transaction conducted with stored-value cards, members of the Federal Reserve's consumer advisory council said last week. While council members said the cards need some regulation, they warned that the government should be careful not to block the march of technology. The council, which met here last Friday, discussed whether the Regulation E rules implementing the Electronic Fund Transfer Act should be applied to smart cards and other new technologies. The Federal Reserve is accepting comments on the plan through Nov. 17. If cards are included under the rule, banks could be required to send periodic statements listing transactions to cardholders. "It would be both uneconomical and impractical for card issuers to track and control all stored-value transactions, making compliance with Regulation E virtually impossible," according to Richard L. Mount, president of the Independent Bankers Association of America. Terry Jorde, a member of the council and president of Towner County State Bank, Cando, N.D., said disclosure requirements should apply when a card is purchased because money would likely have to be drawn from an existing bank account. But beyond the initial purchase, disclosure is "not possible," she said. Regulators, too, would have a tough time policing banks. "It would be completely out of the Fed's control," she said. Fed Vice Chairman Alan S. Blinder agreed at the meeting Friday that such disclosures would be difficult. However, he added that as financial technology grows to include more and bigger transactions, it might be dangerous to exempt them totally from regulation. "It's not just stored-value cards that we're talking about in the exemption," Mr. Blinder said. "When Microsoft and other companies get involved more and this area grows, we're talking potentially about huge volumes of money being transferred from computer to computer." Fed Governor Lawrence Lindsey said one of the debate's key issues was whether the term "account" within the act applies to electronic money. The funds transfer act defines an account as "a demand deposit, savings deposit, or other asset account ... established primarily for personal, family, or household purposes." Mr. Mount, representing the independent bankers group in a letter to the council, wrote that the act was designed to cover money drawn from a bank, and that purchases with a stored-value card should not be included. He added that after its initial purchase, these cards should be treated like paper currency. "While Regulation E may apply when the card is used to access an account, once the value is added to the card, it is the equivalent of cash," Mr. Mount wrote. "Since it is not subject to the control of the institution, it should not be expected that the value on the card is the responsibility of the institution." Making banks responsible for a smart card's value, Mr. Mount noted, could invite fraud because of the difficulty of documenting each specific transaction. Thus, he said, the Fed would be inhibiting the growth of the new technologies in addition to putting banks at financial risk. Mr. Blinder said that risk may determine how much regulation the cards face. The value of a smart card should be factored into future regulatory decisions, he said, because calling cards and subway tickets don't concern the Federal Reserve as much as higher-value smart cards or electronic banking.
Save $400 off your subscription. Special offer ends April 30, 2017.
No credit card required. Complete access to articles, breaking news and industry data.
Have an account? Sign In