Contract, Deposit or E-Value? Reconsidering Stored Value Products for a Modernized Payments Framework
Thomas Jefferson School of Law
August 17, 2008
DePaul Business and Commercial Law Journal, Vol. 7, No. 2, p. 275, 2009
Thomas Jefferson School of Law Research Paper No. 1226402
Stored value products (SVPs) are currently one of the fastest growing products in the financial industry. Ascertaining the legal nature of SVPs, however, has not been a straightforward process. The concept of the deposit has long played an important role in the regulation of payments, and discussions on the nature of SVPs have understandably focused on deposit analogies or the deposit-like characteristics of SVPs. The premise that deposits are central to SVPs is, however, a questionable one. Although there are so called SVPs incorporating deposits or deposit like features, they do not account for the large majority of the SVPs currently in use. The presumption that deposit analogies are relevant obscures the reality that true SVPs lack the characteristic features of a deposit. In sum, different SVPs manifest functional distinctions and these significantly affect the relevance of deposit-related analogies.
Stored value products are technologically enabled contractual constructs configured into one of three models: the SVP-as-facilitator, the SVP-as-mirror, or the SVP-as-currency model. When examined more closely, it becomes evident that deposit analogies are ill-suited to all but the SVP-as-mirror model, and appropriate to the latter in only limited circumstances. If SVPs are not deposit based, and deposit analogies are inappropriate, do deposit related rules thus become inapplicable? Are SVPs, in other words, truly covered by existing law? Does the applicable law vary depending on the SVP model involved?
This article explores such questions, demonstrating that the traditional role of deposits is undermined, and no longer central to the functioning of most SVPs. The result is that the consumer protection traditionally flowing from deposits is absent, and the systemic regulation of SVPs is fragmented. Current regulation of SVPs is patchy as a result, and arguably incomplete. Consumer confidence, valuable operating experience, and the viability of certain models can only be detrimentally affected.
Change is afoot, however. The interconnectedness of the financial systems of the world has been underscored by the current global economic crisis. This crisis has been the impetus for an unprecedented degree of cooperation between national financial system regulators. The possible harmonization of national financial systems to minimize the risks of a re-occurrence of such a crisis has become topical. The potential of e-money as a possible facilitator of harmonization, as happened with the euro, will come under closer examination.
Stored value products herald, in any case, a future in which payments will be increasingly digitized. At least one country is on the brink of introducing state-backed SVPs as legal tender. Though not necessarily the exact blueprint of tomorrow's payments systems, today's SVPs surely indicate that payments will become increasingly abstract and that tangibility will become increasingly irrelevant. The relevance of traditional concepts and doctrines in this context will continue to diminish. The concern that the U.S. may be at a competitive disadvantage, compared with countries with a more modernized regulatory framework, has already motivated the recently announced review of the American regulatory framework. An important part of this crucial review must include a re-evaluation of the efficiency and adaptability of consumer payments with an eye to the future. The political will to consider and implement framework change is being fuelled by the global economic crisis. This provides the perfect opportunity for inconsistencies and gaps, such as those detailed in this article, to be thoroughly addressed.
Number of Pages in PDF File: 83
Keywords: stored value card, gift card, prepaid card, payments, electronic payments, deposits, contracts, regulatory policy
JEL Classification: K12, K23Accepted Paper Series
Date posted: August 17, 2008 ; Last revised: February 4, 2010
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