Imperfect Protection

Using money transmitter laws to insure prepaid cards


General purpose reloadable prepaid cards have rapidly gained popularity. They allow consumers to direct deposit their paychecks and pay their bills online, just like a checking account. But unlike checking accounts that carry up to $250,000 in mandatory deposit insurance per customer, prepaid cards are not required to carry any at all.

The report, Imperfect Protection: Using Money Transmitter Laws to Insure Prepaid Cards, finds that:

  • In the event that the company operating the card goes under, its customers would be compensated with varying amounts of money, depending on the state in which they live, and some states' residents may not be protected at all.
  • Prepaid card operators that choose to cover consumers via a state money transmitter license rather than through the Federal Deposit Insurance Corporation (FDIC) are generally required to post a surety bond and hold permissible investments against outstanding obligations. The size of the bond differs depending on the state in which the card was issued.
  • Without a streamlined process such as the one offered by the FDIC, a consumer would likely have to navigate the legal process in order to receive their funds. Cardholders would be unsecured creditors in a bankruptcy proceeding, and may have to wait several months for the case to be resolved before having access to the money on their cards, if they get access at all.
  • This experience is in sharp contrast to that of a consumer whose account is covered by the FDIC, which ensures that customers have a seamless transition to a new bank, with no difficulties or delays in accessing their money when their financial institution fails.