Consumer groups ask FDIC for prepaid card protections
Cards hold payroll, gift, tax refund and other stored value funds
Story update: FDIC says prepaid cards qualify for deposit insurance
A coalition of consumer groups has asked federal officials to protect money held in prepaid debit and gift cards against bank failures in the same way that savings accounts are protected.
In an Aug. 25 letter addressed to the chairwoman of the Federal Deposit Insurance Corporation (FDIC), the federal agency best known for insuring up to $100,000 of deposits in U.S. banks and financial institutions, the consumer advocates urged quick action in clarifying how money kept in prepaid card accounts is insured.
"The public needs clear, simple and reassuring answers from the FDIC to these questions now -- as the U.S. faces the beginning of a wave of financial institution failures," according to the coalition's press release.
The groups urged the FDIC to adopt an emergency provision to treat prepaid card funds the same as insured deposits and to determine what more needs to be done to protect consumers using the cards.
Prepaid cards are becoming increasingly popular as a means to quickly transfer funds from one entity -- such as an employer, the Social Security administration or the Federal Emergency Management Administration -- to an individual. Other prepaid cards or stored value cards allow one person to purchase a gift card from a bank to give to another person. Tax refunds, loan proceeds, public assistance benefits, employee flexible spending account benefits and payroll proceeds are among the types of items that can be held on prepaid cards.
The cards are convenient and can be more secure than sending paper checks in the mail. However, members of the coalition cite the following potential problems:
- Do deposit insurance caps apply to the entire amount held by a financial institution or to the amounts held by individual prepaid cardholders?
- How will consumers know if deposit insurance covers their particular prepaid card?
- Who would benefit from any FDIC insurance on a prepaid account -- the bank or the cardholder?
Members of the coalition include Consumers Union (the nonprofit publishers of Consumer Reports magazine), the Consumer Federation of America, U.S. PIRG, the Arizona Consumers Council, the California Reinvestment Coalition and the Virginia Citizens Consumer Council.
"All types of prepaid cards are funded with the hard assets of American families, precisely the types of funds that the FDIC deposit insurance system was designed to protect," according to the coalition. "Unless deposit insurance is clarified, individuals and families who have participated in a prepaid card program and have entrusted to a bank wages and other household funds ... could experience exactly the type of loss or delay in access to funds that deposit insurance was designed to avoid."
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