August 31, 2010
Authored by: Bryan Cave Leighton Paisner
On August 10, 2010, the FDIC published a pilot program to evaluate the feasibility of insured depository institutions offering low-cost transactional and savings accounts. The FDIC will accept applications from banks wanting to participate in the pilot program through September 15, 2010.
Banks participating in the pilot program must offer electronic deposit accounts having the core features identified in the “Model Safe Accounts Template.” The pilot program is expected to last one year, during which participating banks would report to the FDIC on the viability of the accounts, focusing on the volume, use, success and profitability of the accounts.
In its announcement for the pilot program, the FDIC emphasizes the numbers of unbanked and underbanked consumers in the United States and the FDIC’s commitment to ensuring that all U.S. households have access to safe and affordable banking services. Unless banks participating in the pilot report significant and serious losses, there seems to be a real possibility that all banks will be coerced in one way or another to offer these accounts after the program. This post discusses the proposed features of the accounts and the possible difficulties.
Electronic, Checkless Accounts
Under the pilot program, the accounts would be “largely” electronic, purportedly for the purpose of limiting acquisition and maintenance costs. The transactional accounts also would be checkless, allowing withdrawals only through electronic means.
Because the accounts would be checkless, institutions will have somewhat more ability to prevent losses from overdrafts than they otherwise would have. On the other hand, all banks know that it is impossible to block every electronic transaction that results in an overdraft. Moreover, under at least the pilot program, banks would be expected not to impose any overdraft or insufficient funds fees. With consumers having absolutely no economic incentive to avoid overdrafts, it can be expected that banks will incur losses.
Very Low Fees
Monthly maintenance fees for the transactional accounts under the pilot program would be limited to $3, and the bank would not be able to charge any monthly fees for the savings accounts. The minimum monthly balance requirement for the account would be only $1, and it seems safe to assume that the target consumer market for these accounts is unlikely to maintain any significant average daily balances.
The FDIC states the goal of developing “sustainable product offerings” through the pilot program. It is hard to see how a transactional account with these minimal monthly fees, no overdraft fees, and no real expectation of any significant balances could ever be sustainable except by passing the costs on to mainstream consumers.
Stricter Requirements for Paper Statements
There will be no meaningful difference from the consumer’s perspective between the proposed transaction accounts and prepaid cards. In both cases, the account is checkless, withdrawals can be made only electronically, and funds can be spent only after being deposited to the issuer of the account.
However, for the transaction accounts under the pilot program, a bank would be required to provide paper statements unless the consumer consents to electronic statements. These rules for transaction accounts are consistent with existing Electronic Fund Transfer Act regulations applicable to traditional deposit accounts. In contrast, general purpose prepaid cards are not subject to the Electronic Fund Transfer Act and, for those “payroll cards” that are subject to the Act, the issuer is required to provide a paper account history only upon the consumer’s specific request.
For these reasons, it may be more advantageous for a bank to offer prepaid accounts rather than the transaction accounts as proposed by the FDIC, at least for now. But it should be noted that Congress and the bank regulators are busily adding or proposing new regulation of prepaid cards. The regulatory distinctions between prepaid cards issued by banks and traditional deposit accounts offered by banks may be rapidly disappearing.
Expectations After The Pilot Program
As we have seen time and time again, when a regulator issues guidance or best practices suggestions, the guidance soon becomes de facto law. For a recent example, banks throughout the country are currently embroiled in class actions that essentially are based on claims that the banks’ overdraft practices are unfair and deceptive to the extent those practices are inconsistent with regulatory guidance or best practice suggestions.
The FDIC’s announced aim under the program is for banks to develop a “sustainable” product. If the product is adopted by any number of banks after the pilot, those who conclude that they cannot afford to do so may find themselves subject to accusations of deposit-account “redlining” or other impermissible discrimination.
At the very least it seems likely that bank regulators will come to expect banks to offer the product after the FDIC concludes that it is sustainable. And the FDIC is almost certain to reach that conclusion. Because participation in the pilot is voluntary, many of the banks that sign-up might have already concluded that the product could work for them given their overhead, location, and prospective customer base. When those self-selecting banks report success, bank regulators could extrapolate from those few to the industry and conclude that what is good for one bank is good for all.