In a decision that would resolve one of the last regulatory questions confronting stored-value cards, the Federal Deposit Insurance Corp. is preparing to rule that balances on most of the cards do not qualify for deposit insurance.
But the agency will carve out an exception for certain stored-value programs that would allow banks to offer deposit insurance on those cards, according to FDIC senior policy analyst Jeffrey M. Kopchik.
The FDIC's planned action - generally considered favorable for banks - will mark the second time in three months that regulators have tackled electronic money issues. The Federal Reserve Board in April proposed exempting stored-value card balances of less than $100 from most of the consumer protections found in Regulation E.
Speaking at a conference Friday in Washington, Mr. Kopchik said the FDIC staff is expected to issue its recommendation to the agency's board within a few weeks. The board either will issue a formal policy detailing its decision, or it will spell out its views in an interpretative letter that a bank requested last month, Mr. Kopchik said. He would not identify the bank.
Industry observers praised the FDIC's two-pronged approach Monday, saying it would give banks two clear options for competing in the emerging world of smart cards.
"You get the best of both worlds," said Thomas Vartanian, a partner at the Washington law firm of Fried, Frank, Harris, Shriver & Jacobson and an organizer of the conference. "You can develop a product outside the bounds of regulation. But if you want to provide an insured account you have that capacity."
The approach should enhance competition among banks and nonbanks, said Frank O. Trotter 3d, senior vice president of Mark Twain Bank in St. Louis. Banks with insured products can market the advantage of insurance coverage, he said.
Institutions that choose to go without the FDIC's backing can counter that their cards are confidential, he said, noting that banks with insured cards must record every transaction so they can deduct the funds from the customer's account. Detailed records aren't needed for uninsured products because the cash already has left the consumer's account, he added.
"This all makes sense to me," Mr. Trotter said. "This is a good course for banking."
The approach also should permit banks to segment the market, said Robert Ballen, a partner at the Washington law firm of Schwartz & Ballen.
Institutions could offer uninsured cards to consumers who will use the products to buy soda and other small-ticket items; insured cards could be aimed at people who want to carry higher balances, he said.
"It will give the producers flexibility," he said. "If they think FDIC insurance gives them an important marketing advantage, they can design their product to have deposit insurance."
Mr. Kopchik, one of the agency's lead lawyers researching the issue, said the legal analysis was straightforward. The Federal Deposit Insurance Act specifies what types of products are guaranteed by the government, he said. This includes money held by the bank on behalf of a customer and funds held for a special purpose, such as money escrowed to pay local taxes or insurance.
The bulk of stored-value cards don't qualify for either provision, he said. Most banks plan to create general liability accounts to hold the cash placed on the cards. These accounts do not belong to the customer, he said. The funds also don't meet the special-purpose test because they are not being held to pay a specific bill, he said.
"Under this scenario, it doesn't seem to fit any of the sections of the FDI Act," he said. "General liability accounts are not insured deposits."
Under the plan that the FDIC is developing, banks will be able to offer deposit insurance if funds remain in the consumer's account until a vendor demands payment for a purchase on the stored-value card, Mr. Kopchik said.
The FDIC's action, though settling a key issue, will not resolve all regulatory questions facing stored-value cards. Among the largest unresolved issues: how to apply anti-money-laundering laws and reserve requirements.