Why Your Prepaid Debit Card Needs FDIC Insurance

For millions of Americans, a prepaid debit card takes the place of a checking account for making purchases and paying bills. But unlike most traditional bank accounts, a prepaid card doesn’t guarantee you’ll get your money back if the card issuer goes belly up.

Some prepaid cards offer no recourse whatsoever if the issuer tanks or in cases of fraud or theft, unlike credit cards and bank debit cards. Some do have fraud protection, while others are insured by the Federal Deposit Insurance Corp., meaning the government covers losses of up to $250,000 if your card company fails — as long as you’ve registered the card in advance.

To close those gaps, the Consumer Financial Protection Bureau late last year announced new federal protections aimed at holding card issuers accountable for security and clarity regarding fees and services. The regulations offer protections against loss or theft, for example, capping your responsibility at $50 on fraudulent charges if you report the incident within two days. The new rules will go into effect Oct. 1.

Expert advice on using prepaid debit cards

NerdWallet spoke with Thaddeus King, an officer for the consumer banking project at the Pew Charitable Trusts, and Christina Tetreault, an attorney with the financial services team at Consumers Union, about the new rules, how they affect FDIC insurance coverage and why it’s important for consumers to compare prepaid debit cards before they buy.

Are issuers of prepaid cards required to insure funds with the FDIC?

Tetreault: They are not, but they are required [under the new rules] to disclose if the accounts are protected by deposit insurance. Obviously, our advice to consumers is to pick a card that’s got it. … The fact that consumers will be able to choose is definitely an improvement. The better protection would be having [deposit insurance protection] required by the new rules, which they don’t.

King: With the new disclosure rules, it has to be written very clearly that you do or don’t offer FDIC insurance protection. It’s a change, because with many of these cards, even if they are FDIC-insured, it’s very difficult to see from a consumer standpoint. It may have only been disclosed deep in the terms and conditions. A consumer isn’t probably going to go looking for that.

Why should your prepaid card have FDIC insurance?

Tetreault: Deposit insurance protects consumers from losing their funds if the issuer folds. It’s an important protection to make sure your funds are safe, and it’s one we encourage all providers to offer and all consumers to shop for.

How are most prepaid cards structured?

King: Typically, there is a program manager and an issuer, a bank that holds the money. As long as the program manager keeps information on who the people are who have the account and how much money they have, then that money is FDIC-insured.

So the program manager has to keep tabs on who has money in the account, but the onus is on the consumer to come forward, as it were, by registering the card, correct?

Tetreault: Absolutely. And we encourage consumers to register their card. In some cases, depending on the card, it also opens up other card functions, like the ability to do bill pay.

What happens if a consumer tries to use the card and finds out it’s not good anymore? Is there any recourse?

Tetreault: If the card isn’t registered, there’s zero recourse. If your card is registered and the provider in the contract says they will limit your losses if you report it, and you report it right away, then you have recourse, but it varies from card to card because it’s contractual under the card rules.

Make sure you're protected

An estimated 23 million people regularly use prepaid cards each month, according to the Pew Charitable Trusts. Be careful when choosing a card, because they vary a great deal.

It’s important to shop around for the best deal, for what you want in a card and what you’re willing to pay. Before you buy a prepaid card, make sure it's FDIC-insured, and don’t forget to register the card to get the protections it offers.