What happens to your money if your prepaid card issuer goes broke? We’ve surveyed all of the most popular prepaid cards to find out when you’re protected…and when you’re not.
When was the last time you asked your bank for its balance sheet? Probably never. We take for granted that money in our bank accounts are safe even if the bank goes under.
That’s thanks to FDIC insurance. FDIC insurance is the federal government’s guarantee of bank deposits. It insures each depositor up to $250,000 in the event the bank fails. Federal law requires all banks to have it. Credit Unions have the equivalent with NCUA insurance.
But what about prepaid cards? Is the money loaded on the card safe if the card issuer goes bankrupt?
How FDIC Insurance Applies to Prepaid Cards
With a prepaid card, you don’t have an associated bank account. But you can still have the same FDIC protection as checking or savings accounts.
That’s because the funds you deposit on a prepaid card are held in a bank account, just not a separate one. The FDIC calls the account a “pooled account.” Funds on many prepaid cards are “pooled” together in a single bank account.
The FDIC insures pooled accounts if the account is set up as a custodial account for the cardholders. The account must also identify the individual cardholders and track the funds owned by each. So Netspend® Visa® Prepaid Card, for example, may keep cardholder money in its own named account. But its account lists its cardholders as the owners of the funds.
If the account meets those requirements, the money in the account, and the prepaid cardholders that own it, are covered. It’s what the FDIC refers to as “pass-through” insurance. The protections are passed through to the cardholders. Pass through insurance offers the same FDIC protections as those available to bank accounts.
Although there is no legal rule that prepaid card accounts have FDIC insurance, nearly all do.
Which Cards are Covered?
We reviewed the terms and conditions of 48 prepaid cards. And 45 purport to meet the requirements for FDIC insurance, according to the cardholder agreements that govern the accounts. (see below)
So do most popular prepaid cards from non-bank distributors. Like Netspend® Visa® Prepaid Card, Brink's Prepaid Mastercard®, and Walmart MoneyCard® Visa®. Generally, cards distributed by these companies are issued by the bank that holds the funds. MetaBank, for instance, is the issuing bank for Netspend. MetaBank rather than Netspend holds the account containing the cardholders’ deposits.
The cardholder agreements of three of the cards are silent about FDIC insurance–the MyVanilla card, the H&R Block Emerald card, and the U.S. Money Prepaid Mastercard. Though the MyVanilla and Emerald cards say elsewhere on their websites that their cards are covered.
What Cards (or Funds) Aren’t?
Unregistered reloadable prepaid cards aren’t covered by FDIC insurance. Those are the temporary cards that you buy in retail stores like Walmart or 7-11. That’s because those cards, and the funds that you load on them, aren’t registered in your name. The money becomes insured only after you register the card and get the personalized card in your name.
Non-reloadable prepaid cards aren’t covered either. Those include store-specific gift cards, like a Kohl’s or Best Buy card. They also include non-reloadable, general purpose prepaid cards. Those are the gift cards that carry the Visa or Mastercard logos but aren’t personalized.
For the same reason, cash reload cards, such as Green Dot MoneyPak or the Reloadit pack, aren’t insured. They don’t identify the purchaser.
The Bottom Line
Money on prepaid cards can have FDIC protections, like bank accounts. And in fact, almost all reloadable prepaid cards do.
But they’re not required to. So it’s essential that you verify the card has FDIC insurance by reading the terms and conditions. That way, if the card’s bank goes under, your money doesn’t go with it.