A
prepaid card, also commonly referred to as a stored-value card, is typically a credit, card-sized piece of plastic that contains or represents an amount of pre-loaded value. Unlike, credit card, which draw their value from a line of credit, or debit card, which draw their value, from a checking account, the value on a prepaid card typically comes from money given to the, card’s issuer (or a designee) prior to its use. Prepaid cards take many forms, including gift cards, that can be used at a specific merchant or mall, travel cards that can be used in the same way as, travelers’ checks, payroll cards that can be used to access one’s wages, and “teen cards” that are, marketed to those under 18 years to access funds their parents load onto the card. The application of prepaid card can be view in four types;
Closed-system
Closed-system prepaid cards are those that can only be purchased from and redeemed at a, single merchant (or merchant chain). They include a host of gift-card-type products, such as those , offered by Starbucks, Barnes and Noble, and Home Depot. These cards are usually purchased, directly from a retailer and, unlike credit or debit cards, are not embossed with the cardholder’s, name. The cards are typically sold in fixed amounts (e.g.$25, $50, or $100) and are not re-loadable. Although they function very much like paper gift certificates, prepaid cards provide retailers with additional benefits.
First, gift card transactions are easier to, clear and settle than paper gift certificate transactions, as they do not require paper-based, settlement and tracking systems.
Second, unlike a paper certificate, the card can store any value, that remains after its initial use.
This obviates the need for merchants to refund cash to consumers, who use less than the card’s full value. Such a feature likely ensures that most people will either, spend more than the face value of the card or never use the card’s entire value.
Third, gift cards, are easier to issue and less susceptible to fraud than paper gift certificates (i.e., they are more, difficult to counterfeit).
Finally, the information systems that track gift cards enable merchants to, gather data on the ways that consumers use such cards. This kind of information can be used to, improve merchants’ marketing efforts.
Some merchants, however, have had success developing gift-card products that are more ,
than just substitutes for paper gift certificates. For example, Starbucks, which launched its closed-, system prepaid card about two years ago, markets the card as both a gift idea and “a fast and, convenient way to simplify your busy day." The company reports that it has sold 18 million gift, cards and that gift card purchases represent 10 percent of the coffee retailer’s transaction, volume.4 Gift card proponents point to this success as evidence that the cards can ultimately, increase a merchant’s sales volume and simplify its check-out process.
Semi-ClosedUnlike closed-system cards, which are issued by and redeemed at a single merchant, semi-closed system cards are issued by third parties (e.g., banks, money transmitters) and often
redeemable at multiple merchants. They often look like credit cards (i.e., they have a magnetic
stripe on the back), and they operate on and carry the logo of a branded card network (e.g.,
MasterCard, Visa, American Express, Discover). For this reason, merchants that already accept
traditional credit cards do not need to make any modifications to their POS terminals in order to
accept them. Mall cards and resort cards are two examples of semi-closed-system cards. Both can usually be purchased from mall or resort management and used at any on-premises merchant. In general, semi-closed cards are not reloadable and do not carry the cardholder’s name. As with closed-system cards, merchants may benefit from the use of semi-closed cards to the extent that a customer spends more than the amount loaded on the card. In addition, such cards may bring customers into a mall or resort shopping area that they otherwise might not visit. From the cardholder’s perspective, semi-closed-system cards may obviate the need to carry lots of cash at a mall or while on vacation. In addition, some semi-closed-system cards offer replacement protections in the event the card is lost or stolen. With a few exceptions, accepting a semi-closed prepaid card at the point of sale is effectively the same as accepting a signature debit or credit card. Upon being presented with the card, the merchant swipes it through a card reader to obtain authorization for the purchase. Information about the transaction is typically sent, via the branded network, to the card’s issuer (or a designee). If the prepaid card amount being applied toward the purchase does not exceed the amount on the card, the issuer approves the transaction and the sale is completed.
If, however, the amount being applied toward the purchase exceeds the amount on the card, the transaction is denied. One of the limitations of using branded card networks to authorize these transactions is the inability on the part of the merchant to know how much value is on the card. So, for example, if a customer presents a prepaid card that contains $35 of value to make a $50 purchase and the customer does not inform the merchant of the $15 shortfall, the merchant will not be able to get authorization to complete the sale. Most issuers of these kinds of prepaid cards provide cardholders with a means of checking a card’s balance (e.g., by calling an 800 number or by checking a web site). Unfortunately, even if a customer is fully aware of the prepaid card’s remaining value, he or she may still be challenged to complete a transaction involving a shortfall. Assume, for example, that the customer above alerts the merchant to the $15 shortfall and presents a credit card to cover the difference. Some older POS terminals do not allow consumers to use more than one branded card to pay for a single transaction. If the merchant has one of these terminals, consumers must pay for any prepaid card shortfall using cash or check. Although increasingly rare, the so-called “split-tender” problem complicates a transaction that would otherwise provide the merchant with sales above and beyond the prepaid card’s value.
Semi-closed-system prepaid cards also provide benefits to their issuers. Issuers can earn
interest on any unused prepaid card value (i.e., float), receive an interchange fee on gift-card
purchases, and potentially charge fees for issuance or inactivity or both. In Rinearson’s opinion,
these benefits, coupled with the fact that their limited universe of acceptance insulates them from most fraud risk, make semi-closed-system cards a seemingly profitable product.
Semi-OpenFrom an operational perspective, semi-open and semi-closed prepaid card transactions
are very similar. They gain authorization, clear, and settle in the same manner, on the same
networks. They offer similar value propositions to merchants (e.g., lower interchange, reduced
OpenOpen cards are essentially semi-open cards with ATM functionality. Examples of open-system cards include payroll, teen, and travel cards. Payroll cards are an increasingly popular wage distribution alternative for employers that do not want to go through the weekly or biweekly process of printing and distributing individual payroll checks. A product largely targeted to people with no established banking relationships, the payroll card is funded by an account into which an employer has deposited an individual’s earnings. The cardholder can then use the card to buy things at a merchant or to get cash from an ATM. The teen card has been promoted as a tool that parents can use to teach teenagers about financial responsibility. Teen cards are typically funded through a deposit account and can be used by those not yet old enough to have a credit card (i.e., those under 18). Finally, a travel card is essentially a plastic version of a traveler’s check.
