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A FDIC gift voucher for all

From the people that brought you GE Capital’s participation in the Temporary Liquidity Guarantee Program – FDIC is now insuring ‘Stored Value Cards’.

Exsqueeze me?

Yes, that would be Stored-Value-Cards (and other non-traditional access mechanisms). According to the definition provided by the NY Fed these are:

… one of the most dynamic and fastest growing products in the financial industry. Anyone who makes purchases with a merchant gift card, places phone calls with a prepaid telephone card, or buys goods or services with a prepaid debit card is using a stored value card.

In other words, gift voucher cards, pre-paid telephone cards and any other prepaid debit cards.
….
hat said, consumers should be relieved. The spectre of losing holiday gifts to a retail bankruptcy certainly doesn’t incentivise Christmas shopping.

When Sharper Image filed for bankruptcy protection this year it apparently left an estimated $20m on unused gift cards, according to the Boston Globe.

So, good news for those holding cards issued by Circuit City, at least.

Unless I an some of the commenters are reading this entirely wrong, this interpretation is almost entirely wrong. Why? Because what would a company that issued stored-value cards be doing putting the resulting money in an FDIC-insured bank account when they could be investing it in the short-term money market, using it to pay their suppliers, pretty much anything but leaving it in the bank?

These cards aren’t redeemable in cash anyway, they’re only redeemable in goods and services so if you keep the money in the bank you’re only going to have to take it out and commingle it with the rest of the money you pay employees and suppliers, so why not just do that straight off? If card purchases and redemptions are pretty much equal at any given time, this works perfectly; if there are unmatched ups and downs, you might keep a certain level of reserves, but nowhere near the whole value of cards outstanding, and probably not in an account at an insured institution.

What if you go belly up? I can’t see why gift-card holders would have to stand in line with all the other unsecured creditors. (I haven’t read the fine print on a card lately, so maybe I’m wrong.)

There is one situation where this new ruling would be useful to consumers and to the companies issuing the cards. If the bank where the card reserves are deposited goes belly up, each gift card will now be treated as a separate deposit. So if the company had $10 million on deposit with the First Bank of Fail, where previously the FDIC would have said, “Here’s your $250K, goodbye and good luck” now they’ll act as if there were really a zillion little deposits, each insurable up to the limit.

Maybe I’m wrong, and a lot of this money really does sit there on deposit. Or maybe the FDIC, whose business is the health of insured institutions, would really like it if it did, and is waving the incentive of way-higher limits for deposited cash at the companies who issue gift cards and have to park their reserves somewhere.

(h/t eschaton for the pointer to the original (mistaken) post)

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