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| ## Comptroller of the Currency                                        |
|                                                                       |
| > Administrator of National Banks                                     |
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Washington, DC 20219

June 27, 2003

###### Corporate Decision 2003-10

Carl V. Howard, Esq. **July 2003**

General Counsel -- Bank Regulatory

Citigroup, Inc.

425 Park Avenue

2^nd^ Floor / Zone 2

New York, NY 10043

> Re: Operating Subsidiary Application of Citibank USA, N.A., Sioux
> Falls, South Dakota
>
> Application Control No. 2001-ML-08-0022

Dear Mr. Howard:

This is in response to the application filed by Citibank USA, N.A.,
Sioux Falls, South Dakota ("Bank"), to expand the activities of Citicorp
Diners Club, Inc., its wholly-owned operating subsidiary ("Diners
Club"). Diners Club issues the Diners Club credit card and operates a
reward points program for its card members. The Bank proposes for Diners
Club to sell reward points to unrelated third parties and act as a
finder to assist individuals with reward points in redeeming those
points. For the reasons given below, we conclude that the proposed
activities are permissible, and approve the Bank's application.

**A. Background and Proposal**

Diners Club issues the Diners Club credit card and offers the Club
Rewards incentive program to its card members. Under the reward program,
card members receive points for card usage, and the points may then be
used to acquire merchandise or services. Diners Club manages the Club
Rewards program for its card members by tracking the awarding of and
redemption of reward points.[^1] Diners Club also facilitates its card
members' redemption of the reward points by maintaining a database of
available merchandise, publishing a catalog of available merchandise and
reward points required, and transmitting card members' "orders" to the
appropriate vendor. Diners Club does not purchase any of the reward
merchandise for its own account, nor does it store or distribute any of
the reward merchandise selected by its card members.

The Bank now proposes for Diners Club to sell reward points to third
parties in both the loyalty and the incentive markets. In the loyalty
market, Diners Club would sell points to merchants, who then would award
the points to their customers. The merchants, and not Diners Club, would
determine how to allocate the points to their customers. In the
incentive market, Diners Club would sell points to businesses, who would
then award the points to employees, distributors, or other parties. The
businesses, and not Diners Club, would determine how to allocate the
points to their employees, distributors, or other parties. Both the
loyalty and the incentive programs would offer points which could be
redeemable for a subset of the products and services currently available
in the Club Rewards program -- frequent flyer miles, gift certificates,
car rentals, charity donations, and certain merchandise. Both programs
would rely on the existing agreements between Diners Club and the
third-party vendors.

Both programs would operate in a similar manner. Merchants and
businesses would purchase reward points by paying for the points in
advance.[^2] The fees charged by Diners Club to the participating
merchants and businesses would cover all of its costs in developing,
maintaining, and administering the programs, its marketing costs, and
the costs of reward merchandise that individuals receive in exchange for
redeemed points.[^3] Diners Club would safekeep the portion of the fees
that covers the cost of the reward merchandise and would disburse these
funds to a vendor when an individual "purchases" (*i.e.*, redeems points
for) that vendor's merchandise. As with the current Club Rewards
program, Diners Club would not purchase any of the reward products or
services for its own account, and would not store or distribute any of
the reward products selected by its card members.[^4]

In the incentive program, Diners Club would provide the supporting
administrative services for the program. In the loyalty program, Diners
Club may provide the supporting administrative services. These
administrative services are similar to those currently being provided as
part of the Club Rewards program. Diners Club would track the awarding
of and redemption of reward points, operate a telephone call center to
provide customer assistance, maintain a database of merchandise
available for redemption, publish a catalog of available merchandise and
reward points required, and transmit card members' "orders" to the
appropriate vendor.

#### B. Discussion

Section 5.34(e) of the OCC's operating subsidiary regulation provides
that "a national bank may conduct in an operating subsidiary activities
that are permissible for a national bank to engage in directly either as
part of, or incidental to, the business of banking, as determined by the
OCC, or otherwise under other statutory authority." [^5] The reward
points, whether sold to a business that uses them to reward its
customers (loyalty market) or to reward its employees (incentive
market), are the equivalent of gift certificates that may be used to
purchase a limited number of products or services. The OCC has
authorized national banks to dispense such prepayment media as the
equivalent of "performing a bill payment function by transferring funds
from the cardholder's account to the merchant's account." [^6] Here, the
reward points serve the same purpose -- transferring funds from the
company that purchases the points from Diners Club to the merchant that
provides the product for which an individual redeems his points. Diners
Club accomplishes this transfer function by selling reward points to
third parties, holding the funds until the points are redeemed, and then
dispersing the funds to the merchant.[^7]

The remainder of the proposal, with one exception discussed below,
consists of permissible finder activities to bring individuals with
reward points together with the merchants (*i.e.*, third-party providers
that are willing to accept those reward points). Such activity is the
essence of a national bank's finder role.[^8] Diners Club has negotiated
with the merchants to offer reduced rates to those customers it refers
to the merchants.[^9] Diners Club would perform the administrative and
clerical tasks of tracking purchases of points (*i.e.*, the sale of gift
certificates) and redemption of points (*i.e.*, use of gift
certificates) and forwarding individuals' redemption "orders" to
merchants.[^10] Diners Club would also use its current telephone call
center to take "orders" and answer questions.[^11]

The sole remaining activity that Diners Club would engage in is the
publication of a catalog of merchandise and services available. The
catalog would contain descriptions of the items available; the phone
number for the telephone call center, which individuals could call to
place "orders"; and an "order" form, on which individuals could submit
orders by mail. National banks are authorized to engage in an activity
if that activity is incidental to the performance of the five powers
enumerated in 12 U.S.C. § 24(Seventh) or incidental to the performance
of an activity that is part of the business of banking.[^12] Incidental
activities are activities that are permissible for national banks, not
because they are part of the "business of banking," but rather because
they are "convenient" or "useful" to an activity that is part of the
"business of banking."[^13] Products and services are incidental to a
banking activity, as is the case here, when they make the use of a
banking authorized product or service more convenient and useful and
thereby increase customer demand for banking products.[^14]

The Supreme Court in *Franklin Nat. Bank v. New York*, 347 U.S. 373
(1954), made it clear that national banks may advertise their products
and services to the general public in the course of maintaining their
current business relationships and soliciting new customers. This is
true even in situations where a state for some reason has sought to
circumscribe such advertising. In *Franklin*, New York had restricted to
savings banks and saving and loan associations the use of the words
"saving" and "savings" in advertising materials. However, the Court held
that since Franklin National Bank could offer savings deposits, as an
incidental banking power it must be able to advertise the nature and
availability of such offerings notwithstanding the contrary state law on
the subject.

In the instant case, the publication of the catalog is properly
incidental to Diners Club's finder activities and the selling of
alternate media. The catalog would be the means by which individuals
with reward points would know the items available and the "price" of
those items. In this instance, without giving individuals the means to
identify available items, the finder activity itself -- the bringing
together of individuals and merchants -- would break down. Moreover,
given the variety of items available from a number of merchants and
given that Diners Club currently publishes a similar catalog as part of
the Club Rewards program, it would be more efficient for Diners Club to
publish this catalog. Therefore, we believe the publishing of the
catalog would be incidental to Diners Club's other permissible
activities.

**C. Conclusion**

Accordingly, based upon the foregoing, the Bank's application to expand
the activities of Diners Club is approved.[^15] If you have any
questions, please contact Richard Erb, Licensing Manager, Large Banks,
at (202) 874-5060, or Steven Key, Senior Attorney, Bank Activities &
Structure Division, at (202) 874-5300.

Sincerely,

/s/ Julie L. Williams

Julie L. Williams

First Senior Deputy Comptroller and Chief Counsel

[^1]: As part of the Club Rewards program, Diners Club maintains
    agreements with various third party merchants that the merchants
    will make specified products available to Diners Club card members
    for a specified number of points. Thus, a \$50 gift certificate to a
    restaurant may "cost" 500 points, while 1,000 airline miles may
    "cost" 1,000 points.

[^2]: All businesses participating in the incentive program would be
    required to purchase points in advance. Occasionally, in the loyalty
    program, Diners Club may agree to bill a merchant for the points on
    a monthly basis. Prior to making this option -- receiving a monthly
    bill instead of paying in advance for the points -- available to a
    merchant, the Bank has represented the relationship will be
    subjected to the same credit review process applicable to other
    credit extensions to the same party.

[^3]: The Bank represents that the portion of the fees allocated to
    cover the cost of reward merchandise would cover the "cost" of all
    reward merchandise. This is because Diners Club maintains a
    consistent reward points-to-dollar "cost" of reward merchandise.
    Thus, if Diners Club must disburse \$25 to a merchant for an item an
    individual purchases with 500 points, the reward points-to-dollar
    "cost" 20-to-1. A similar ratio would apply across all available
    reward products.

[^4]: The contracts between Diners Club and the companies that purchase
    the reward points would provide that all reward products and
    services are supplied by third-party vendors who are the sellers of
    the products and services. The contracts would further provide that
    only the sellers, and not Diners Club, are responsible for the
    products and services supplied.

[^5]: 12 C.F.R. § 5.34(e)(1).

[^6]: Interpretive Letter No. 718, *reprinted in* \[1995-1996 Transfer
    Binder\] Fed. Banking L. Rep. (CCH) ¶ 81-033 (Mar. 14, 1996). *See
    also* 12 C.F.R. § 5.34(e)(5)(v)(Y). In addition to being the
    permissible sale of prepayment media, the sale of reward points
    constitutes a permissible billing and financing function.
    Conditional Approval No. 535 (June 21, 2002) (subsidiary of the Bank
    to administer roadside assistance programs on behalf of rental car
    companies and auto makers; permissible billing and financing
    function for subsidiary to advance funds to service provider and
    bill companies); 12 C.F.R. § 5.34(e)(5)(v)(C) (making loans and
    extensions of credit) & (D) (servicing loans or other extensions of
    credit). When an individual redeems points, Diners Club makes a
    payment to the merchant and looks to the business that purchased
    those points for repayment. Since most businesses would prepay for
    the reward points, Diners Club would obtain repayment from the
    prepaid funds. For those businesses that qualify to pay at the end
    of each month, Diners Club would look to the businesses' monthly
    bills for repayment.

[^7]: While we do not believe that the proposed activities constitute a
    stored value system, we believe that the activities raise risks
    similar to those raised by stored value systems. Therefore, the Bank
    should review the risks outlined in OCC Bulletin 96-48, "Stored
    Value Card Systems" (Sept. 10, 1996).

[^8]: 12 C.F.R. § 7.1002.

[^9]: The OCC has approved, as part of the finder activity, a national
    bank's arranging a discounted rate for customers it refers to a
    merchant. Conditional Approval No. 535, *supra*, at fn. 6;
    Conditional Approval No. 368 (Apr. 3, 2000) at fn. 7.

[^10]: The OCC has approved these administrative and clerical functions
    as part of the finder activity. Conditional Approval No. 535,
    *supra*; Letter from Julie L. Williams, Chief Counsel (Oct. 2, 1996)
    (unpublished); Interpretive Letter No. 653, *reprinted in*
    \[1994-1995 Transfer Binder\] Fed. Banking L. Rep. (CCH) ¶ 83,601
    (Dec. 22, 1994); Interpretive Letter No. 607, *reprinted in*
    \[1992-1993 Transfer Binder\] Fed. Banking L. Rep. (CCH) ¶ 83,445
    (Aug. 24, 1992).

[^11]: ^?^ The OCC has approved the use of telephone call centers in the
    provision of finder services. Conditional Approval No. 535, *supra*;
    Interpretive Letter No. 741, *reprinted in* \[1996-1997 Transfer
    Binder\] Fed. Banking L. Rep. (CCH) ¶ 81-105 (Aug. 19, 1996).

[^12]: ^?^ *NationsBank of North Carolina, N.A., v. Variable Annuity
    Life Insurance Co.*, 513 U.S. 251, 258 n.2 (1995) ("*VALIC*");
    Interpretive Letter No. 742, *reprinted in* \[1996-1997 Transfer
    Binder\] Fed. Banking L. Rep. (CCH) ¶ 81,106 (Aug. 19, 1996) (bank
    may provide full Internet access to customers and non-customers in
    order to create a package of related services needed to satisfy
    consumer demand and enable the bank to successfully market its home
    banking services); Interpretive Letter No. 737, *reprinted in*
    \[1996-1997 Transfer Binder\] Fed. Banking L. Rep. (CCH) ¶ 81,101
    (Aug. 19, 1996) (where a national bank was providing a closed stored
    value system, the provision of multi-function smart cards and card
    readers is incidental to the business of banking because it enables
    the bank to create a package of related services required to satisfy
    customer needs and to market successfully its stored value system).

[^13]: ^?^ *VALIC*, *supra*.

[^14]: ^?^ *Clement Nat'l Bank v. Vermont*, 231 U.S. 120 (1913) (to
    promote customer use of bank's business and enhance demand for its
    services, national bank, as incidental to deposit services, may
    compute, report, and pay tax levied on interest earned by its
    deposit customers); *Miller v. King*, 223 U.S. 505 (1912) (to
    promote demand for its services, national bank, as incidental to
    power to accept deposits, may institute a lawsuit on behalf of a
    customer to collect funds); Interpretive Letter No. 611, *reprinted
    in* \[1992-1993 Transfer Binder\] Fed. Banking L. Rep. (CCH) ¶
    83,449 (Nov. 23, 1992) (national banks may provide smart phone to
    offer variety of banking and non-banking services "to increase the
    customer base and the usage of the program"); Letter from Julie L.
    Williams, Chief Counsel (Oct. 2, 1996) (unpublished) (national bank
    may perform variety of activities as incidental to the bank's finder
    services in order to enhance the functionality and marketability of
    the finder services).

[^15]: This approval, and the activities and communications by OCC
    employees in connection with the filing, do not constitute a
    contract, express or implied, or any other obligation binding upon
    the OCC, the U.S., any agency or entity of the U.S., or any officer
    or employee of the U.S., and do not affect the ability of the OCC to
    exercise its supervisory, regulatory, and examination authorities
    under applicable law and regulations. The foregoing may not be
    waived or modified by any employee or agent of the OCC or the U.S.