WASHINGTON Google stunned observers Monday when it confirmed that it would provide federal deposit insurance for funds stored on its wallet service, but frustrated many by not providing details about how or why it was doing so.
On its face, the development suggests Google is trying to tempt users away from Apple Pay and PayPal wallet service providers by offering a perk that consumer advocates see as vital for the future of mobile payments. It may also signal a further evolution of its Google Wallet, the specifics of which it doesn't want to make public yet.
Whatever its reasons, Google's offering pushes it further in the direction of becoming a stored-value provider, as opposed to merely facilitating transactions between merchants and consumers, and reignites a debate over whether all such funds should be backed by the Federal Deposit Insurance Corp.
Following are some answers to frequently asked questions about what that means for Google, the FDIC, other wallet providers and the industry at large:
Why is Google making Wallet funds FDIC-insured?
Beyond confirming that Google Wallet funds will be FDIC-insured, the tech giant isn't saying anything more. But observers said the promise of government backing for funds stored with Google Wallet gives the company another way to draw consumers to its mobile payments platform.
While Google Wallet can be used to make purchases linked to a consumer account at a bank, it also allows users to keep a balance stored directly. Those funds can be used to make purchases or to make transfers to other consumers.
By providing FDIC-backing for such funds, it makes Google Wallet more like other stored-value or prepaid card providers that have already made deposit insurance available via so-called "pass-through" coverage. A number of Bitcoin operators, such as Coinbase, have also made or attempted to make the leap into offering deposit insurance for their wallet services.
How is Google providing FDIC insurance?
Google is using its multiple bank partners to provide the insurance, according to a Google spokesperson quoted by Yahoo Finance, which first reported the news. (A Google spokesperson declined to discuss the issue further with American Banker.)
This would indicate that Google is likely taking advantage of "pass-through" insurance, which is the typical means that a prepaid card issuer offers FDIC coverage. Essentially, an agent which in this case is Google stores funds on behalf of a customer in either one or multiple bank accounts. As long as the agent and bank keep accurate records on each customer's funds, the FDIC pledges backing up to its full insurance limit for each individual user of the service should the insured institution fail.
The arrangement, however, usually requires clear disclosures to consumers about the treatment of their funds. Google has "to tell you what bank it's in," said Paul Clark, a partner at Seward & Kissel. Google has yet to do so.
The FDIC released a legal opinion in 1996 providing guidance on the "insurability" of stored value cards, and updated that opinion in 2008. The FDIC said it recognizes the holder of stored-value accounts as being a depositor as long as certain requirements are satisfied. For example, the insured bank has to disclose the relationship with the agent, and either the bank or the custodian must maintain records on the identities of accountholders and the amounts of their funds.
"I'm sending money that's in an account in Google's name at a bank but where Google is acting as my agent, and Google is keeping records that they owe me" the money back, Clark said.
Clark noted the FDIC protection is meant to cover an accountholder in the case of the bank's failure, not necessarily a collapse of Google. In a Google bankruptcy, the accountholder would likely keep their funds, Clark said, but there may be a delay in accessing them.
"You're not losing FDIC insurance.... You may lose immediate access to your money because the bankruptcy trustee is going to step in and figure out the disposition of those funds that are held by Google on your behalf," he said.
Does this mean the FDIC now regulates Google?
No. Since Google is working through partner banks, the FDIC and other federal regulators will scrutinize those institutions, not the tech giant. Google's relationship with federal regulators remains unchanged at least for now.
That could conceivably change in the future. The Consumer Financial Protection Bureau released a proposal in November detailing its plans for how it wants to regulate prepaid card and stored-value accounts. The proposal skirted the question of whether such accounts must all be FDIC-insured, saying only that it must be clearly disclosed, but the CFPB has the power to regulate any large players in this area. It is highly unlikely Google is on CFPB's radar now, but it may not stay that way.
"Conceivably if Google became a massive player in the prepaid space, the CFPB could supervise them," said Thaddeus King, an officer with the consumer banking project at The Pew Charitable Trusts.
Are companies like PayPal going to follow Google's lead?
Google's move has undoubtedly reignited a discussion about whether all stored value accounts should be FDIC insured. Ironically, PayPal used to provide FDIC insurance, but ceased doing so after a change in California state law made it more expensive to do so.
The Pew Charitable Trusts and others, meanwhile, are pushing the CFPB to require FDIC insurance, arguing it is safer for consumers. Indeed, research suggests that most consumers view FDIC insurance as important but are not aware that some prepaid and stored value accounts do not have it.
"Your money is much safer with FDIC insurance," said Susan Weinstock, the director of the consumer banking project at Pew. "It's a seamless process if the bank shuts down."
Without government backing, if a provider were to go bankrupt, what consumers could get back would vary state by state according to money-transmitter laws.
"Who knows if there would be money left by the time it was given out," Weinstock said.
Moreover, while Google Wallet is currently mostly used for transactional purposes, not storing money, that could change in the future.
"We want to make sure that money is safe," Weinstock said. "Maybe right now it's just $50, but it's really important down the line that if the company is going to become something more than that, that the money is insured."