August 2, 2002
Re: Mall-Wide Gift Cards
Dear [ ]:
Your letter, dated May 8, 2002, to Superintendent McCaul, has been referred to me for reply. [ ] ("Company"), a New York State licensed money transmitter, has developed a new product, a mall-wide gift card ("Gift Card"). A Gift Card is a magnetically stripped card, which will be purchased from shopping malls that are the authorized agents of Company. The recipient of a Gift Card may use it multiple times to partially redeem a Gift Card's account value, by purchasing goods and services offered by merchants located within the participating malls, until that value is exhausted. Additional value may not be added to a Gift Card once it is issued. Company will charge its agents' bank accounts each business day via an ACH debit for the value loaded to Gift Card accounts. Settlement with the redeeming merchants will occur when Company transfers money from its account to the redeeming merchants.
In connection with this new product, you pose two questions:
(1) Is a money transmitter license required by the entity on whose books the liability for unused Gift Card account value is reflected or by the entity authorized by the Gift Card association or company to issue the cards?
For purposes of our analysis we point out that Company's definition of money transmitter is inconsistent with the definition contained in the New York State Banking Law ("Banking Law"). Section 641(1) of the Banking Law provides:
"…[N]o person shall engage in the business of selling or issuing checks, or engage in the business of receiving money for transmission or transmitting the same, without a license … nor shall any person engage in such business as an agent, except as an agent of a licensee or as agent of a payee; provided, however, that nothing in this article shall apply to a bank, trust company, private banker, foreign banking corporation licensed pursuant to article two of this chapter, savings bank, savings and loan association, an investment company, a national banking association, federal reserve bank, corporation organized under the provisions of section twenty-five-a of an act of congress entitled the "Federal Reserve Act", federal savings bank or federal savings and loan association, state or federal credit union …"
A "check" is defined in Section 640(3) of the Banking Law to mean "any check, draft, travelers check, money order or other instrument for the transmission or payment of money". A "payment instrument" is defined in Section 640(5) of the Banking Law to mean "any check, draft, money order, or other instrument or order for the transmission or payment of money, whether or not such instrument or order is negotiable, and sold to one or more persons." A "payment instrument" does not, however, include any instrument "which is redeemable by the issuer in merchandise or services" (emphasis added).
The Banking Department has previously determined that "gift certificates" are included in the definition of "payment instrument" when the gift certificates in question were not both issued and redeemed by the same entity, but rather, as in the present case, were issued by Company, while a merchant provided the merchandise or services. The term "payment instrument" has been interpreted by the Banking Department to include prepaid phone cards. Company's Gift Cards share features common to both prepaid phone cards and gift certificates. As such we conclude that they constitute payment instruments, as such term is defined in Section 640(5) of the Banking Law and that Company, in order to issue the Gift Cards to residents of New York State, must be a licensed money transmitter.
While your letter does not discuss it, we assume that the shopping malls would enter into an agency agreement with Company whereby the shopping malls become an agent for the sale of gift cards. Provided the agency agreement authorizes the shopping malls to accept payment from the purchasers of gift cards and the agency agreement clearly and unconditionally indicates that payment to the shopping mall is, in effect, payment to Company, the shopping mall could be deemed to be an agent of a payee (Company) and would not be engaged in money transmission for the purposes of Article 13-B of the Banking Law. Thus, there is little risk of loss to the purchaser of the gift cards. If the shopping mall fails to remit the proceeds from the sale of the cards, Company, may not, from a legal standpoint, "cut off" the use of the purchasers of the cards, as Company, in effect, received payment of the cards.
(2) If the entity authorized to issue the cards is a federally insured bank, must Company be a New York money transmitter licensee in order to offer gift cards if the liability for unused gift card value is reflected on the books of Company instead of the card issuer?
As set forth above, a federally insured bank is exempt from the requirements of Section 641(1) of the Banking Law. However, we are unclear as to what the relationship between Company and the FDIC insured bank would be. If you are asking whether Company is permitted to act as an agent of an FDIC insured bank we believe that this question is more properly addressed to the FDIC.
I trust that the foregoing is responsive to your inquiry.