Why FDIC Insurance for Google Wallet?
By Adam Perrotta, Assistant Editor
The recent news that funds stored in Google Wallet now are FDIC-insured might indicate the tech giant has more changes in store for the wallet—and may even begin positioning it as a checking account alternative. The news was first reported last week by Yahoo Finance, which cited a Google spokesperson as confirming the company has made changes to its Google Wallet user agreement and that wallet balance funds now are backed by FDIC insurance. The company will hold wallet balances in “multiple banking institutions that are FDIC-insured,” according to the Yahoo report.
In addition to enabling payments via a stored credit or debit card, Google Wallet also enables users to load funds into a “wallet balance” via transfer from a bank account or debit card or gmail P2P load. Once loaded, funds in the wallet can be used to make a contactless in-store or online purchase using a one-time Bancorp-issued virtual prepaid card specific to each purchase. (For in-store purchases at retailers that don’t accept contactless payments, Google Wallet offers a plastic prepaid card, also issued by The Bancorp.)
While details of the new policy remain murky—an updated user agreement has yet to be released and Google declined a request for comment—it’s likely that wallet balance funds now are being insured on a pass-through basis via the FDIC-insured financial institutions in which the balances are held. That means Google must be listed with the bank(s) as the custodian of the funds, rather than the owner of the funds, and must keep records of each individual customer’s funds separately. If those requirements are met, each account holder is insured by the FDIC for up to $250,000 in the event that the bank or Google should fail.
But as a Google or bank failure is highly unlikely, why would Google make the effort and incur the expense of insuring balance funds? Some industry observers believe it simply could be a matter of giving Google Wallet a way to differentiate from other mobile wallet providers that also enable users to store balances, including PayPal and Venmo—neither of which offers FDIC insurance on balances. (PayPal funds were FDIC-insured until 2012, when a law passed in California significantly increased the cost of doing so.)
But another answer may lie in Google’s future plans for how it positions Google Wallet and how it sees customers using the service. Currently, most users maintain relatively low wallet balances, opting to have a few dollars in their wallets for quick access or a specific use. But FDIC insurance could encourage users to hold larger balances in their Google Wallets. “Google is obviously focusing heavily on building consumer trust,” Rick Oglesby, head of research, Double Diamond Payments Research, tells Paybefore.
Keeping larger balances would enable Google Wallet customers to use the wallet as a more fully functional banking and payments alternative—if Google also enabled cash reloads, which aren’t available today. Several services billed as checking account alternatives have come to market in the past few years—including American Express’ and Walmart’s Bluebird and Green Dot Corp.’s GoBank platform—and those platforms have touted FDIC insurance as a major asset. And, by law, for any federal government disbursements, such as Social Security payments, to be directly deposited to a prepaid account, that account must be FDIC-insured on a pass-through basis. Therefore, Google’s new policy could enable users to have benefit funds directly loaded onto their wallets. Meanwhile, the CFPB has been circling the issue of FDIC insurance for prepaid accounts; although the agency didn’t say it would require FDIC insurance in its NPRM for prepaid accounts, it did propose requiring prepaid providers to notify cardholders if their products aren’t protected by FDIC pass-through insurance.
“This could be setting Google up to do something more with the wallet,” says Jeff Crawford, manager, First Annapolis Consulting. “Google may be looking at expanding Google Wallet’s functionality into something that might require FDIC insurance; possibly a bank account alternative,” he tells Paybefore, noting that Google already has modified the wallet several times since its initial launch. A February report by the Wall Street Journal said Google is planning another makeover for the wallet, set to be unveiled in May at the company’s annual I/O developer’s conference. “Google could be looking at re-launching the product, and this could be a way to get ready for that,” says Crawford.