Bank-issued prepaid and gift cards could be hit by a proposed FDIC rule change that seeks to protect the contents of savings accounts and may make the cards less competitive with retailer-issued gift cards. To date, banks issue gift cards in compliance with a 1996 FDIC legal opinion that defines whether the funds on the card are insured deposits. If an issuing bank holds an individual account for a prepaid customer, the FDIC classifies cash loaded onto the card as an insured deposit. Conversely, if a bank holds funds in a pool to pay merchants accepting prepaid cards, the FDIC does not classify the funds as insured deposits.

Richard Fischer, a legal representative of Visa USA, believes the 1996 FDIC opinion is adequate in the current prepaid market, but the FDIC argues that the revised rule will protect merchants if a bank goes into receivership. Given the new types of prepaid cards being issued by banks, the FDIC’s view is that the 1996 opinion is insufficient, and proposes that prepaid funds held in a pool, be classified as insured deposits if the required reserve limits are met. In view that US telco, ICM Communications, has teamed with Sutton Bank, to issue prepaid cards, further FDIC guidance is likely to be needed on the issue.

ICM Telecom and Sutton Bank are marketing their tie-up as a win-win in that their stored-value ATM cash card program will issue cards that are accepted on the Star, Maestro and Cirrus financial networks, and, for an additional USD 25 fee, can be upgraded to a branded MasterCard. Over 30,000 POSA (Point of Sales Activation) and banking terminals currently support the ICM-Sutton Bank program and this total will exceed 100,000 within 90 days. Cardholders pay USD 19.95 for each debit card, of which ICM receives USD 3.65 per card, in addition to an average of USD 7 more per month in recurring fees for each card.

(PR Newswire)