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American Express prepaid cards to offer FDIC insurance

american expressOn Tuesday, amid pressure from consumer advocates, American Express announced its prepaid cards would be covered under insurance by the FDIC, which could help the card operator to grow its consumer base.

Prepaid cards have enjoyed increasing popularity following the financial crunch that left millions of American consumers without access to the traditional banking system. The cards, however, do not provide consumers with the same protections as checking accounts and operate under fewer regulatory restrictions, The Washington Post reports.

Most prepaid card operators have opted in to carry up to $250,000 per customer FDIC deposit insurance, which will apply to all Bluebird cards sold at Wal-Mart.

Bluebird cards display the American Express insignia and work much like a credit card. Card customers are also able to write out checks and load up to $100,000 per year onto the card.

“This product is really designed to be an alternative to traditional banking,” Dan Schulman, the group president of enterprise growth at American Express, said, according to The Washington Post. “Technology is beginning to blur the distinction between those lines.”

Bluebird customers will now have access to direct-deposit services for government benefits and payments, including Social Security, tax refunds and military pay, which can be loaded directly onto their cards. Government-issued payments can only be deposited into federally insured accounts.

Consulting firm Mercator Advisory Group said prepaid card use is expected to generate $202 billion in revenue this year, compared to $28.6 billion in 2009, The Washington Post reports.

While many customers who use the cards do not want or do not have access to traditional credit products, consumer advocates have expressed concern that card issuers, which do not always disclose their fee structures, are pushing lower-income consumers into products with unclear terms.

Adam Rust, the research director of consumer advocacy group Reinvestment Partners, said American Express’ move to opt in to deposit insurance is an indication that the industry is 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, according to The Washington Post.