There is much for consumers to like about a new generation of prepaid cards offered by up-and-coming challenger banks and fintech startups. But not all of them provide the same degree of protection for the money customers load onto them.
Unlike gift and reward cards, the new prepaid format works similarly to debit cards. Clients can keep adding funds and use their prepaid cards for most purchases, as well as, usually, to withdraw cash. Better yet, the cards are often linked to low-fee, high-interest rate accounts and some come with credit card-like perks such as cashback rewards or the ability to spend abroad without currency conversion fees or exchange rate markups.
Consumers are taking notice. In 2023, according to Payments Canada, the value of transactions Canadians made using prepaid cards reached $24-billion, representing 10-per-cent annual increase that outstripped both debit and credit card growth, though it still makes up a tiny slice of the overall pie.
But users who are pondering keeping larger balances on reloadable cards should keep in mind not all of them come with deposit insurance, which protects customer’s money if a financial institution fails, or what’s known as zero liability policies around fraudulent transactions.
The Globe and Mail looked at five popular reloadable cards offered by EQ Bank, the online banking arm of Equitable Bank; fintech startups Koho and Neo Financial; online investment company Wealthsimple and international money transfer service Wise. The review found varying levels of safeguards.
Deposit insurance guarantees that savers won’t lose their funds if the institution that holds becomes insolvent. The Canada Deposit Insurance Corporation (CDIC), a federal crown corporation, automatically insures funds held in savings and chequing accounts, term deposits and foreign currency at its member institutions.
The CDIC protects up to $100,000 per depositor in each insured category.
There are also other deposit insurance plans for provincially-regulated financial institutions.
A zero-liability policy shelters consumers against financial losses if someone uses their payment card without their permission.
Of the five reloadable cards examined, those provided by EQ Bank, Neo Financial and Wealthsimple come with both CDIC insurance and a zero-liability policy.
At Koho, prepaid card balances have CDIC coverage if they are linked to interest-bearing accounts, the company said. However, all card users can count on a zero-liability policy.
The Wise prepaid card doesn’t have either deposit insurance or a zero-liability policy, though the company says it holds customer funds in safe, liquid investments and has a dedicated anti-fraud team.
When it comes to deposit insurance, EQ Bank parent Equitable Bank is the only one of the five prepaid card providers that is a member of CDIC.
Koho, Neo Financial and Wealthsimple aren’t banks and can’t be part of CDIC. But all three companies still manage to provide deposit insurance by holding customers’ funds at CDIC-insured institutions.
But at Koho, card balances are not insured unless customers opt for an interest-bearing account. The company offers what it calls “plans,” through which clients can earn annual interest rates of between 3.5 per cent and 5 per cent on their deposits.
The firm charges between $4 and $19 a month for its plans, similar to a subscription fee. However, users can access the most basic plan at no cost by setting up a recurring direct deposit of their paycheque or government benefits or adding at least $1,000 each month, Koho spokesperson Alison Fleming said.
Ms. Fleming did not directly address a question by The Globe about where Koho keeps the funds of customers who don’t opt for interest-earning accounts, saying the company uses multiple federally-regulated banks to manage its deposits.
Wise, whose global headquarters are in London, U.K., says on its website it holds customers’ funds in safe assets such as EU, U.K. and U.S. government bonds.
Dulcie Everitt, a spokesperson for the company, said the firm keeps customers’ funds separate from those it uses to manage its business, even though it isn’t currently required to do so in Canada.
In terms of protection against fraudulent transactions, all prepaid cards reviewed with the exception of Wise’s are branded as Mastercard and come with the payment network’s zero liability policy.
On its Canadian website, Wise does not mention similar protections for its cardholders. Ms. Everitt said the company uses a variety of measures to prevent fraud on its platform and assesses instances of unauthorized transactions on a case-by-case basis.