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Why Should American Express Offer FDIC Insurance?

Adam Rust's picture

Posted March 25, 2013

When CEOs or prepaid card companies act to counter the voices of critics that call their products "second-tier bank accounts," one oft-cited defense has been that these cards have FDIC insurance. American Express' BlueBird card - otherwise a functional and affordable product - remains the lone holdout among major prepaid cards.

Any prepaid debit card can come with FDIC insurance as long as funds are placed into a bank account held in the name of the depositor. There is a cost, which the FDIC assesses based on the sum of deposits as well as the

risk associated with them, but the premium paid to offer FDIC insurance is minimal.

AMEX could put those deposits in its American Express Centurion Bank, but for some reason it instead places those monies into an account held in the name of its travel company.

The people that run BlueBird are business persons with a commitment to inclusion. Nonetheless, I fail to see how this decision presents a compelling investment theory for the company. Given that it lacks for FDIC insurance, BlueBird cannot accept recurring benefits payments made by the federal government. That makes no sense from the perspective of profit maximization, because the most profitable prepaid accounts are the ones that are signed up to receive a direct deposit. Direct deposit makes for a "sticky" relationship. The accounts last longer and they are loaded with more dollars on average. The company saves on the cost of finding new customers and they earn more interchange.

In some ways, the problems presented by BlueBird's status are most troubling for what they could encourage. American Express is itself about as financially sound as any company in the United States. It is very, very, very unlikely that any dollars put into a BlueBird account are ever going to be lost. However, if BlueBird has no insurance, then what is stop a much smaller and far less stable non-bank entity from doing the same thing?

It would mean a lot if American Express decided to rethink its decision to not offer FDIC insurance. Already, the company has shown its willingness to re-imagine its prepaid product. Recently, the company signed a contract to give its cardholders access to the free MoneyPass ATM network. Until that point, the only place where a consumer could access an ATM without fear of paying a host network charge was at one of the American Express Travel offices - and only those designated as financial centers. There were no such locations in North Carolina at the point in time when AMEX introduced its original prepaid card.

Imagine if AMEX did switch over to a system that gave its customers an FDIC-insured product. Then they would be able to attract even more consumers.

AMEX is already a big player in prepaid. Earlier this year, they reported that they now had approximately 500,000 accounts. It is easy to imagine that they could double that in just the next year, especially given their premium spots in Wal-Marts across the country.

If they did respond to the critiques made by consumers advocates and not because of regulatory intervention, then a good product would become an industry-leading card.