Prepaid Cards & Deposit Insurance
Issue
Should FDIC pass through insurance be required for all prepaid card products?
NBPCA Position
The NBPCA supports the application of FDIC pass-through insurance for prepaid products for which the consumer’s identity is required to be known, as is the case with most reloadable[1] prepaid products. However, the NBPCA believes the application of FDIC pass-through insurance for products for which the consumer’s identity is unknown, as is common for low-balance gift cards, would significantly limit prepaid card usefulness and availability.
[1] A “reloadable” card allows a party to load funds to the balance of the prepaid after the initial load.
Explanation
When consumers purchase or receive prepaid cards, the funds underlying the cards are often deposited in a single account known as a “pooled account.” Because all funds for a particular card type are placed in the pooled account, the account value often exceeds the current $250,000 deposit insurance limit.
In many circumstances, prepaid cardholders do not qualify for individual deposit insurance because FDIC rules extend insurance only to the named accountholder. For pooled accounts, the named accountholder normally is the card issuer or promoter, not the individual cardholders. This arrangement evolved so that card issuers could administer prepaid card programs efficiently. Without it, prepaid card programs would become cost-prohibitive and unmanageable.
In recognition of the importance of prepaid cards in modern payment systems, the FDIC issued opinions that extend deposit insurance to certain pooled accounts on a “pass-through” basis. These opinions allow holders of prepaid cards to be treated as the deposit owners if: (1) the bank’s records disclose the existence of the custodial relationship; (2) records held by the bank, custodian or other party disclose the cardholder’s identities and the amount owned by each cardholder; and (3) the deposits are actually owned (under the agreements among the parties) by the named cardholders.
The NBPCA supports rules that would require certain reloadable prepaid card programs, like payroll cards, to be structured to fulfill FDIC “pass-through” requirements. Such programs can be made to comply with existing rules without excessive administrative burden or invasion of consumer privacy. However, nonreloadable prepaid card programs—with their high-volume, low-value transactions—are not conducive to compliance with the FDIC’s “pass through” requirements. Moreover, due to heightened consumer vigilance with regard to issues such as identity theft and privacy, it is impractical to collect and unreasonable to expect consumers to furnish the information necessary for provision of FDIC pass-through insurance when purchasing a low-value nonreloadable prepaid card. As such, absent new FDIC rules that would provide specialized treatment for pooled accounts, the NBPCA believes that deposit insurance requirements for non-reloadable prepaid cards would diminish their availability and usefulness
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