The Federal Reserve Board's proposal to regulate stored-value cards should concern bankers. Under the March 20 plan, the Fed made a distinction between "off-line accountable" and "off-line unaccountable" stored-value cards.
The Fed determined that the off-line accountable cards are subject to the Electronic Funds Transfer Act, or EFTA, and can therefore be subjected to Regulation E. However, off-line unaccountable cards do not fall within the scope of EFTA. This distinction will cause unnecessary regulatory and pricing disparity between the different card models.
These cards use a magnetic stripe or microchip to store value. The consumer uses the card to purchase goods and services or, at least under one model, to transfer value to another person. Because the microchip contains all of the information necessary to identify the card and its value, it eliminates the need for an on-line point of sale terminal to authenticate a consumer transaction.
The off-line processing capability will allow the cards to be used in situations where on-line point of sale terminals are either impractical or too expensive. The cards are either disposable or reloadable and can be stand-alone products or combined with credit and debit features.
Under the Fed's proposal, "off-line accountable" systems are those that can obtain information from the merchant that can be used to create a central data base containing the balances on any given stored-value card.
An off-line unaccountable card has no central data base that contains the balances or transactions on the stored-value card. It is widely assumed that the Mondex card model, which allows individuals to transfer value between cards without the intermediation of a central processing system, gave rise to the Fed's distinction between the two types of cards.
Visa Cash is an example of an off-line accountable system. Here, the merchant's terminal not only stores the value transferred by the card, but the serial number of the card and details of the transaction. This information is then transmitted by the merchant and can be used to reconstruct the balances on any individual card. Such a reconstruction would only be done on request and with some difficulty.
The Fed staff concluded that because the off-line unaccountable systems do not maintain an ongoing record of individual card balances or of transaction data, it is "difficult to conclude that an account exists for purposes of Regulation E."
However, the Fed decided Reg E applies when transaction data are kept in a central system because this more closely resembles a traditional deposit account.
The funds transfer law only authorizes regulation of devices that access a consumer account. The fact that one type of stored-value system can track a card's value in a central data base, and another cannot, is not a meaningful distinction on which to determine whether a consumer account exists. From the consumer's perspective, there will be no obvious distinction.
The Fed has gone to great lengths in the proposed regulation to make the "accountability" distinction matter in form rather than substance.
The only requirement the Fed is placing on accountable stored-value products is an initial disclosure to consumers, which banks and other issuing corporations will no doubt provide regardless of regulation. Even so, banks should be concerned. Once the Fed has determined that only accountable products are subject to Reg E, it will have the latitude in the future to more closely regulate them.
There is nothing that prevents the Fed from revisiting this issue later and imposing greater burdens on the accountable products.
The staff's statement that accountable products look like traditional deposit accounts also raises other significant issues, including the still unresolved matter of the application of federal deposit insurance and reserve requirements to stored-value cards.
If regulators ultimately impose more restrictions and economic disincentives on one type of card product, they will no doubt hinder that product in the marketplace. Only by allowing free competition among the various products - and avoiding unnecessary regulation - will the best consumer product emerge.
Mr. Parker is a partner in the financial institutions group of Alston & Bird, Washington.
