Post by Sapphire Capital on Oct 3, 2008 11:03:08 GMT 4
Contract, Deposit or E-Value? Reconsidering Stored Value Products for a Modernized Payments Framework
Eniola Akindemowo
Thomas Jefferson - School of Law
August 14, 2008
TJSL Legal Studies Research Paper No. 1226402
Abstract:
Stored value products (SVPs) are currently one of the fastest growing products in the financial industry. The ubiquitous gift card is a familiar example illustrating that stored value products have become a way of life and are here to stay. 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. Discussions of the nature of SVPs have understandably focused on deposit analogies or the deposit-like characteristics of SVPs. The relevance of deposit analogies has been taken for granted, or it has been addressed by ultimately circular arguments. The premise that deposits are central to SVPs is, however, a questionable one. Although there are SVPs that clearly incorporate deposits, such SVPs do not account for the large majority of the SVPs currently in use. Presuming the relevancy of deposit analogies obscures the reality that true SVPs lack the characteristic features of a deposit. Different SVPs manifest functional distinctions and these significantly affect the relevance of deposit-related analogies.
Stored value products are contractual devices configured into one of three models: the SVP-as-facilitator, the SVP-as-mirror, or the SVP-as-currency model. Under close analysis, it becomes evident that deposit analogies are ill-suited to all but the SVP-as-mirror model, and then only in limited circumstances. Despite this, it is not a contradiction to also describe SVPs as contractual facilities that are associated in two of these three models, with an external card issuer/merchant, deposit-centered relationship.
If SVPs are not deposit based, and deposit analogies are inappropriate however, do deposit related rules 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 these 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 impacted.
Stored value products herald 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 end result will be that the relevance of traditional concepts and doctrines will continue to decline. The concern that the U.S. may be at a competitive disadvantage, compared with countries with a more modernized regulatory framework, motivated a recently announced review, led by the U.S. Treasury, of the American regulatory framework. For future efficiency, and to maintain the leading role of the U.S. financial system in the global financial arena, issues such as those raised in this article must be given serious attention. The present political will to consider and implement framework change provides the perfect opportunity for the inconsistencies and gaps detailed by this article to be thoroughly addressed.
papers.ssrn.com/sol3/Delivery.cfm/SSRN_ID1276446_code699328.pdf?abstractid=1226402&mirid=1
Eniola Akindemowo
Thomas Jefferson - School of Law
August 14, 2008
TJSL Legal Studies Research Paper No. 1226402
Abstract:
Stored value products (SVPs) are currently one of the fastest growing products in the financial industry. The ubiquitous gift card is a familiar example illustrating that stored value products have become a way of life and are here to stay. 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. Discussions of the nature of SVPs have understandably focused on deposit analogies or the deposit-like characteristics of SVPs. The relevance of deposit analogies has been taken for granted, or it has been addressed by ultimately circular arguments. The premise that deposits are central to SVPs is, however, a questionable one. Although there are SVPs that clearly incorporate deposits, such SVPs do not account for the large majority of the SVPs currently in use. Presuming the relevancy of deposit analogies obscures the reality that true SVPs lack the characteristic features of a deposit. Different SVPs manifest functional distinctions and these significantly affect the relevance of deposit-related analogies.
Stored value products are contractual devices configured into one of three models: the SVP-as-facilitator, the SVP-as-mirror, or the SVP-as-currency model. Under close analysis, it becomes evident that deposit analogies are ill-suited to all but the SVP-as-mirror model, and then only in limited circumstances. Despite this, it is not a contradiction to also describe SVPs as contractual facilities that are associated in two of these three models, with an external card issuer/merchant, deposit-centered relationship.
If SVPs are not deposit based, and deposit analogies are inappropriate however, do deposit related rules 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 these 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 impacted.
Stored value products herald 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 end result will be that the relevance of traditional concepts and doctrines will continue to decline. The concern that the U.S. may be at a competitive disadvantage, compared with countries with a more modernized regulatory framework, motivated a recently announced review, led by the U.S. Treasury, of the American regulatory framework. For future efficiency, and to maintain the leading role of the U.S. financial system in the global financial arena, issues such as those raised in this article must be given serious attention. The present political will to consider and implement framework change provides the perfect opportunity for the inconsistencies and gaps detailed by this article to be thoroughly addressed.
papers.ssrn.com/sol3/Delivery.cfm/SSRN_ID1276446_code699328.pdf?abstractid=1226402&mirid=1