he Federal Deposit Insurance Corp. (FDIC) has been monitoring SVC trends since the late 1990s. By most accounts it has kept an arm's-length distance between its regulatory apparatus and the nascent market for stored value payment alternatives. But a proposal now under consideration at the FDIC, coupled with new data on SVC acceptance and use, suggests that the cards' days in regulatory obscurity could be numbered.

The FDIC is proposing that only the party placing funds with the bank issuing a prepaid card should be treated as "insured deposits." So-called "pass through" insurance would be available only when the depositor and/or its bank maintain records detailing the identities and amounts payable to holders of each and every card.

The FDIC has also proposed excluding from federal deposit insurance coverage prepaid gift cards for amounts under $100. It has asked for public comment on the need for and implementation of rules for disclosing the extent of deposit insurance coverage with each card that banks and/or their agents sell.

Not surprisingly, many banks, card companies and processors want the FDIC to back off from regulating SVCs, or at the very least make distinctions between different types of cards. Say, for example, in the treatment of prepaid payroll cards versus merchant gift cards.

Here's how TSYS summed up matters in a comment letter to the FDIC: The proposal "could result in unintended consequences with respect to electronic funds transfer rules and money laundering and escheat laws." A transaction processing giant, TSYS runs a prepaid operation, TSYS Prepaid Inc.

Echoing sentiments expressed by about 25 companies that responded to an FDIC request for comments, TSYS urged the FDIC to consider differences in prepaid card products in any final ruling on deposit insurance coverage. "An anonymous gift card bought by one consumer to pass on to another differs greatly from a general purpose card used as a consumer's primary financial tool," wrote Cherie Hamblin, TSYS Prepaid Vice President and Compliance Officer.

Market Growth Spurs Government Interest

SVCs are a huge hit with consumers and merchants alike. Recent research from Dove Consulting, conducted on behalf of the American Bankers Association and several electronic payments companies, found that 4% of all in-store payments today are made using SVCs. That's up from 2% in 2003.

Boston-based Aite Group LLC predicts $257 billion in SVC transactions by 2009, up from $63 billion in 2004. That's great news for TSYS and other transaction processing companies. Gwenn Bézard, a Research Director at Aite, estimates U.S. processors will generate $1.8 billion in revenues from prepaid card payments in 2009, up from an estimated $500 million this year. "In coming years, sheer size and rapid growth will place the prepaid market at the forefront of competition among card processors," Bézard said.

The FDIC first took an interest in prepaid (a/k/a SVCs) nearly 10 years ago, when the market was in its infancy. At that time it issued a legal opinion that in essence described various types of stored-value programs and suggested when deposit insurance might kick in for the funds backing cards in each of those situations.

The agency began looking anew at prepaid cards last year and issued a regulatory proposal to revise, codify and elaborate upon what had previously been a staff legal opinion. The proposal now under consideration (published for public comment this summer) incorporates insights and suggestions that resulted from that public comment process, the FDIC said.

The deadline for submitting comments on the latest proposal was in early November, and a spokesman for the agency said it is reviewing the comment letters. Any final decision isn't likely until next spring.

Taking Account of Differences

The FDIC proposal states for purposes of deposit insurance coverage, the party placing funds with the bank to cover one or more SVCs (e.g., the employer issuing a payroll card) is considered the insured depositor unless
1) the bank's records indicate the employer is not the owner of the funds; and
2) records maintained by the bank or the employer reflect the identities of cardholders and the amounts payable.

This could have significant implications for prepaid card issuers and customers and for the federal deposit insurance fund. Here's the math: If 1,000 individuals are issued prepaid cards, each with $500 in value, and each card is treated as a separate deposit account, the result would be $500,000 in federal deposit insurance coverage.

Whereas, if the card's issuer (say the company paying salaries) is considered the insured depositor, coverage would be limited to $100,000, the legal maximum per deposit account under federal deposit insurance rules.

In its comment letter to the FDIC, Visa U.S.A. complained that the proposal will undermine public confidence in prepaid cards such as corporate payroll cards. "[T]he Proposed Rule ignores the core policy implications of deposit insurance coverage," the letter stated, submitted under the signature of Russell Shrader, Visa Senior Vice President and Assistant General Counsel.

"Implicit in 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."

Other comment letters warned the proposal could stymie efforts to mainstream millions of Americans who don't have bank accounts.

Perhaps the most common concern expressed by those companies that have examined the proposal is that any regulation adopted now could thwart market growth. "We believe that issuing new regulations could stifle development of stored value products and limit stored value options for consumers," wrote Lily Thomas with the Credit Union National Association.

Raising the specter of stifled competition has always been a favorite argument against regulation in the payments space. Is it viable in this case? No one can say for sure. But when you couple this with other pending issues, like the brouhaha over interchange fees, payments is becoming a hot button issue in Washington. The sums involved, $250 billion-plus in card value, may be too huge to ignore.

Patti Murphy is Contributing Editor of The Green Sheet and President of The Takoma Group. Send an e-mail to her at patti@greensheet.com .