Prepaid cards: How safe is your money?

In recent decades, much effort has been put into protecting consumer finances in the financial services sector, including Section 75 (of the Consumer Credit Act) and the Financial Services Compensation Scheme (FSCS). However, this protection does not apply to prepaid card accounts (or e-money accounts).

So, how safe is your money on a prepaid card?

• What exactly are prepaid cards?
  
• How are funds protected on a prepaid card?
  - The Financial Services Compensation Scheme and prepaid cards
  - What happened to Loot prepaid customers and their money?
  - What happened to Wirecard?
• Do I get purchase protection with prepaid cards?
  - Section 75 and prepaid card purchases
  - Can I dispute or make a chargeback claim on prepaid card purchases?
  - What limitations apply to dispute claims on card purchases?
  - How do I dispute a transaction on a prepaid card?

What exactly are prepaid cards? 

Most prepaid cards are classed as electronic money (or ‘e-money’). Put broadly, e-money is an amount of money stored electronically on a device that can, among other things, make payments. Such ‘devices’ can include:

• Financial apps such as Chip and Plum
• Currency cards or accounts like example Wise (formally Transferwise)
• Digital current accounts like Revolut and Monese
• Web-based services such as PayPal
• Prepaid cards, for example Pockit and Tuxedo Prepaid
• Small business current accounts like the Tide Current Account and Anna

For a more detailed definition, see ‘The definition of electronic money’ by the FCA. In the UK, prepaid cards are regulated by the Financial Conduct Authority (FCA). There are many reasons why you may want to get a prepaid card, some of these include:

• You have a bad credit history or a poor credit rating
• You are unable to get a bank account, for example, you are new to the country
• You are particularly interested in budgeting and controlling your finances
• You want to use a currency card for overseas travel
• You need to improve your credit score

How are your funds protected on a prepaid card?

The Financial Services Compensation Scheme and prepaid cards

E-money accounts such as prepaid cards are not protected by the FSCS (Financial Services Compensation Scheme). The FSCS protects customers’ money when a bank, building society or credit union goes into administration, guaranteeing up to £85,000 (or up to £170,000 for joint accounts).

However, according to e-money rules any funds that you have on a prepaid card should be ring-fenced or safeguarded. That means if your prepaid card issuer goes into administration, the money you have on your prepaid card account should be protected and returned to you in full.

It’s worth mentioning there are many firms offering saving tools, payment cards and budgeting apps to manage your money who are classed as payment providers. Just like e-money institutions, payment providers are not covered by the FSCS. Some e-money and payments providers allow you to open other accounts where your money is held with a third party who the FSCS may cover.

TIP: The FSCS have a handy tool called the bank & savings protection checker which will check if your money is under the scheme or not. You can also ask your provider directly if in doubt.

NOTE: The FSCS does not cover e-money accounts (including prepaid card accounts) and payment providers. E-money rules require all customer funds to be segregated or ring-fenced.

What happened to Loot prepaid customers and their money?

The Loot prepaid card provider went into administration in May 2019 affecting more than 200,000 customers in the UK. Wirecard Card Solutions took over the management of customer accounts, and on 28th May 2019 it gave customers 60 days’ notice that accounts were due to be closed. Customers were asked to withdraw their money.

All accounts are now closed. However, according to the Wirecard website it continues to safe-guard any remaining customer funds that have not been claimed or withdrawn. For more information, see the FCA statement on Loot Financial Services Limited first published 29th May 2019.

TIP: Some e-money providers may refer to their products as current accounts, bank accounts or alternative bank accounts. Before depositing money (whether for personal or business reasons), check if the account is covered by the FSCS, particularly if you plan on placing a large sum of money in an account.

What happened to Wirecard?

Wirecard AG in Germany collapsed following a serious fraud investigation and €1.9 billion reportedly going ‘missing’. This affected UK-based Wirecard Card Solutions (a subsidiary of Wirecard AG), who offer payment services including issuing e-money onto prepaid cards.

The FCA stepped in due to growing concerns and froze Wirecard Card Solutions’ activities. The result? From 26th June to 29th June 2020 many customers could not access their own money. Some of the cards affected included:

• Anna Money
• British Airways’ Multi-Currency Cash Passport
• CardOneBanking
• Curve Card
• FairFX
• Pocket Prepaid Card
• Thomas Cook Cash Passport
• Tuxedo Travel MasterCard Prepaid Card
• U Account
• Wirecard’s Multi-Currency Travel Card
  
  

The FCA defended its action, saying the "primary objective of these requirements was to protect the electronic money funds of consumers in safeguarded accounts”. Once the temporary restrictions had been lifted, and Wirecard allowed to resume activities, customers could access their funds as usual. Wirecard Card Solutions Limited has since announced that it is winding-down its business. Most prepaid card providers have since stopped using Wirecard services and moved to alternative providers.

Do I get purchase protection with prepaid cards?

Section 75 and prepaid card purchases

Debit cards and prepaid cards are not protected by Section 75 of the Consumer Credit Act 1974. Section 75 means that credit card providers and retailers are jointly liable for purchases over £100 that go wrong (limited to £30,000). Generally, you can be entitled to a refund if you have made a purchase over £100 using a credit card and:

• The product supplied is faulty.
• The product provided is not what was described.
• The seller or supplier goes bust.
• The item or service is not delivered.

Can I dispute or make a chargeback claim on prepaid card purchases?

Although prepaid cards are not covered by section 75, you may still be able to claim or dispute a refund if something goes wrong (this can also be referred to as a chargeback). A transaction dispute claim can apply to debit and credit cards, as well as prepaid cards. However, it’s applied on a voluntary basis (unlike Section 75, which is a legal requirement). This means there is no guarantee that you will get your money back. You can generally claim if:

• The product is faulty or damaged.
• The product you receive is not what was described.
• You don’t receive the product or the service you paid for.
• The seller or supplier goes into administration.
• The item or service is not delivered.
• You did not make the purchase, or your card was used fraudulently.
• You are over-charged or incorrectly charged.
  
  

NOTE: Prepaid card transactions are not covered by Section 75. You may, however, be able to get a refund by disputing the transaction with your provider.

What limitations apply to dispute claims on card purchases?

There are limitations on what you can claim or dispute. For example, if you have exceeded the time limit to make a claim (usually 120 days). Or if you withdrew the money with your card but purchased the item with cash. If you have a MasterCard prepaid card, you won't be able to claim for purchases under £10. It's also worth mentioning that the scheme doesn't typically apply to PayPal transactions.

How do I dispute a transaction on a prepaid card?

There is no guarantee that you will be able to get a refund from your card provider, as mentioned before. Dispute claim schemes or chargebacks are voluntary and not a legal obligation. So first, you should try to resolve purchase issues with the merchant or retailer. Make sure you have a record of all communications demonstrating that you are trying to resolve the matter. If the seller still refuses to give you a refund despite all efforts, you should contact your card provider and give the details of the transaction. Procedures will vary, so always check with your prepaid card provider. Here's a quick summary:

1. Contact the seller first and try to resolve the matter directly with them. Make sure you keep a record of all communications, including written communications.
2. If the seller still refuses a refund, contact your card provider and inform them you want to dispute a transaction.
3. Follow your provider's dispute procedures and provide the details requested. These may include a record of communications with the retailer and copies of any correspondence, for example letters and emails.
   
   

NOTE: Dispute claim (or chargeback) schemes are voluntary and not a legal obligation for card providers. First, try to resolve the matter with the seller and make sure you keep a record of all communications.

A word of caution, though: the seller can dispute your payment claim too. So while your card provider may successfully obtain a refund from the seller’s bank account on your behalf, the refund may be clawed back if the seller successfully disputes your claim.

Summary

The FSCS does not cover e-money products such as prepaid cards. This is particularly important to know if you are planning on depositing or saving large amounts of money in an e-money account (whether a personal or business account). However, customer funds on prepaid card have a level of protection in that they must be segregated or ring-fenced. Prepaid cards are not covered by Section 75, but you may still be able to get a refund where a dispute arises with a seller by making a claim with your card provider.

When it comes to financial services and products, it's always worth checking the risks involved and what protection you have. We recommend comparing financial products to make sure that they are right for your needs. You can compare prepaid cards on MustCompare, and for more general information on how prepaid cards work and what to look out for, read our guide on prepaid cards.