Individual bank accounts are insured by the FDIC or NCUA (credit union equivalent of FDIC) for up to $250,000 per account if the bank goes out of business. As the Consumer Financial Protection Bureau explains: Funds loaded onto prepaid cards are typically held in pooled (not individual) accounts at banks or credit unions. Pooled accounts may qualify for FDIC or NCUA pass-through insurance if they meet certain requirements. Among other things, in order for your funds to be insured, the bank or credit union must have information in its files that identify you (in other words, you card has to be registered with the issuer). The CFPB’s prepaid rule also requires prepaid card providers to inform you pre-purchase whether the money in the account is eligible for pass-through insurance.
Cardholders might be protected even without FDIC insurance. That’s because some states regulate financial services providers through “money transmitter” laws, which apply to non-bank businesses that facilitate consumer payments. Money transmitter laws ensure the soundness of the businesses they cover and the security of their customers’ money. State money transmitter licenses require that consumers’ funds, including prepaid card balances, be held in trust for those consumers in case the business fails. To find out if a card issuer is covered by money transmitter laws in your state, contact your state’s department of financial institutions or similar agency. (Do an online search for your state’s name plus “Department of Financial Institutions.”)