American Express announced Tuesday that its prepaid debit cards will now be backed by the Federal Deposit Insurance Corp., the latest indication that a market once shunned by established financial institutions is gaining ground.
The use of reloadable prepaid cards has exploded in the wake of the credit crisis that left millions of Americans outside the traditional banking system. But reloadable prepaid cards do not offer the same financial protections for consumers as checking accounts. They also operate with fewer regulatory constraints.
Facing increasing scrutiny from consumer advocates, the vast majority of card operators have opted in the past few years to carry up to $250,000 in mandatory deposit insurance per customer offered through the FDIC. American Express is one of the last major providers to sign on to that government backstop.
The coverage will apply to Bluebird cards sold at Wal-Mart stores. The card carries the American Express insignia and 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.
“This product is really designed to be an alternative to traditional banking,” said Dan Schulman, group president of enterprise growth at American Express. “Technology is beginning to blur the distinction between those lines.”
This move could expand American Express’s customer base. Bluebird customers will now be able to have government payments, such as Social Security, military pay and tax refunds, deposited directly onto their cards. Government funds can be deposited only into federally insured accounts.
Demand for the cards exploded as nearly 1 million households exited the banking system between 2009 and 2011. The industry is expected to reach nearly $202 billion in revenue this year, compared with $28.6 billion in 2009, according to consulting firm Mercator Advisory Group.
In the six months since Bluebird debuted, more than 575,000 customers have signed up, placing more than $275 million into their accounts. Many of these customers either had no desire for a traditional credit or debit card or could not apply for such products because of their poor credit histories, Schulman said.
But consumer advocates have warned that prepaid card operators are not always forthcoming about their fees, including charges to load money, activate the card, speak to customer service or check a balance at an automated teller machine. They worry that card operators are steering lower-income consumers into these products without fully disclosing the terms.
The Consumer Financial Protection Bureau is expected to issue rules this year to address some of the consumer advocates’ concerns, including fee disclosure policies. Adam Rust, research director of Reinvestment Partners, a consumer advocacy group, applauded American Express for insuring Bluebird accounts without being prodded by regulators, a sign, he said, that the industry is evolving and responding to consumer demands.
“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,” Rust said.
But Susan Weinstock of Pew Charitable Trusts is concerned that the FDIC insurance is not being extended to all American Express prepaid products, including a similar prepaid card offered through Target.
“Does it set a precedent that allows other companies to get into this space and avoid FDIC insurance?” Weinstock said. “Should those companies go under, the big question is what will happen to consumers and their money?”
American Express officials said the company is considering deposit insurance for its entire suite of prepaid cards.