Changing demands have led to new payment methods. One of these methods, prepaid stored value cards, has become very popular. This commentary by Professor Arnold S. Rosenberg focuses on the legal ramifications and regulation of stored value cards, discussing the applicable law, application of the Electronic Fund Transfer Act (EFTA) and Reg E to payroll cards under new regs promulgated by the Fed, and state gift card legislation and new cases on preemption of such legislation. He writes:
Stored value cards can be categorized according to two sets of parameters. First, stored value cards are either online, offline accountable, or offline unaccountable. Online denotes a stored value card, transactions with which are authorized online in real time, normally by a processor under contract with the issuer of the card. An offline stored value card is a stored value card as to which transactions are authorized centrally in batch mode (e.g., at the end of a specified time period such as a business day) rather than in real time, or as to which the card balance is stored and debited on the card itself. An offline stored value card as to which the card balance is stored on the card itself is offline accountable if the balance also is stored in a central record linked to the card, and is offline unaccountable if the balance is maintained only on the card.
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In analyzing legal issues involving stored value cards, much depends on the type of stored value card at issue in a particular case. This is because EFTA and Regulation E apply only to an electronic fund transfer that authorizes a financial institution to debit or credit a consumers account. Account is defined in Regulation E Section 205.2(b)(1) as a demand deposit (checking), saving, or other consumer asset account held directly or indirectly by a financial institution and established primarily for personal, family or household purposes. Financial institution is broadly defined as including any person who issues an access device and agrees with a consumer to provide electronic fund transfer services. However, according to a Federal Reserve Staff Interpretation, most prepaid card transactions do not authorize a financial institution to debit or credit a checking, savings or other consumer asset account. As a result, most transactions in which payment is made with a stored value card are governed primarily by the contracts among the parties and by any applicable state laws, rather than by EFTA and Regulation E.
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If a retailer issues gift cards or an employer issues payroll cards, and the bank where the underlying funds are deposited fails, does the cardholder have recourse to federal deposit insurance? The Federal Deposit Insurance Corporation (FDIC) has proposed that for FDIC deposit insurance to cover stored value cards and what it called other nontraditional access mechanisms in case of failure of the bank where the underlying funds are deposited, the issuer must waive any right to ownership of the underlying funds (and this fact must be noted on the banks records) and maintain records correlating cardholders and accounts. Some stored value card programs are structured by the retailer or employer that issues the cards so that unused funds remaining on lost or expired cards (referred to in the stored value card industry as breakage) revert to the issuer through dormancy fees before they would otherwise escheat to the state. Under the proposed rule, if the issuer retains the right to breakage, the cardholders would lose deposit insurance protection.
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