Wal-Mart, Amex prepaid card gets FDIC insurance
WASHINGTON — American Express and Wal-Mart announced on Tuesday that their prepaid debit card accounts will now be backed by the Federal Deposit Insurance Corp., making them among the last major providers to sign on to the government backstop.
This is a significant move for the prepaid card market as it matures into a viable financial services industry, one that has experienced remarkable growth in recent years.
Unlike checking accounts that carry up to $250,000 in mandatory deposit insurance per customer, reloadable prepaid cards are under no such obligation. A vast majority of card operators opt for the coverage, but until now American Express had not.
The use of reloadable prepaid cards has exploded since the credit crisis that left millions of Americans outside the traditional banking system.
Prepaid cards act much like debit cards that are tied to a traditional bank account, but they do not enjoy the same consumer protections.
American Express said it was responding to customers' requests to receive direct deposit of government payments, such as Social Security, military pay and tax refunds. Government funds can be deposited only into federally insured accounts.
Insuring the prepaid cards, called Bluebird, could open American Express and Wal-Mart to a larger consumer base — although the companies are not hurting for business.
In the six months since Bluebird debuted, more than 575,000 customers have signed up, placing more than $275 million into their accounts.
The card operates much like a debit or credit card with features such as roadside assistance and mobile banking. Customers also can write checks with the account and load up to $100,000 a year.
Consumer advocates warn that prepaid card operators are not always forthcoming about the fees attached to the product, including charges to load money, activate the card, speak to customer service or check a balance at an ATM.
They worry that card operators are steering lower-income consumers into these products without fully disclosing the terms.
The Consumer Financial Protection Bureau is working on new rules for the prepaid card industry, which has long been governed by a patchwork of state and federal laws. The rules, which the bureau expects to complete this year, will address protection from unauthorized transactions and fee disclosure, among other things.
Americans have been streaming out of the banking system in the past few years, giving rise to a broad range of alternative financial products. Whereas the market for prepaid cards hovered around $28.6 billion in 2009, consulting firm Mercator Advisory Group estimates it will reach nearly $202 billion this year.
Nearly 1 million households exited the banking system from 2009 to 2011, according to the FDIC.
One in four American households, or 28.3 percent, had one bank account or no bank accounts as of 2011. A third of these households told researchers that they did not have enough money to open and fund an account.
“If used correctly, prepaid cards can be far more cost effective than a regular checking account, particularly if you are someone who doesn't have the money to set aside for a minimum monthly balance,” said Adam Rust of Reinvestment Partners, an advocacy group.