Prepaid Card

A prepaid card is a payment card that draws on funds loaded in advance, either by the cardholder or by someone paying them, such as an employer, a government agency or a company issuing refunds. Each purchase or withdrawal reduces the balance, and when the balance runs out the card is declined until more money is added. Unlike a debit card, it is not attached to a bank current account, and unlike a credit card, it does not involve borrowing.

Prepaid cards are used for budgeting, payroll, benefit payments, travel money, gifts, corporate expenses and access to card payments for people without a bank account. The money sits in a prepaid account held by the issuer, which in many countries is a bank or an electronic money institution, while the card is often designed and marketed by a separate program manager.

The market divides mainly by how widely the card can be used and whether it can be reloaded:

• Open-loop cards. These carry a network brand such as Visa or Mastercard and can be used wherever that network is accepted. They run on an open-loop card scheme through the normal issuer and acquirer system.
• Closed-loop cards. These work only with one merchant or group, such as a retailer's store card or a transport card, and are a form of closed-loop card scheme.
• Reloadable cards. A general purpose reloadable (GPR) card can be topped up repeatedly by bank transfer, cash at retail locations or direct deposit of wages.
• Non-reloadable cards. Single-load products, most commonly a gift card, are loaded once and discarded when spent.
• Purpose-specific cards. Payroll cards, benefit cards, incentive cards, insurance disbursement cards and travel cards with multiple currency balances are all prepaid products designed for a particular use.

A network-branded prepaid programme usually involves several parties. The issuer holds the licence, owns the relationship with the card network and holds the customer funds. A program manager designs the product, runs marketing and customer service, and often owns the commercial relationship with the cardholder. An issuer processor maintains the balances and authorises transactions in real time. For newer fintech issuers, a BIN sponsorship arrangement lets the brand use a bank's range of card numbers and licence.

When the card is used, the authorisation request travels through the network to the issuer processor, which checks the available balance and approves or declines. Because prepaid accounts cannot normally go overdrawn, issuers manage risks such as partial approvals at fuel pumps, holds that outlast the transaction and refunds credited after the card has been closed.

Prepaid cards sit in several regulatory frameworks at once. In the European Union and the United Kingdom, open-loop prepaid balances are generally electronic money, so issuers must be authorised and must safeguard customer funds, and limits apply to anonymous or lightly verified products under anti-money laundering rules. In the United States, network-branded prepaid products are covered by consumer protection rules on prepaid accounts under Regulation E, gift cards have their own rules on expiry dates and dormancy fees, and FinCEN's rules on prepaid access set registration, identification and record-keeping duties for providers and sellers.

Deposit insurance is a separate question. A US prepaid balance may be eligible for pass-through deposit insurance if the funds are held at an insured bank in a properly titled account, while e-money balances in Europe are protected by safeguarding rather than deposit guarantee schemes.

Prepaid programmes earn revenue from interchange fees on purchases, cardholder fees and interest on balances held. Common cardholder fees include purchase fees, reload fees, ATM fees, foreign transaction fees and monthly or inactivity fees. Non-reloadable gift programmes also earn from gift card breakage, the value that is never spent. Consumer groups have criticised some prepaid products for fee structures that are complex or high relative to basic bank accounts.

Prepaid cards are attractive to criminals because they can move value without a bank account, especially where cards are sold for cash with little identity checking. Typologies include buying cards with illicit cash, loading stolen funds onto cards and using cards in scams where victims are told to pay with gift cards. Regulators respond with load limits, verification thresholds and monitoring. Operational risks include the failure of a program manager or processor, which can leave cardholders temporarily unable to reach their money, a reason supervisors focus on safeguarding and record keeping.