As Free Checking Fades, Prepaid Cards Make Sense For Some

by Mercator Advisory Group 0

In an article about how prepaid cards can take the place of free checking and benefit some consumers, a report cites an expert who says that prepaid cards do not offer Federal Deposit Insurance Corp. insurance on deposits. This shows how the industry continues to be misunderstood, in part because of the complexities with the prepaid products.

When you deposit money with a general-purpose reloadable card, the company you deposit it with pools it with others’ funds and deposits them. Their money is FDIC-insured (up to $250,000), the consumer’s isn’t. Your access to the money depends on the solvency of the company holding it.

What is wrong with this paragraph is that the FDIC has said, in its General Counsel’s Opinion No. 8, that the FDIC will insure the deposits of the individual cardholders, provided that the FDIC’s standard recordkeeping requirements are satisfied and the money can be demonstrated to be held by a pooled account holder.

Under this opinion, all funds underlying stored value cards and other nontraditional access mechanisms will be treated as “deposits” to the extent that the funds have been placed at an insured depository institution. If the FDIC’s standard recordkeeping requirements are satisfied, the holders of the access mechanisms will be treated as the insured depositors for the purpose of applying the insurance limit. Otherwise, the distributor of the access mechanisms (i.e., the named accountholder) will be treated as the insured depositor.

This article shows that the industry still needs to do some work to make sure that consumers and the press understand the full scope of how prepaid cards function and what options can be offered.

Read the complete article here: http://today.msnbc.msn.com/id/42461441 Read the complete opinion here: http://www.fdic.gov/regulations/laws/rules/5500-500.html