Amended Comments of Margot Saunders and Professor Mark E. Budnitz

Consumer Electronic Payments

Consumer Electronic Payments Task Force

Docket No. 97-11
June 9, 1997

The National Consumer Law Center is a non-profit organization representing the interests of consumers. Margot Saunders is the Managing Attorney of the Washington, D.C. office of the Center. Professor Mark E. Budnitz is a Professor of Law at Georgia State University College of Law in Atlanta, Georgia.

The National Consumer Law Center, Inc. (NCLC) is a nonprofit Massachusetts corporation, founded in 1969, specializing in consumer issues, with an emphasis on consumer credit. Its primary focus and mission are the interests of low-income consumers. On a daily basis NCLC provides legal and technical consulting and assistance on consumer law issues to legal services, government and private attorneys representing low-income consumers across the country. NCLC publishes a series of twelve practice treatises and annual supplements on consumer credit laws, including Unfair and Deceptive Acts and Practices (NCLC 1991), Truth in Lending, 3rd ed. (NCLC 1995) and Cost of Credit (NCLC 1995), as well as bimonthly newsletters on a range of topics related to consumer credit issues and low-income consumers. In its twenty-six year history, its staff has been in a position to see literally thousands of consumer credit contracts, and how a full range of creditors from around the country have used -- and misused -- the consumer credit protections and lack thereof on the statute books in the United States.

Professor Mark E. Budnitz teaches courses in Consumer Protection, Commercial Law, and Bankruptcy Law. He has written over a dozen law review articles, primarily about consumer protection. His most recent article is Stored Value Cards and the Consumer: The Need For Regulation, 46 American University Law Review 1027 (April 1997).

Research for this article about stored value cards uncovered evidence that consumers already were experiencing many problems using the cards. Moreover, the manner in which they were sold in a major marketing effort in Atlanta during the Olympics raised further concerns. In addition, several federal regulatory agencies and an American Bar Association Task Force have noted the confusing operational and legal relationship between these cards and similar payment devices, the need for issuers to make disclosures, and the need for clear legal rules to fill the current legal vacuum.

Briefly summarized, Professor Budnitz= research showed that the insolvency of card issuers is a major problem for those who purchase pre-paid telephone cards, a form of stored value card. Some issuers do not provide cardholders with agreements disclosing the rights and obligations of the parties. Those who do provide agreements do not disclose key features. Topics about which disclosure is absent or inadequate include: fees, liability for loss of funds, availability of an error resolution procedure, and redemption of unused value. Where an agreement does specify the terms of the agreement, it also allows the issuer unilaterally to change the terms without notice to the consumer. Advertising for stored value cards in Atlanta during the Olympics failed to clearly explain the differences between these cards and debit and credit cards, and contained misleading and inaccurate statements that stored value cards are superior to cash. A survey of consumers indicated they were confused about the nature of the card.

The National Consumer Law Center and Professor Budnitz have drafted the attached model statute which is designed to solve many of the consumer problems which his study and the work of others have explored. The model statute is a preliminary proposal. We recognize that modifications may be needed. Nevertheless, we believe this concrete, specific articulation of consumer concerns and needs and how they may be resolved can serve as a productive sounding board for further consideration of the regulation of stored value cards.

The Need for Basic Regulation.

While the initial offering of the new stored value card product may include the basic consumer protections necessary to make a novel idea acceptable to consumers, eventually, the lack of regulation will encourage a race to the bottom. After the market for stored value cards becomes well established, most if not all stored value cards provided will be those with the least amount of consumer protections, because there will be no competitive advantage from offering the products with the most protections.

Even more alarming to those of us who represent low income consumers on a regular basis is the long term effect that these proposed regulations will have on the market for stored value cards which will be available to low income consumers. State law will not cover the stored value cards (Articles 2, 3 & 4 of the Uniform Commercial Code do not seem to apply), and the state money transmitter statues are uneven, and generally of little use in terms of providing actual consumer protections; it  also appears that the FDIC insurance will not be required, and the Electronic Funds Transfer Act will not be applicable to most transactions. Thus, a federal law will be the only method of providing some level of consumer protection. The long term effect of the absence of any federal protections for consumers will undoubtedly be the creation of a shadow stored value system for the low income community. While the initial marketplace may dictate basic consumer protections for stored value cards provided to the average American consumer, the completely unregulated providers of stored value cards to poor people will not be subject to the same competitive forces. The effect will be that the stored value cards generally provided to poor people will be more expensive, less secure, and undoubtedly with less accessibility to basic information.

The Marketplace May Take Care of Average Consumers, But It Won't Protect Low-Income Consumers. Should stored value cards take off in American commerce, they will do so because of aggressive marketing of the product. The only consumer protections on these cards will be those required by the marketplace - for middle class customers. Middle class customers who are deciding whether to use the new product and how much to use it, will make these determinations based on whether the products offered to them provide the right mix of benefits. Convenience, accessibility to information, ease and cost of usage will all be crucial issues in the launching stages of the stored value market. Protection from losses - especially those caused by the financial institution - will also be an important concern.

We believe that it is plausible that the marketplace will require the resolution of many of these issues in favor of the middle class consumer in the short run. In other words, in order to make stored value cards acceptable to the general public, the early providers of this new product will ensure convenience and accessibility to information, limit fees for usage, and provide reasonable methods of resolving disputes about losses. As we have seen with the recent addition of fees on debit cards, however, once the product takes hold in the market, it is more than likely - indeed it is inevitable - that those competitive forces requiring consumer protections will lessen in strength, and fewer protections will be provided. This will be the scenario unless there is a minimum floor of federal regulation requiring basic consumer protections.

Let us assume that stored value cards take off. Assume further that in 10 or 15 years stored value cards become so common that in most major cities they are the only way to use parking meters, most public telephones, most vending machines and many laundromats. Stored value cards would thus no longer be simply a convenience or a different method of transacting business, they would become an essential tool in conducting commerce in American society. (The evolution of the use of credit cards and debit cards predicts just such a potential: one cannot rent a car or obtain a hotel in many situations without a credit card; and even the poorest segment of our society will soon be using debit cards - welfare recipients receiving their government benefits through electronic benefits transfers.)

As is the case with credit cards, poor people will not have access - either actually or simply by perception - to the same stored value cards provided to middle America by conventional banks. The low income community will instead seek to purchase stored value cards from the same unregulated, and higher cost providers of financial services that they have traditionally turned to - check cashers, high cost mortgage brokers, etc.

We know that when less competitive providers begin providing similar products to those who perceive that they have fewer choices - generally low income consumers - the complete absence of regulation will become most significant: fewer protections and greater fees and losses will undoubtedly be experienced by low income consumers acquiring these stored value cards. Depending upon the prevalence of stored value cards, the potential for detrimental impacts on the poor could be substantial. The low income communities will undoubtedly be sold stored value cards which require exorbitant fees and have no protections from loss of funds due to provider error, fraud or insolvency.

Similar experiences in a number of other areas of consumer credit show clearly that the lack of adequate regulation most seriously impacts on the poor. The primary and most well known example of this has been the experience of many low income and minority homeowners in high rate home loans as a result of reverse redlining. Exorbitant rates, astronomical closing costs and fees, and unreasonable terms charged to low income homeowners are typical elements of these unregulated transactions. While the lack of regulation may have abetted the growth of the mortgage market to the gain of most consumers, the gross costs of deregulation on the poor has been well documented.

While the poor will suffer the most from the lack of regulation of stored value cards, many middle income consumers will be injured as well. Once the market takes off, and stored value cards become a necessity, the financial institutions providing the cards will feel more able to limit the protections and conveniences provided. This will be especially likely given the probability that only a few providers of major stored value cards will share the vast majority of the market.

Stored Value Card Protection Act
**D*R*A*F*T**

1. Coverage

   This Act applies to all stored value cards except those devices designed and issued for use in a single, wholly integrated system for a single, specific purpose (such as transportation, copying, long distance telephone charges); and on which no more than $25 in U.S. currency can be loaded.

2. Definitions

   "SVC" means a stored value card on which U.S. currency is stored or is accessible, and other devices, such as a SVC reader, stored value "wallet" or similar device which is issued or provided to the consumer, and to which the Electronic Fund Transfers Act does not apply.
   "Issuer" means the initial provider of the SVC, and all related and affiliated providers owned, operated, or licensed by the initial provider, as well as its distribution machines, reader devices, automated teller machines.
   "Consumer" means any person who is issued a stored value card, or who is authorized to use the SVC by the person to whom it was issued.

3. Consumer Protections
   
   
   1. Issuers. All issuers must be either
      
      1. regulated for safety and soundness by the federal government; or
      2. bonded in an amount equal to twice the total value of the sales of stored value cards sold in one year by the issuer, by an insurance company regulated by the state in which the issuer is licensed to do business.
   2. Final Payment. Payment for goods or services by a SVC shall constitute full and final payment by the consumer, and shall discharge the consumer's obligation.
   3. Limits on Fees.
      1. The maximum fees for the initial purchase of the SVC or the reloading of funds on to the SVC, and related equipment, are those that are agreed to between the issuer of the SVC and the consumer.
      2. A seller of goods or services who accepts a SVC as payment from a consumer shall not add a fee for the use of the SVC, nor discount the value of the currency on the SVC used towards the purchase.
      3. An issuer may charge no more than $1.00 for the redemption of the unused portion of funds on an SVC.
      4. No fee may be charged by the issuer for the provision of information relating to the balance of funds remaining on the card from an issuer.
      5. No fee may be charged for complying with the provisions of this Act, except as otherwise expressly allowed.
   4. Redemption. Time limits on the valid use of the SVC may be as agreed upon between the issuer and the consumer. Regardless of any time limit on the usage of the SVC as method of payment, the issuer shall redeem the remaining value on the card for ten years after the later of either the initial issuance or the reloading of new value on the SVC.
   5. Change in Terms. An issuer may not change the terms of the agreement between the consumer and the issuer unless the initial agreement provides for such a change in terms, and the issuer furnishes written notice of the change in terms to the consumer at least thirty days before the change takes effect.
   6. Liability for Loss of Funds. An issuer shall provide the consumer with complete reimbursement of funds lost as a result of --
      
      1. an error attributed to the issuer's or a merchant's defective automated teller machine, card reader, or point of sale device;
      2. fraud or mistake on the part of the issuer, a merchant, or an agent of either;
         
      3. damage to the SVC if the amount of funds remaining on the SVC is reasonably determinable;
      4. theft as the result of unauthorized use of electronic transmissions or interference between the consumer and the issuer or a merchant.
         
      5. any other cause, when the amount remaining on the SVC can reasonably be determined and the issuer can prevent the access to these funds.
   7. Error Resolution. Each issuer shall establish an error resolution procedure. Once a consumer provides an issuer with oral or written notice of a loss pursuant to the error resolution procedure disclosed to the consumer, the issuer must investigate and reimburse the consumer within 30 days of receiving the notice, unless --
      
      1. the issuer determines the loss is not one for which the consumer is entitled to reimbursement pursuant to subsection (F) of this section; or
      2. the loss would not have occurred but for the failure of the consumer to report any loss or theft of a SVC or other means of access within 30 business days after the consumer learns of the loss or theft.
   8. Prohibitions.
      
      1. Issuers and merchants are prohibited from making false and misleading claims regarding SVCs, including advertising or promoting the use of SVCs as the equivalent of cash unless the SVC does indeed have substantially all of the attributes of U.S. Currency, including, but not limited to, unlimited acceptance, unlimited and free usage as a method of payment for goods and services, and unlimited and free redemption.
         
      2. Issuers and merchants are prohibited from disclosing personal information about consumers, including name, address and telephone numbers, to third parties without the express, written permission of the consumer to do so.
      3. Except where otherwise specifically permitted, a consumer's waiver of the protections under this Act shall be invalid.
4. Disclosures.
   
   
   1. Initially. When a SVC is purchased, the issuer must deliver to the consumer, in a clear and conspicuous written form, all material terms relating to the use of the SVC, including:
      
      1. An explanation of all fees that will be charged, including but not limited to --
         1. for the initial purchase of the card and related devices and services;
         2. for adding to or reloading of value on to the card;
         3. in relation to the use of the card at any automated teller machines or other points of access to the funds stored on the card, or information about the remaining value on the card;
         4. to determine the remaining balance on the SVC;
         5. to obtain a transaction history;
         6. for the redemption of funds remaining on the card;
         7. for any other purpose.
      2. An explanation of all applicable error resolution procedures, including the name, address, and phone number to which notices of loss and requests for reimbursement may be made by the consumer.
         
      3. The issuer's obligations to cover loss of funds and the consumer's risk of loss from other causes.
         
      4. The consumer's right of redemption.
         
      5. The expiration date for the use of the card and for the right to redeem the remaining value on the card.
         
      6. Whether and to what extent the funds stored on the SVC are insured against loss by the consumer, or loss resulting from the default of the issuer; the party which provides the insurance, and an explanation on how to claim the insurance.
         
      7. The circumstances under which the terms of the agreement between the issuer and the consumer are subject to change.
         
      8. The facts that a SVC is different from both a credit card and a debit card, and that issuers and consumers have different rights and obligations from the other cards.
         
      9. Any other material information that affects the value of the card to the consumer.
         
         
   2. Disclosures on the SVC. The following information must be clearly and conspicuously provided on each SVC issued to a consumer:
      
      1. The date of issuance.
      2. The expiration date for usage of the SVC.
      3. The name and telephone number of the issuer to contact for error resolution and reimbursement for losses.
      4. The consumer's right to redeem the remaining value on the SVC ten years from the later of the date of issuance or the reloading of new value on the SVC.
         
         
   3. Transactions of $5 or more. When $5 or more is withdrawn from the SVC (except when the amount is transferred to another SVC issued to the same or another consumer) a written receipt must be provided disclosing the following information:
      1. The amount of the sale or withdrawal of cash to the consumer.
      2. Any fees charged for the transaction.
      3. The total amount withdrawn from the SVC.
      4. The amount of funds remaining on the SVC.
         
         
   4. Transactions under $5. When the consumer authorizes the transfer of funds of less than $5, the following information must be clearly and conspicuously disclosed:
      1. The amount of the sale.
      2. Any fees charged for the transaction.
      3. The total amount withdrawn from the SVC.
         
         
   5. Transaction Histories. For a reasonable fee, the consumer shall be entitled to obtain from the issuer, or an agent of the issuer, at one or more designated sites, including the place at which the SVC was issued, a history of all withdrawals or transfers of funds since the later of (i) the date the card was issued, or (ii) funds were added to the card. This transaction history shall include the following information in a clear and conspicuous manner:
      1. The date and other identifying information regarding the withdrawal or transfer.
      2. The amount of the purchase.
      3. The amount of any fees which were charged in relation to the transaction.
      4. The remaining balance on that date.
         
         
5. Enforcement.
   1. Compliance with the requirements of this Act shall be enforced pursuant to the provisions of Section 917 of the Electronic Fund Transfers Act.
      
   2. Any person who fails to comply with this provisions of this Act shall be liable as set out in Section 915 of the Electronic Fund Transfers Act.
      
   3. The provisions for criminal liability under Section 916 of the Electronic Fund Transfers Act shall apply to the obligations under this Act.
      
      
6. Regulations.

   The Federal Reserve Board shall prescribe regulations to carry out the purposes of this title.