Cards are ‘Just Another’ DDA

Is a payroll card — or any kind of prepaid card — an individual bank account? The Federal Reserve System and the Federal Deposit Insurance Corporation (FDIC) aim to answer that question with separately pending proposals that have the potential to raise the costs of offering the product. The agencies last September requested public comment on recommendations that would apply to payroll cards many of the same regulations that apply to bank accounts. Industry sources expect a final ruling on the issue later this year.

According to information from the FDIC, the proposal to consider funds held as part of a prepaid card as a deposit for the purposes of the Federal Deposit Insurance Act would mean that:

• the value of the card becomes insured by the FDIC against the risk of loss;
• the value is added to the total amount of deposits on which banks must pay assessments to the FDIC.

This regulation would apply only to funds held by federally insured banks and thrifts. The FDIC has not made a distinction, however, as to whether the funds are “pooled”— meaning that all the payroll funds for a given company are held in one big account and then broken into sub-accounts to cover each employee — or whether separate accounts are held for each employee. That is a distinction some banks had been making in determining which regulations apply, leading some banks to conclude that pooled accounts were exempt from certain regulatory responsibility.

At the same time, the Federal Reserve is looking at how Regulation E of the Electronic Funds Act would apply to payroll cards. Previously, payroll cards were not held to the same regulatory scrutiny as traditional debit cards — banks were not required, for example, to send consumers monthly statements detailing transfer activity, implement procedures for handling consumers’ claims that a transfer reflected an error or limit consumer liability for unauthorized transfers.

While application of these regulations could raise some banks’ cost of handling payroll card programs, many banks expect the anticipated regulatory changes to have little impact.

“We treat our prepaid accounts as if they were deposit accounts already so I don’t expect we’ll have to do a lot of things differently,” says Taylor Vaughn, senior vice president of treasury management services for Memphis-based First Horizon National Corp.

Cleveland-based Keycorp also considers payroll card funds as separate individual accounts. “To us, they are just another checking account. The only difference is that employees can only get funds out of the account using their cards and they can only make deposits into the account through their employer,” says Sarah Grotto, senior vice president of Key consumer payments.

The proposed regulations might lower costs, according to Nora Arpin, first vice president of commercial card products for Comerica Inc. Arpin explains that Comerica mails bank statements to all employees with payroll cards issued by the bank. But, the proposed regulations enable banks to offer cardholders the option of getting transaction statement information via the Web or through interactive voice telephone systems. Indeed, recent changes in state laws and regulations are making it easier for banks to offer payroll cards. According to Arpin, several states are starting to specifically list payroll cards as a legal means of paying employees in their regulations concerning payroll. While banks and other third-parties have sold the product and cards have been in use prior to this sanction, some corporations were hesitant to proceed without the states’ specific seal of approval. And, two states that specifically outlawed payroll cards have rescinded those restrictions, Arpin adds.

Lauri Giesen