More about the Amex Prepaid Card

There are new reasons why the Amex prepaid card presents some problems.

I have written twice about the Amex card already. The Amex card appears to be a great card but hard to use. BillPay only works for vendors that accept American Express. It won’t use recurring ACH transactions, either.

I love that the card offers free roadside assistance. I used roadside assistance last night. When you need it, you want it. Even better, it is a very low-fee card. Using an ATM costs $2 (one free ATM per month) and there are no fees for loading the card. Granted, AMEX doesn’t have its own ATMs so you will be paying about $3 to use another bank’s machine. You’ll also spend $4.95 to use a Green Dot MoneyPak when you load the card. Amex can have such low fees because it has high interchange.

A big concern for me is that Amex has decided to offer the card without FDIC insurance. FDIC insurance is a baseline element for any kind of banking relationship. Prepaid cards have had FDIC insurance for some time. Granted, the feature was voluntary in the past. The cards had FDIC insurance and that is what is important.

There are other types of accounts that do not come with FDIC insurance. Investments in a non-bank brokerage account do not have a guarantee.

There are two reasons why Amex prepaid card doesn’t offer FDIC insurance. Part of it goes back to the way that the company records its deposits. Regulation E states that any account held in the name of a consumer can have FDIC insurance. The distinction is important and it is one that is only for general purpose reloadable (GPR) cards. But Amex doesn’t do that. Instead they leave the money in a pooled account.

Pooled accounts are an idea that were part of the first generation of loaded-value cards. They were generally used for gifts, or to facilitate a refund from a store. This is still the case for cards serving those purposes. There is no FDIC insurance on the card that Target gives you when you return merchandise. There is no FDIC insurance on the gift card that you purchase at Wal-Mart. Funds on those cards are held in pooled accounts. When a customer uses one of those cards to buy something, the money comes from the retailer’s account.

If you go to the trouble to read the fine print on their disclosures, Amex is upfront that their card shouldn’t be used as an asset account: “The Card…does not constitute a checking, savings or other demand deposit or consumer asset account.”

The non-bank distinction is also a factor.

GPR cards act as a substitute for a bank account. Consumers with basic payment needs can use a Green Dot card to handle most anything – direct deposit of a paycheck, paying a bill to the electric company, or getting cash from an ATM.

The result is very good for Amex. American Banker believes that this distinction will free the Amex prepaid from Durbin interchange regulation. That will help Amex – because they should be able to generate much higher interchange fees. High interchange fees are what Amex is all about, and this is why so many retailers refuse to accept American Express. Depending on the type of transaction, retailers pay as much as 3.5 percent in interchange for a payment made by American Express.