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FDIC: Prepaid cards qualify for deposit insurance

Consumer groups asked for protections on prepaid and gift cards

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People who have their payroll deposits, government benefit checks and other payments loaded onto prepaid cards may take comfort in a recent ruling by the Federal Deposit Insurance Corp.

Amounts stored on prepaid or stored value cards may be covered under FDIC insurance for up to $250,000 per account, the FDIC ruled in a legal opinion issued Nov. 13.

The ruling came after a coalition of consumer groups appealed to FDIC Chairman Sheila Bair in September to take steps to prevent consumers from losing money stored on prepaid cards or gift cards if an issuer (such as a retail store) or a bank holding the funds goes out of business.

The FDIC ruled on only one part of the request -- the issue dealing with banks that hold funds stored on prepaid cards.

Prepaid card ruling
"It's a very good opinion," said Gail Hillebrand, spokeswoman for Consumers Union, the consumer advocacy group that publishes Consumer Reports magazine. "It makes it very clear that there is a way for banks to set up prepaid cards so consumers can get FDIC insurance."

At issue was the fact that prepaid cards can be distributed by a third party, such as an employer or the Social Security Administration or other government agency. Many employers now give workers the option of having their paychecks automatically loaded onto prepaid cards to allow fast access to their wages. That money is held at banks that process the transactions, but it was not clear whether these funds -- like other bank deposits -- were insured against loss by the FDIC.

According to the FDIC ruling, "All funds underlying stored value products will be treated as 'deposits' to the extent that the funds have been placed at an insured depository institution. As a result, all such funds will be subject to assessments. Also, all such funds will be insured up to the FDIC insurance limit."

During the recent Wall Street crisis, Congress increased the FDIC insurance limit on individual bank accounts from $100,000 to $250,000.

Consumer groups had questioned whether the insurance applied to the card distributors or to individual accounts. John V. Thomas, acting general counsel for the FDIC, ruled that to receive FDIC insurance coverage banks must keep records of individual prepaid accounts that disclose the identities of the actual owners of the funds and the amounts owned on the cards and the existence of the distributor. The funds on the cards must actually be owned by those named on the accounts.

"The FDIC still does work," Hillebrand said. "We just want to make sure it works that way for consumers holding cards as well as consumers with accounts." Hillebrand said the next step before prepaid accounts are insured is that banks must comply with this record-keeping standard. 

Her message to consumers: "Now, let's make sure the programs that we're involved in are set up this way."

More protection needed
For bank-issued gift cards, Hillebrand said consumers should ask the following: "Is my card going to be any good if the bank goes under? Any consumer that is buying a high-dollar gift card from a bank is going to want to know the answer to that question."

Still unresolved, Hillebrand said, is the issue of consumer protection for retail store gift cards. In September, consumer groups asked the Federal Trade Commission to consider . Currently, if a retailer, such as Circuit City or Sharper Image, files for bankruptcy or goes out of business, there are no guarantees that gift cards for those establishments will be honored. A retailer can ask the bankruptcy court to allow the store to honor gift card redemptions along with other creditors. Hillebrand said protections for gift cards must come from federal or state laws.

To comment on this article, write to: Editors@CreditCards.com.

See related: Consumer groups ask FDIC for prepaid card protections,  

Published: November 17, 2008



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