01-5

June 7, 2001

Re: Proposed Stored Value Card Program

Dear M _______:

This is in response to your letter of December 29, 2000. Your letter asked whether an Issuer, a Franchiser, a Merchant or ________, as those terms are defined in the portion of your letter quoted below, are subject to regulation under the California Financial Code in connection with the sale of stored value cards pursuant to the “Program” described in your letter.

As discussed below, it is our view that none of the persons about whom you inquired is subject to a regulation under any law administered by the Department of Financial Institutions (“DFI”), with the possible exception of the Banking Law.

I.DESCRIPTION OF PROGRAM.

You described the Program as follows:

“There are four different entities participating in this Program. The stored value card (the ‘Card’) is issued to the consumer cardholders (the ‘Cardholders’) by an FDIC insured state-chartered or national bank (the ‘Issuer’). The Issuer maintains the customer relationship with the Cardholder pursuant to its card agreement with the Cardholder, retains the Cardholders’ funds pending Card transactions, and honors the transactions effected by Cardholders with the Card. ________, a non-bank corporation organized under Delaware law, provides certain marketing and account services in connection with the Program. ________ arranges for the Franchiser and/or the Merchant (described below) to sell the Card at retail locations. ________ also provides Card promotional materials to the Franchiser and/or the Merchant, and transmits information about Card requests and load transactions from sales locations to the Issuer. ________ also provides Cardholders with information about their Card transactions through telephone response units, Internet websites and mailed periodic statements. One or more franchise companies (the ‘Franchiser’), which have relationships with independently-owned franchisee or other retail locations (the ‘Merchants’), arrange for the Cards to be sold through the Merchants at their retail locations. Cardholders also may load value onto the Cards at the Merchant retail locations. The Card Issuer — and not ________, the Franchiser or the Merchant — is responsible to the Cardholder, with respect to the funds loaded onto the Card and for the payment of Card transactions.

“The main elements of the Program, including Card purchasing, Card loading, collection of Card sale and load funds, and Card usage, are described in greater detail below.

Card Purchasing

Cards may be purchased only at participating Merchant locations.
The Cardholder can use cash or credit card to pay an issuance fee in order to purchase the Card at the Merchant location.
The Merchant obtains the Cardholder’s name and address information.
The Merchant enters the Cardholder information into a computer terminal administered by the Franchiser or ________.
If the Franchiser administers the computer terminal, it transmits the Cardholder information electronically to ________.
________ electronically transmits the Cardholder information to the Issuer.
The Merchant provides the Cardholder at the point-of-purchase with a printed receipt evidencing the Card purchase.
Approximately seven to ten days after purchase of the Card, the Cardholder receives the Card in the mail directly from the Issuer.
The Card has zero value at the time of issuance.
The Card is embossed with the Cardholder’s name and account number, has a ‘mag stripe’ on the back, and carries one of the national credit card association marks (i.e., MasterCard or Visa). The Card indicates the identity of the Issuer.
Card Loading

In order to load value onto the Card, the Cardholder returns to one of the Merchant locations. The Cardholder need not return to the same Merchant location at which it purchased the Card, or to the same Merchant from which the Card was purchased.
The Cardholder can use cash or credit card to load value onto the Card.
The Merchant collects the amount of the load, plus a load fee, from the Cardholder. The Merchant enters the Card load data into a computer terminal administered by the Franchiser or ________.
The maximum balance permitted for a Card is $9,999.
If the Franchiser administers the computer terminal, it electronically transmits the Card load information to ________.
________ electronically, transmits the Card load information to the Issuer.
Upon receipt of the electronically transmitted Card load information, the Issuer loads the Card with value.
The Merchant presents the Cardholder with a printed receipt evidencing the Card load.
Collection of Card Sale and Load Funds

The Merchant deposits funds from the sale or load of Cards into its bank account on a daily basis.
The Franchiser arranges for the transfer of these funds each business day from the bank accounts of the Merchants into a cash concentration account at the Franchiser’s bank.
The Franchiser arranges for the transfer of the aggregated funds each business day from its cash concentration account into an account at the Issuer established and maintained by the Issuer to receive Cardholder funds.
Card Usage

The Cardholder can use the loaded Card at stores and ATMs that accept credit and debit cards bearing the national card association mark that is on the Card.
No credit is extended to the Cardholder in connection with the Card, and the Cardholder can only use the Card to purchase goods or obtain funds up to the amount originally loaded onto the Card.
Cardholders can obtain information regarding his/her Card transactions and outstanding balance by means of an automated phone response unit and Internet website operated by ________.
________ will also mail periodic statements to the Cardholders containing the Card transactional information. This periodic statement will include the information required by Federal Reserve Board Regulation E (12 C.F.R. §205.9).”
We assume from your description of the Program that in all cases, an FDIC insured state or national bank, and no one else, will be liable to a Cardholder for payment of any amount owing on a Card.

II. DISCUSSION.

Aside from regulation as banking, sale of Cards in California could arguably be subject to two laws administered by DFI, namely, the Payment Instruments Law (division 16 (commencing with section 33000) of the Financial Code) or, chapter 14 (commencing with section 1800), division 1 of the Financial Code (the “Transmitters of Money Abroad Law” or “TMA Law”). Together, the Payment Instruments Law and the TMA Law will be referred to in this letter as the “DFI Money Transfer Laws.”

The Payment Instruments Law regulates the business of selling “payment instruments” in California. See Financial Code sections 33400 and 33401. The TMA Law regulates receipt of money in California “for the purpose of transmitting the same or its equivalent to foreign countries . . .” Financial Code section1800.3(a).

Assuming solely for the sake of discussion, and without deciding, that sale of stored value cards is subject to either of the DFI Money Transfer Laws, the Program would not be subject to regulation because FDIC insured banks are exempt from both laws.

As you point out, Financial Code section 33100(a)(1) exempts from the Payment Instruments Law, “[a]ny insured bank, when selling a payment instrument issued by it.”n1 Section 1800.3(b) of the Financial Code exempts from the TMA Law “[a] commercial bank . . . the deposits of which are insured by the Federal Deposit Insurance Corporation.” Under the Program, it appears that obligations to pay amounts owing on the Cards are exclusively obligations of an Issuer that is an FDIC insured bank. Accordingly, the Issuer is not subject to regulation under the DFI Money Transfer Laws. Furthermore, the agents through which the Issuer facilitates that service, including ________, Franchisers, and Merchants, are not subject to regulation under those laws, provided they have no obligation to Cardholders to pay amounts due on Cards.

The foregoing discussion of exemption of the Program from the DFI Money Transfer Laws does not imply that we view the Program as subject to either of those laws. In our view, sale of a stored value card does not constitute sale of a payment instrument and is, therefore, not subject to the Payment Instruments Law. Sale of a stored value card by someone other than a bank may or may not be subject to the TMA Law. These issues are discussed in our letter of June 7, 2001 to another party. A redacted copy of that letter is enclosed.

Finally, the Commissioner has not decided the issue of whether sale of stored value cards constitutes banking, which is subject to regulation under the Banking Law (division1 (commencing with section 99) of the Financial Code). Our policy regarding that issue is set forth in the enclosed letter, as follows:

– – – – – – – – – – – – – – – – – -Footnotes- – – – – – – – – – – – – – – – – –
n1Financial Code section 33051 provides that for purposes of the Payment Instruments Law “insured bank” means “any bank the deposits of which are insured by the Federal Deposit Insurance Corporation . . . .”
– – – – – – – – – – – – – – – – -End Footnotes- – – – – – – – – – – – – – – – –< "There may be a question of whether selling . . . cards constitutes accepting deposits and therefore, whether only a bank licensed to do a banking business in this state may sell . . . cards in California as principal. See California Financial Code sections 102 and 3390. This matter has not yet been resolved, and we are reserving this question. However, in case we should decide that selling . . . cards does constitute accepting deposits and, therefore, that only a bank may sell cards in California, we would give . . . notice of our decision, and we would not seek any civil fine or injunctive relief against . . . under California Financial Code section 3395 on account of its sale of VTM cards in California at any time before the giving of such notice. "In short, then, we are not at this time objecting to . . . proposal to sell . . . cards in California." That policy would apply to the Program. If it were determined that sale of stored value cards is banking, Issuers under the Program would need to consider whether the Program raises interstate or other branching issues under the Banking Law. This Department administers, among other laws, the Banking Law, the TMA Law, and the Payment Instruments Law. We express no opinion as to any law, state or federal, other than those laws. Furthermore, this response is limited to the facts and circumstances set forth in or incorporated into this letter. Should any of the facts or circumstances change, our answers might be different. If you have any questions regarding this matter, please feel free to contact me at (415) 263-8512. Very truly yours, DONALD R. MEYER Commissioner of Financial Institutions By THOMAS M. LOUGHRAN Senior Counsel TML:acp Enclosure June 7, 2001 Re: Sale of ATM - Accessible Cards Dear M ________: I. INTRODUCTION. This responds to your letter of January 19, 2001. Your letter asked whether the sale by your client ("Company") of a stored value card product (a "Card") is subject to regulation by the Department of Financial Institutions under the Payment Instruments Law (Division 16 (commencing with section 33000) of the Financial Code), the Travelers Checks Act (Chapter14A (commencing with section 1851), Division 1 of the Financial Code) or Chapter 14 (commencing with section 1800), Division 1 of the Financial Code (The "Transmitters of Money Abroad Law" or "TMA Law"). You also asked us to confirm our position regarding regulation of stored value cards under the Banking Law (Division 1 (commencing with section 99) of the Financial Code). As discussed below, it is as our view that sale of Cards in California is not subject to the Payment Instruments Law or the Travelers Checks Act. Such sales may be subject to the TMA Law if Cards are sold for the express purpose of effecting delivery of currency in foreign countries. Respecting regulation as banking, what you characterized as the "safe harbor" position reflected in our letter of January 30, 1997, would apply to the sale of Cards. II. DESCRIPTION OF SERVICE. You described the business of selling Cards as follows: "A Customer will purchase a Card from an independent retailer* (the "Retailer"). The Company expects that the typical amount of value initially placed or stored on a Card will be approximately $100; however, any amount up to $1,000 will be accepted by the Retailer. The Customer will pay for the Card with cash or, at the risk of the Retailer, other payment means* in the amount of value to be input into the Card*. The Customer may use the Card to place domestic or foreign telephone calls using an 800 access number. The per-minute charges for long distance telephone calls by a Customer are extremely competitive. For this reason the Company believes the primary use for the Card will be to make long distance calls. The Customer may also use the Card to obtain cash at both foreign and domestic ATM machines or make purchases at POS machines that accept debit cards. - - - - - - - - - - - - - - - - - -Footnotes- - - - - - - - - - - - - - - - - - *Footnote in original omitted here. - - - - - - - - - - - - - - - - -End Footnotes- - - - - - - - - - - - - - - - - "Both the Card's serial number and PIN will be encoded in the magnetic stripe on the back of the card. The Customer will obtain the PIN needed to use the Card by scratching off a covering over a number printed in the packet provided with the Card. Each Card packet will contain instructions concerning the Card and a duplicate Card which can be given by the Customer to a family member or other person to permit that person to place phone calls, make POS purchases and/or obtain cash at ATMs so long as he or she knows the PIN. Thus, a family member or other recipient of the Card will be able to access funds from any ATM in the United States and abroad. "The Customer may stop payment on any lost or stolen Cards and can obtain a new Card and PIN that can access the balance remaining on a lost or stolen card. Additionally, the value available for each Card may be renewed at any time by the Customer at any participating Retailer up to the maximum limit of $1,000. "Neither Company nor any Retailer will open an individual bank account on behalf of any Customer as a consequence of the purchase of a Card. Instead, information as to the value available for each Customer will be maintained at a centralized database by an independent processor (the "Processor") pursuant to a contract with the Company. Authorization for specific transactions will be given by the Processor based on the centrally maintained records of value associated with each Card. "Proceeds from the sale of the Cards will be maintained in a commercial bank deposit account in the name of the Company. The Customer will receive no interest on the funds, nor will the Customer have any ownership interest in the Company's commercial bank deposit account." III. DISCUSSION. A. The Payment Instruments Law. As you point out, the Payment Instruments Law regulates the sale of payment instruments. "Payment instrument" is defined in Financial Code section 33059 as, "[a]ny instrument (whether or not negotiable) for the transmission or payment of money which is designated on its face by the term 'money order' or by any substantially similar term" or "[a]ny check, draft, or other instrument (whether or not negotiable) for the transmission or payment of money, if payable on demand." The Card does not qualify as a payment instrument under the first part of this test because it is not designated on its face as a "money order." Under the second part of the test, a card might be viewed as "an instrument (whether or not negotiable) for the transmission or payment of money" which is payable on demand. However, it has been our view that the term "other instrument" as used on Section 33059 means a paper instrument, like check or draft which is governed by Division 3 ("Division3") the California Uniform Commercial Code ("UCC"). It is appropriate to refer to Division 3 in construing the Payment Instruments Law because the Payment Instruments Law incorporates terminology and concepts of liability relating to a commercial paper that is governed by Division 3. For example, section33524 of the Payment Instruments Law provides: "Each licensee shall be liable as a maker in accordance with the California Uniform Commercial Code with respect to each payment instrument issued by it which is sold in this state by it, directly or indirectly through a California agent." (Emphasis added.) Throughout the Payment Instruments Law reference is made to the issuance of payment instruments and to a licensee as an issuer. See, e.g., the definitions of "licensee" (Financial Code § 33056) and "agent" (Financial Code § 33043). The terms "issue" and "issuer" are defined in section 3105 of Division 3 in relation to delivery of and the person who delivers an instrument governed by Division 3. Section 3104(a) of Division 3 provides that an instrument must be "an unconditional promise to or order to pay a fix amount of money . . ." Section3103(6) of Division 3 defines "order" as a "written instruction to pay money signed by the person giving the instruction." Section 3303(a)(9) of Division 3 defines "promise" as a "written undertaking to pay money signed by the person undertaking to pay." Accordingly, we have taken the view that for purposes of the Payment Instrument Law, an "instrument" is a written, signed document that it is similar in nature to a check or a draft, even though not negotiable. We have, therefore, not viewed electronic media, such as stored value cards, as payment instruments. B. Travelers Checks Act. The Travelers Checks Act regulates sales of travelers checks, and prohibits their sale in California by anyone (except certain exempt entities) not licensed under the Travelers Checks Act. See, Financial Code §§ 1853, 1854. As you point out, a Card is not a travelers check as defined in section 1852(i) of the Travelers Checks Act, which states: "(i) 'Travelers check' means an instrument for the payment of money which: Is designated on its face by the term 'travelers check' or by any substantially similar term or its commonly known and marketed as a traveler's check . . . . (A) If issued in United States currency, is in the sum of ten dollars ($10) or a whole multiple thereof, if less than one hundred dollars ($100), or in the sum of one hundred dollars ($100) or a whole multiple thereof; (B) If issued in any foreign currency, is in an even denomination of such currency; Contains a provision for a specimen signature of the purchaser to be completed at the time of purchase, and Contains a provision for a countersignature of the purchaser to be completed at the time of negotiation." A Card fails to qualify as a travelers check because it is not designated as such on its face, it is not limited to issuance in the denominations specified in Section 1852(i)(1), and it does not require a customer's signature at the time of purchase or negotiation. C. The TMA Law. Section 1800.3 of the TMA Law provides in pertinent part as follows: "(a) No person shall engage in the business of receiving money for the purpose of transmitting the same or its equivalent to foreign countries without first obtaining a license from the commissioner . . . ." (Emphasis added) Accordingly, a person is not subject to the TMA Law unless the person engages in the business of receiving money for the express purpose of transmitting or delivering the same or its equivalent to a foreign country. We cannot determine from your letter whether some or a substantial part of the money received by your client is expressly intended at the time a Card is sold to be delivered abroad in the form of currency through the medium of the Card. The fact that the Card may be used for a purpose other than transmitting money abroad is not necessarily controlling. The express purpose of the sale transaction would govern. Evidence of that purpose might be found in such factors as the manner in which availability of Cards is advertised in the media and at locations where Cards are sold, and in company records reflecting the manner in which Cards are actually used. We leave it to you to evaluate, based on the foregoing principle, whether the sale of Cards in California is subject to licensure under the TMA Law. D. Banking. Finally, there is the question of whether selling Cards in California constitutes doing a banking business. Our position on that issue is the same as expressed in our letter of January 30, 1997, a copy of which is enclosed for convenient reference. In short, we have reserved our opinion on that issue. Should we determine that the sale of Cards does constitute a banking business, we would notify you of our determination, and we would not seek any civil fine or injunctive relief against your client on account of your client's sale of Cards at anytime before the giving of such notice. IV. CONCLUSION. For the reasons discussed above, it is our view that the sale of Cards in California is not subject to regulation under the Payment Instruments Law or the Travelers Checks Act. We have insufficient information to determine whether the sale of Cards is subject to regulation under the TMA Law. Finally, respecting regulation of the sale of Cards as banking, the policy stated in our letter of January 30, 1997 would apply. This Department administers, among other laws, the Banking Law, the TMA Law, the Travelers Checks Act, and the Payment Instruments Law. We express no opinion as to any law, state or federal, other than those laws. Furthermore, this response is limited to the facts and circumstances set forth above. Should any of the facts or circumstances change, our answers might be different. If you have any questions concerning this matter, please feel free to call me at (415) 263-8512. Very truly yours, DONALD R. MEYER Commissioner of Financial Institutions By THOMAS M. LOUGHRAN Senior Counsel TML:acp January 7, 1997 Re: ________ TravelMoney Program Dear M ________: This is in response to your letter of January 7, 1997. Your letter requests the Department's position on the need for ________to obtain a license from the Department prior to selling its ________ ("________") product in California. You described the ________ service generally as follows: The ________ program enables ________customers to access cash in the United States and abroad at ATM machines through the use of a ________ card. ________will sell ________ cards through financial institutions and travel agencies who will act as ________'s sales agents. ________ cards may also be purchased directly from ________by mail. A customer may purchase a ________ card for any amount up to a maximum amount fixed by ________. Except in the case of sales by mail, the customer will select a personal identification number ("PIN") to be associated with the card at the time of sale. PINs will be assigned by phone after the card is received by the customer in connection with sales by mail. The ________ card contains a magnetic strip with a serial number. The value associated with the card will not be stored on the card itself but will be posted at the time of sale to an account maintained on a centralized database. The database will be maintained by VISA. Each card will represent a separate account in the database. The amount represented by a card may not be increased after its sale; however, a customer may purchase a new card and roll the balance of any existing card onto the new card. A customer may use the ________ card only to obtain cash, not as a point of sale device. All withdrawal transactions will be authorized on-line by accessing account balance information on the central database through VISA/Plus ATM machines world wide. A customer may stop payment on a lost or stolen card, and may redeem the entire balance remaining on any card at any sale location. Neither ________nor any selling agent will open an individual bank account for a purchaser solely because of his purchase of a ________. Rather, proceeds from sales of ________ cards will be deposited into general liability accounts at Citibank, N.A. for ________ which will be owned by ________Services Inc. and represent money due the issuer, ________, just as with paper travelers cheques. The ________ cardholder will receive no interest on the funds, nor will the cardholder have any ownership interest in the general liability account. You indicate that the market for ________ cards will be similar to the market for travelers checks. However, the ________ card does not meet the technical requirements of the definition of "travelers check" in California Financial Code Section 1852(j). Therefore, the sale of ________ cards is not subject to the licensing or other provisions of the Travelers Checks Act (Chapter 14A (commencing with Section 1851) Division 1 of the California Financial Code). There may be a question of whether selling ________ cards constitutes accepting deposits and, therefore, whether only a bank licensed to do a banking business in this state may sell ________ cards in California as principal. See California Financial Code Sections 102 and 3390. This matter has not yet been resolved, and we are reserving this question. However, in case we should decide that selling ________ cards does constitute accepting deposits and, therefore, that only a bank may sell ________ cards in California, we would give ________notice of our decision, and we would not seek any civil fine or injunctive relief against ________under California Financial Code Section 3395 on account of its sale of ________ cards in California at any time before the giving of such notice. In short, then, we are not at this time objecting to ________'s proposal to sell ________ cards in California. Please note that the foregoing views relate exclusively to provisions of the California Financial Code administered by the Superintendent of Banks. We express no position with respect to any other law, state or federal, that may apply to the ________ program. If you have any questions concerning this matter, please feel free to contact me at (415) 263-8512. Very truly yours, CONRAD W. HEWITT Superintendent of Banks By THOMAS M. LOUGHRAN Senior Counsel TML:arc cc: W. J. Mix J. L. Owen[/et_pb_text][/et_pb_column_inner][/et_pb_row_inner][/et_pb_column][et_pb_column type="1_4"][et_pb_ca_panel admin_label="Key Consumer Links" _builder_version="3.17.6" show_button="off" heading_align="left" title="Key Consumer Links" panel_layout="standout" saved_tabs="all" global_module="272"]

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