Bank Secondary Systems''). In such systems,
depository institutions act as intermediaries in collecting funds from
customers in exchange for electronic value. In some Bank Secondary
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 (``Bank Secondary--Advance Systems''). In other
systems of this nature, 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 (``Bank
Secondary--Pre-Acquisition Systems'').
In 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.
[[Page 40491]]
Primary Legal Issue
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'' 5 within the meaning of section 3(l) of the Federal
Deposit Insurance Act (FDIA) and are therefore assessable and qualify
for deposit insurance.6 The FDIC General Counsel's legal opinion
on this issue is contained herein. The opinion expressed herein is
general in nature and based upon the information that the FDIC staff
has gathered on stored value cards to date. No view is expressed on any
specific stored value card system and the specific facts of any such
system might cause the opinion expressed herein to change.
---------------------------------------------------------------------------
\5\ Whether and to what extent the funds or obligations
underlying stored value cards constitute ``deposits'' within the
meaning of section 3(l) of the FDIA will in large part determine
whether such funds are ``insured deposits'' under section 3(m) of
the FDIA. An ``insured deposit'' is that portion of a ``deposit''
that is insured. It is the ``net amount due to any depositor'' for
``deposits in an insured depository institution'' (after deducting
offsets) less any part thereof that is in excess of $100,000. 12
U.S.C. 1813(m), 1817(i), and 1821(a). Such net amount is also
determined in accordance with regulations prescribed by the FDIC.
See 12 C.F.R. Part 330.
\6\ This opinion only addresses whether the funds underlying
stored value cards constitute deposits under the FDIA. Such
determinations are relevant for assessment and insurance purposes.
There are other issues, not addressed by this opinion, which are of
great importance to the FDIC and which the FDIC will continue to
monitor as appropriate. Such issues include, but are not limited to,
consumer disclosure matters, systemic risk, security, electronic
funds transfer matters, reserve requirements, counterfeiting,
monetary policy, and money laundering.
---------------------------------------------------------------------------
Applicable Statutes
An analysis of whether funds underlying the value on a stored value
card are considered to be a part of the institution's assessment base
and qualify for deposit insurance coverage begins with the definition
of a deposit under section 3(l) of the FDIA. This section provides in
pertinent part that:
The term ``deposit'' means--
(1) The unpaid balance of money or its equivalent received or
held by a bank or savings association in the usual course of
business and for which it has given or is obligated to give credit,
either conditionally or unconditionally, to a commercial, checking,
savings, time, or thrift account, or which is evidenced by its
certificate of deposit, thrift certificate, investment certificate,
certificate of indebtedness, or other similar name, or a check or
draft drawn against a deposit account and certified by the bank or
savings association, or a letter of credit or a traveler's check on
which the bank or savings association is primarily liable * * *
(2) Trust funds as defined in this Act received or held by such
bank or savings association, whether held in the trust department or
held or deposited in any other department of such bank or savings
association,
(3) Money received or held by a bank or savings association, or
the credit given for money or its equivalent received or held by a
bank or savings association, in the usual course of business for a
special or specific purpose, regardless of the legal relationship
thereby established, including without being limited to, escrow
funds, funds held as security for an obligation due to the bank or
savings association or others (including funds held as dealers
reserves) or for securities loaned by the bank or savings
association, funds deposited by a debtor to meet maturing
obligations, funds deposited as advance payment on subscriptions to
United States Government securities, funds held for distribution or
purchase of securities, funds held to meet its acceptances or
letters of credit, and withheld taxes * * *
(4) Outstanding draft (including advice or authorization to
charge a bank's or a savings association's balance in another bank
or savings association), cashier's check, money order, or other
officer's check issued in the usual course of business for any
purpose, including without being limited to those issued in payment
for services, dividends, or purchases, and
(5) Such other obligations of a bank or savings association as
the Board of Directors, 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, shall find and
prescribe by regulation to be deposit liabilities by general usage *
* *.
12 U.S.C. 1813(l).
Analysis
For purposes of this analysis, the most relevant provisions of
section 3(l) of the FDIA are subsections (1) and (3). Synthesizing the
requirements of these two subsections, in order for the funds
underlying stored value cards to constitute deposits under section
3(l)(1) or (3) of the FDIA, 12 U.S.C. 1813(l)(1) & (3), the funds must
represent: (1) An unpaid balance of money or its equivalent received or
held by an institution; (2) in the usual course of business; and (3)
either (a) the institution must have given or be obligated to give
credit to a commercial, checking, savings, time, or thrift account; or
(b) the funds must be held for a special or specific purpose.
An Unpaid Balance of Money or Its Equivalent Received or Held by an
Institution
The first requirement is that there must be ``an unpaid balance of
money or its equivalent received or held by a bank or savings
association''. In each type of Bank Primary System described above, the
institution will hold the funds to pay merchants and other payees.
Consequently, this requirement of the statute would be satisfied.
In Bank Secondary--Advance Systems the funds may initially be
received by the institution but later transferred to a third party. The
issue then arises as to whether the fact that funds are received and
held by an institution, albeit for a short time period, satisfies this
requirement of the statute, thereby possibly creating a deposit
liability during the period for which the institution holds the money.
In my opinion in Bank Secondary--Advance Systems funds held by an
institution for a time period prior to transfer would meet the
statutory requirement of ``the unpaid balance of money or its
equivalent received or held by a bank or savings association''. In the
analogous case of an institution selling travelers' checks issued by
others, the FDIC staff has long held the opinion that the proceeds from
such sale are deposits while held by the institution.7 In my view,
an institution holding funds prior to transfer to a third party in a
Bank Secondary--Advance System is indistinguishable from the
aforementioned travelers' check case. It is important to note, however,
that the institution would owe the obligation to the third party, not
the holder of the card. Thus, to the extent such funds may constitute a
deposit, the ``depositor'' would be the third party. Moreover, any
deposit liability for such funds would be extinguished upon transfer of
the funds to the third party.
---------------------------------------------------------------------------
\7\ See FDIC Staff Advisory Opinion 93-55 (August 6, 1993)
(funds held for one business day by an agent bank selling travelers
checks on behalf of a company issuing travelers' checks, are
deposits of the bank under 3(l)(3) of the FDIA, until such funds are
forwarded to the company).
---------------------------------------------------------------------------
In Bank Secondary--Pre-Acquisition Systems the funds underlying the
stored value are received or held by the third party. The institution
in effect advances these funds on behalf of its customers and later
collects funds from its customer in exchange for electronic value
loaded onto stored value cards. Because the funds underlying the stored
value are held by the third party, in my view, such funds are received
or held by the third party, not the depository institution.
Consequently, it appears that the requirement of ``an unpaid balance of
money or its equivalent received or held by [an institution]'' would
not be satisfied in Bank Secondary--Pre-Acquisition Systems.
Also in some Bank Secondary Systems the institution may by contract
retain a contingent liability to redeem
[[Page 40492]]
the electronic value from consumers and merchants. This raises the
issue whether a contingent liability to redeem the electronic value
represents an unpaid balance of money or its equivalent received or
held by an institution. In interpreting 12 U.S.C. 1813(l)(1), the
Supreme Court, in accordance with the purpose of the statute, imposed
the requirement that a deposit of money or its equivalent be ``hard
earnings'' that businesses and individuals have entrusted to banks.
FDIC v. Philadelphia Gear Corp., 476 U.S. 426, 435 (1986). The Court
held that a stand-by letter of credit does not fall within the meaning
of section 3(l)(1) of the FDIA because this was only a contingent
obligation and did not represent ``hard earnings''. Id. at 440.
Any contingent liability of an institution to redeem electronic
value in a Bank Secondary System would in my view not constitute ``hard
earnings'' and thus, in accordance with the Court's holding in
Philadelphia Gear, would not satisfy the requirement of an unpaid
balance of money or its equivalent received or held by a bank or
savings association. In Bank Secondary Systems the ``hard earnings''
are ultimately held by the third party, not the institution.
In the Usual Course of Business
Insured depository institutions are increasingly participating in
stored value card systems. In light of this, the FDIC would likely view
any funds received or held by institutions pursuant to participation in
stored value card systems to be in the usual course of business.
The Institution Must Have Given or Be Obligated To Give Credit to An
Account
To be a deposit under section 3(l)(1) of the FDIA, 12 U.S.C.
1813(l)(1), money or its equivalent must not only be held or received
by an institution in the usual course of business, but must (unless
another alternative condition is satisfied) be a payment for which the
institution has given or is obligated to give credit to a commercial,
checking, savings, time or thrift account. This requirement would not
appear to be at issue in Bank Primary--Customer Account Systems because
the funds remain credited to the customer's account until claims on
such funds are made by payees. Assuming the other aforementioned
requirements are met, the funds underlying Bank Primary--Customer
Account Systems would appear to be deposits under section 3(l)(1) of
the FDIA, 12 U.S.C. 1813(l)(1).
With respect to Bank Primary--Reserve Systems and both types of
Bank Secondary Systems, stored value card products appear to be
structured so that the institution does not credit and is not obligated
to credit a commercial, checking, savings, time or thrift account. As
described previously, when a customer purchases a stored value card in
a Bank Primary--Reserve System funds are withdrawn from the customer's
account (or paid directly by the customer) and paid into a reserve or
general liability account maintained by the institution. Such accounts
are routinely created and maintained by insured depository
institutions. The FDIC does not consider such reserve or general
liability accounts to be ``deposits'' within the meaning of section
3(l)(1) of the FDIA, 12 U.S.C. 1813(l)(1), because there does not
appear to be an obligation to credit the funds to a commercial,
checking, savings, time, or thrift account. In addition, the sample
agreements which the FDIC staff has reviewed clearly indicate that the
parties to a stored value card agreement, i.e., the insured depository
institution and the purchaser of the card, do not intend that the funds
be credited to one of the five enumerated accounts.
Similarly, in Bank Secondary Systems the funds which consumers pay
to load value onto a stored value card are ultimately held by the third
party originator of the stored value. In these cases also it would
appear that no commercial, checking, savings, time or thrift account
has been credited nor is the institution obligated to credit such an
account.
The foregoing notwithstanding, at some point the institution may
become obligated to credit a payee's deposit account maintained at that
institution and thus create a deposit liability to the payee. For
example, after a transaction wherein the value on the card is
transferred from a consumer to a merchant, and the merchant requests
that the funds underlying the electronic value be credited to the
merchant's account, the institution would appear to be under an
obligation to credit the merchant's account; thereby, possibly creating
a deposit liability to the merchant.
If the Institution Has Not Given or Is Not Obligated To Give Credit To
An Account; The Funds Must Be Held For a Special or Specific Purpose
If funds held by an institution underlying stored value cards are
not deposits under section 3(l)(1) of the FDIA, 12 U.S.C. 1813(l)(1),
because the institution is not obligated to credit an account, the
analysis must turn to whether such funds may be considered deposits
under section 3(l)(3) of the FDIA, 12 U.S.C. 1813(l)(3). In order to be
considered a deposit under 3(l)(3) of the FDIA, the value underlying a
stored value card must represent: (1) Money or its equivalent (or the
credit given for money or its equivalent) received or held by an
institution; (2) in the usual course of business; and (3) for a special
or specific purpose.
The first two requirements are essentially the same as under
section 3(l)(1) of the FDIA as discussed above. While section 3(l)(3)
of the FDIA, 12 U.S.C. 1813(l)(3), does not require that the
institution be obligated to credit the funds to an account, it does
require that funds be held ``for a special or specific purpose'' in
order to qualify as a deposit.
Congress included in the statute, without limitation, the following
examples of a bank or savings association holding funds for a special
or specific purpose: ``escrow funds, funds held as security for an
obligation due to the bank or savings association or others (including
funds held as dealers reserves) or for securities loaned by the bank or
savings association, funds deposited by a debtor to meet maturing
obligations, funds deposited as advance payment on subscriptions to
United States Government securities, funds held for distribution or
purchase of securities, funds held to meet its acceptances or letters
of credit, and withheld taxes * * * .'' 12 U.S.C. 1813(l)(3).
While Congress included in section 3(l)(3) a number of special or
specific purposes for which money may be held to qualify as a deposit,
the clause ``without being limited to'' means that the section does not
state each and every such purpose. Courts have held that money covering
a Clearing House Interpayment System (CHIPS) release 8 and monies
wired by a loan participant to the lead bank for the purpose of funding
a participated loan 9, each constitute funds held for a special or
specific purpose within the meaning of this statute. The case law seems
to suggest that to qualify as a deposit under 3(l)(3) the purpose for
which the
[[Page 40493]]
money is being held must at least be as specific as the purposes listed
in the statute. See FDIC v. European American Bank & Trust Co., 576 F.
Supp. 950, 957 (S.D.N.Y. 1983); Seattle-First Bank v. FDIC, 619 F.
Supp. 1351, 1360 (D.C. Okl. 1985).
---------------------------------------------------------------------------
\8\ FDIC v. European American Bank & Trust Co., 576 F. Supp.
950, 957 (S.D.N.Y. 1983) (Money covering a CHIPS transfer has as
specific a purpose as the money in the accounts listed by the
statute. Just like money deposited to meet maturing obligations,
money backing a CHIPS release is to insure payment to the recipient
of the release.)
\9\ Seattle-First Bank v. FDIC, 619 F. Supp. 1351, 1360 (D.C.
Okl. 1985) (monies wired by a loan participant to the lead bank, at
the lead's direction, for the purpose of funding a participated loan
can become deposits within the meaning of 3(l)(3) when the wired
funds are not drawn by the intended borrower. The funds were
received for the special or specific purpose of funding the
participated loan).
---------------------------------------------------------------------------
When an institution holds funds in exchange for electronic value
embedded in a stored value card, the relevant questions are: (1) What
is the purpose for which these funds are being held? and (2) Is that
purpose at least as specific as the purposes enumerated in the statute?
With respect to Bank Primary--Reserve Systems funds appear to be
held by an institution to meet its obligations to payees as they make
claims on such funds pursuant to general or miscellaneous and unrelated
transactions undertaken within the stored value card system. It is my
opinion that this purpose is fundamentally different from the examples
listed in section 3(l)(3) of the FDIA, 12 U.S.C. 1813(l)(3). For
example, an escrow account will typically have a very specific purpose
associated with a particular transaction (or two or more related
transactions). Similarly, funds underlying a letter of credit and funds
held for purchasing securities are linked to a specific transaction or
transactions.
The cases holding that certain funds are deposits within the
meaning of section 3(l)(3) of the FDIA, 12 U.S.C. 1813(l)(3), also
involve funds held with respect to a specific transaction. For example,
in Seattle-First Bank the court held that monies wired by a loan
participant to the lead bank at the lead bank's direction for the
purpose of funding a participated loan were monies received for the
special or specific purpose of funding the loan. 619 F. Supp. at 1360.
In that case, as in the examples contained within section 3(l)(3) of
the FDIA, 12 U.S.C. 1813(l)(3), the funds held are for a purpose
associated with a particular transaction or two or more related
transactions.
Conversely, a customer who transfers funds to an institution in
exchange for electronic value may engage in any of a number of
unrelated transactions. Indeed, when a customer has electronic value
loaded onto a card he may have no idea as to what transactions he will
use the card to engage in, nor whom the transferees may be. Thus,
unlike the examples listed in the statute, funds held by an institution
to redeem electronic value could be associated with general or
miscellaneous unrelated transactions. Consequently, an institution
holding funds to meet obligations to transferees in a Bank Primary--
Reserve System does not appear to be as specific a purpose as the
examples in the statute and in the cases finding deposit liabilities
under section 3(l)(3) of the FDIA.10 Therefore, in my view such
funds would not be held for a special or specific purpose within the
meaning of section 3(l)(3) of the FDIA, 12 U.S.C. 1813(l)(3).11
---------------------------------------------------------------------------
\10\ See Seattle-First Bank v. FDIC, 619 F. Supp. at 1360; FDIC
v. European American Bank & Trust Co., 576 F. Supp. at 957.
\11\ The funds underlying a stored value card in a Bank
Primary--Reserve System could, in our view, be considered to be held
for a special or specific purpose within the meaning of section
3(l)(3) of the FDIA, 12 U.S.C. 1813(l)(3), if the system is
structured so that the ultimate payee can only be one pre-determined
specific party. For example, if an institution were to issue a
stored value card solely for the purchase of long-distance telephone
services from a specific company, such funds could be considered to
be held for a special or specific purpose.
---------------------------------------------------------------------------
On the other hand, in the case of Bank Secondary--Advance Systems
the funds are being held or received by the institution in order to pay
the third party in consideration of the electronic value transferred by
such third party to the institution and ultimately its customer. Thus,
like the examples listed in the statute and the cases finding monies to
be deposits under section 3(l)(3),12 these funds are linked to a
specific transaction. Moreover, these funds are analogous to funds held
for one business day by an agent bank selling travelers checks on
behalf of a company issuing travelers' checks. The FDIC staff considers
such funds to be deposits of the bank under 3(l)(3) of the FDIA until
such funds are forwarded to the company. See FDIC Staff Advisory
Opinion 93-55, (August 6, 1993). Thus, in the case of Bank Secondary--
Advance Systems, the funds being held or received in order to pay the
third party may be considered held or received for a special or
specific purpose within the meaning of section 3(l)(3) of the FDIA, 12
U.S.C. 1813(l)(3) and may therefore qualify as a deposit under such
section. It is important to note, however, that such a deposit
liability would be to the third party, not the institution's customer.
---------------------------------------------------------------------------
\12\ See Seattle-First Bank v. FDIC, 619 F. Supp. at 1360; FDIC
v. European American Bank & Trust Co., 576 F. Supp. at 957.
---------------------------------------------------------------------------
Other Subsections of the Statute Defining Deposit--Trust Funds
Trust funds are deposits under section 3(l)(2) of the FDIA, 12
U.S.C. 1813(l)(2). For purposes of the FDIA trust funds are funds held
by an insured depository institution in a fiduciary capacity, including
funds held as trustee, executor, administrator, guardian, or agent. 12
U.S.C. 1813(p). The FDIC staff is not aware of stored value card
systems in which funds are held by an institution in a fiduciary
capacity.
Other Subsections of the Statute Defining Deposit--Certain Negotiable
Instruments
Section 3(l)(4) of the FDIA, 12 U.S.C. 1813(l)(4), includes within
the definition of deposit an ``outstanding draft * * * cashier's check,
money order, or other officer's check * * *.'' Stored value obligations
have been analogized to cashier's checks and money orders. Indeed, Bank
Primary--Reserve System stored value cards operate in much the same way
that these instruments do. Nonetheless, unlike the payment mechanisms
listed in the statute, stored value cards are not negotiable
instruments.13 Moreover, unlike a cashier's check or money order,
the institution is not drawing a check upon itself. Rather, the
institution's customer transfers to a payee the rights to a sum of
money being held at the institution and in making payment to the payee,
the institution is recognizing that its customer has transferred that
right. See FDIC v. European American Bank & Trust Co., 576 F. Supp. at
957.
---------------------------------------------------------------------------
\13\ A stored value card is not in writing, not signed by the
maker, and does not contain an ``unconditional promise to pay a sum
certain in money and no other promise, order, obligation or power''.
See U.C.C., Section 3-104(1).
---------------------------------------------------------------------------
Notwithstanding the fact that stored value card obligations operate
in a manner similar to cashier's checks and money orders, I am of the
view that there are differences between these instruments and stored
value cards. Moreover, for purposes of considering whether a payment
mechanism is a deposit within the meaning of section 3(l)(4) of the
FDIA, 12 U.S.C. 1813(l)(4), I believe that Congress did not intend to
include payment mechanisms other than the negotiable instruments
enumerated in the subsection. Id.14
---------------------------------------------------------------------------
\14\ In my view the same conclusion would apply with respect to
analogizing stored value cards to travelers' checks on which the
institution is primarily liable, which are deposits under section
3(l)(1) of the FDIA, 12 U.S.C. 1813(l)(1).
---------------------------------------------------------------------------
Other Subsections of The Statute Defining Deposit--Authority of the
FDIC to Promulgate a Regulation Finding That Funds Underlying Stored
Value Cards are Deposits
In addition to the statutory definition of deposits under 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
[[Page 40494]]
regulation other obligations of an insured depository institution to be
deposit liabilities by general usage. The FDIC has not promulgated such
a regulation.
Summary
In summary, in my opinion funds underlying Bank Primary--Customer
Account Systems appear to be funds held by an institution, in the usual
course of business, which remain credited to the customer's account
until the payee makes a claim on the funds. Such funds would therefore
appear to be deposits under section 3(l)(1) of the FDIA, 12 U.S.C.
1813(l)(1).
As a general matter, funds held by an institution to meet
obligations under Bank Primary--Reserve Systems would appear not to be
deposits under section 3(l)(1) of the FDIA, 12 U.S.C. 1813(l)(1),
because the funds are not credited to or obligated to be credited to a
commercial, checking, time, or thrift account.
It is my further opinion that the funds underlying Bank Primary--
Reserve Systems are not deposits under section 3(l)(3) of the FDIA, 12
U.S.C. 1813(l)(3), because such funds are not held for a special or
specific purpose. The examples of funds held for such purposes in the
statute are all linked to one or more specific transactions.
Conversely, the funds underlying stored value card transactions are not
necessarily linked to a specific transaction.
In Bank Secondary--Pre-Acquisition Systems the funds underlying the
stored value are, in my view, received or held by the third party, not
the depository institution. Consequently, it appears that this
requirement of section 3(l) (1) and (3) of the FDIA, 12 U.S.C.
1813(l)(1), (3), would not be satisfied in such systems.
The funds held by an institution in a Bank Secondary--Advance
System would not create a deposit liability to the customer because the
liability is owed to the third party for whom the institution is
temporarily holding the funds. Such funds may create a deposit
liability to the third party. The funds are held by the institution in
the usual course of business prior to transferring such funds to the
third party. The parties may or may not intend that the institution
credit an account. Even if the institution is not obligated to credit
such funds to an account, and thus such funds would not be a deposit
under section 3(l)(1) of the FDIA, the funds may be deemed to be held
for the specific purpose of transferring the funds to the third party
and thus would be considered a deposit under section 3(l)(3) of the
FDIA, 12 U.S.C. 1813(l)(3).
The fact that an institution may retain a contingent liability to
redeem electronic value from consumers and merchants in Bank Secondary
Systems does not meet the requirement of ``money or its equivalent held
by an institution'' and therefore would not give rise to a deposit
liability to the customer under either 3(l)(1) or (3) of the FDIA, 12
U.S.C. 1813(l)(1), (3).
With respect to the other provisions of section 3(l) of the FDIA,
12 U.S.C. 1813(l), the FDIC staff is not aware of stored value card
systems in which funds will be held as trust funds. Thus, the funds
underlying stored value cards would not be deposits under section
3(l)(2) of the FDIA, 12 U.S.C. 1813(l)(2). Similarly, while stored
value cards have certain similarities to cashier's checks and money
orders, they are not drafts drawn on the bank, nor are they negotiable
instruments. Consequently, they cannot be considered deposits under
section 3(l)(4) of the FDIA, 12 U.S.C. 1813(l)(4).
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. The FDIC has not promulgated such a
regulation.
This General Counsel Opinion only addresses the extent to which
funds underlying stored value cards may constitute a deposit under 12
U.S.C. 1813(l). It is not intended to address the way in which FDIC
would act in its role as receiver. In the event of an institution's
failure, to the extent that any funds underlying stored value cards are
recognized as deposits, there may be recordkeeping issues and other
issues as to who may be entitled to deposit insurance and in what
amount. See 12 C.F.R. Part 330.
Finally, the FDIC would expect that institutions clearly and
conspicuously disclose to their customers the insured or non-insured
status of their stored value products, as appropriate.
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. 96-19697 Filed 8-1-96; 8:45 am]
BILLING CODE 6714-01-P