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Thursday, June 16, 2011

Setting the Record Straight on Prepaid, Part 3

It’s not a bank account. Why does a GPR card have FDIC insurance coverage?

While the funds of all the prepaid card customers in a specific GPR card program may be held together in a single pool of funds in a custodial account, the FDIC-insured issuing bank and its regulators require the program manager to maintain an accurate accounting of the amount of funds associated with each individual GPR card account, and to retain identifying information about the primary cardholder for each card account. Because the underlying owners of the funds (i.e., the cardholders) are known and individually identifiable, and since the exact amount belonging to each cardholder is known, each cardholder receives FDIC insurance protection up to the full FDIC limits on his or her card account. That is, the custodial account may contain in excess of $250,000 (the limit of each individual depositor’s FDIC insurance coverage at a specific insured bank), but each card account is fully insured up to the FDIC limits regardless of the total sum held in the custodial account. This issue was settled by an FDIC advisory opinion issued on commingled deposit accounts (in that specific case, for payroll cards) as of August 16, 2002. A further clarification affirming the applicability of this rule to stored value cards and other “nontraditional access mechanisms” was issued by the FDIC on November 13, 2008.

FDIC insurance protection means that GPR cardholders’ funds are guaranteed even if the card program manager goes out of business or the issuing bank fails. Using a reloadable prepaid card instead of a bank account does not mean that the people who issue your card can just vanish into the night with your money. If you want to verify that your prepaid card is issued by an FDIC-insured bank, look at the materials which came with your reloadable prepaid card to see who the issuing bank is, and then look up that bank on the FDIC website.

Go to Part 4.

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