Phone Cards

July 23, 1997

Judith Rinearson, Group Counsel
American Express
Travel Related Services Company, Inc.
General Counsel's Office
American Express Tower
World Financial Center
New York, NY 10285-4900

Re: Phone Cards (Your Letter of November 26, 1996)

Dear Ms. Rinearson:

We apologize for the delay in responding to your letter. In part, the reason for our delay is because we recognize that this is an important matter and, even though we have previously considered it, we wanted to review the issues you raised thoroughly.

You have asked whether credit unions may sell prepaid phone cards. We have addressed this issue previously in a letter from Associate General Counsel Richard S. Schulman to Richard E. Byer, dated November 27, 1995. A copy is enclosed. That letter directly addresses your contention that FCUs have the authority to sell prepaid phone cards under both the express and incidental authority provisions of the Federal Credit Union Act (the Act). 12 U.S.C. §§1757(12), 1757(17). Please note that our answer to your letter applies only to federal credit unions (FCUs). State law governs the authority of a state-chartered credit union to engage in a particular activity.

At this time, our view continues to be that FCUs have neither express nor incidental authority to provide prepaid phone cards. We believe prepaid phone cards, to be used as you describe, are quite different than checks and money orders, which are expressly authorized by the Act. 12 U.S.C. §1757(12). Unlike checks and money orders, phone cards can transfer funds to only one recipient and they are not negotiable instruments.

We are not convinced that selling prepaid phone cards to members is necessary to an FCU's ability to carry on its business of serving members and, therefore, do not find the activity permissible under the incidental powers clause of the Act. 12 U.S.C. §1757(17). You contend that prepaid phone cards are "similar to other prepaid products routinely sold at credit unions including but not limited to travelers cheques, money orders, subway tokens and postage stamps." As noted above, FCUs have express authority to sell travelers checks and money orders. We agree that prepaid phone cards are similar to subway tokens and postage stamps and note that we have consistently stated that FCUs do not have the incidental authority to sell such products. We have permitted FCUs to sell subway tokens and postage stamps but only as part of a group purchasing activity. See 12 C.F.R. Part 721. FCUs may sell prepaid phone cards as part of a group purchasing activity but, as such, they may not earn a profit or a commission from the sale. We are considering reexamining the scope of the incidental powers clause and whether more products and services can be considered incidental to an FCU's business. Any such reexamination will include an evaluation of prepaid phone cards.