Card Programs

Card Programs


 

Prepaid Cards

Prepaid cards take the place of cash, checks, and other payment cards where consumers or businesses want to use an electronic means of payment that is not tied to an underlying credit or debit account.  Some carry major card brands (American Express, Discover, MasterCard, and Visa), and are referred to as “network branded” prepaid cards.  Network branded cards – which can be reloaded have recognizable value to cardholders.

Prepaid cards offer merchants a promising way to help people without bank accounts and those who are underserved by the current financial system, access to electronic payment systems.  For customers who have a high risk profile or who do not want to have an account, prepaid cards can serve as a substitute for a bank account. In this case, a merchant could offer the cards as a fee for service product. Prepaid cards can also become a substitute for checking accounts for those who are ineligible, and can be used by merchants for incentives, and rebates, and as a way to pay employees without issuing checks.

For business owners, a loyalty or prepaid card program may be just the thing to jump start your business and promote your brand…

Product Profitability: card issuers and marketers can use prepaid cards as a product line to generate sufficient fees on a standalone basis to create positive net income.

Deepening Relationships: as a business owner, you can use prepaid cards to earn new business, deepen customer relationships, track customers, and/or earn fees from commercial B2B customers who want to pay wages, rebates, or benefits without checks.

Unbanked Consumer: merchants can use prepaid cards to turn people who do not have bank accounts into accountholders and loyal, card-carrying customers

Stored Value Cards vs. Prepaid Cards

Stored value cards are a form of prepaid card where the value is stored on the card itself, and the card does not connect to any account.  i.e. Smart cards with electronic value, where the card’s embedded computer chip contains the value.  Prepaid cards connect to an account and/or database to authorize payments.

 

Types of Prepaid Cards

Cards are grouped according to where they can be used, and whether cardholders can fund, or add money to them.  Cards to which consumers can add funds are reloadable cards, as opposed to one time-use, nonreloadable cards.

Closed-loop prepaid cards can be used only at one merchant, and represent about 2/3 of all prepaid dollars.  Most retail gift cards are closed-loop cards, which currently represent 87.4% of the total gift card market. Other examples of closed-loop cards are transit cards and cards sold to players for Internet games.  Semi-closed loop cards refer to cards that can be used at a select group of merchants, such as a gift card that could be used at any store in a mall.

Open-loop prepaid cards connect to a network and can be used wherever the network is accepted.  Branded open-loop cards carry one of the major card brands (American Express, Discover, MasterCard, or Visa).  The cards draw on funds held in a pooled account at the issuing bank.  Cards that require cardholders to enter a personal identification number (PIN) to make purchases using the NYCE, Pulse, and Star debit networks are also open-loop.


ATM & DEBIT NETWORK OWNERSHIP

PULSE

ATM & POS

Discover Financial Services

Star

ATM & POS

First Data Corporation

NYCE

ATM & POS

Metavante Corporation

Plus

ATM

Visa Inc.

Allpoint

ATM

ATM National LLC

Cirrus

ATM

MasterCard Inc.

Visa Debit Processing/Interlink

POS

Visa Inc.

Debit MasterCard/Maestro

POS

MasterCard Inc.


Open-loop cards are the ones used most often to provide financial services to people without bank accounts.  The ability to use the cards for almost all kinds of payments means that they can substitute for cash, credit cards, and checks.

Open-loop prepaid cards can take a wide range of forms…
The cards are used as general purpose, reloadable cards where consumers can load money onto the cards and use them for general payments.  They can be used as payroll cards, which employers give to employees and load wages onto the cards instead of printing paychecks.  Retailers give open-loop cards as incentive cards or rebate cards instead of checks or other merchandise.  Parents give reloadable open-loop cards to children and college students as a way of providing them with an allowance and to monitor spending. Consumers use open-loop cards to pay for medical expenses using money from a Health Savings or Flexible Spending Account.  Also the federal government uses prepaid cards to distribute social security benefits and state governments use them for unemployment insurance and child support benefits.  With features like bill payment, consumers may use prepaid cards as substitutes for checking accounts.

 

Regulatory Issues that Affect Prepaid Cards

•  Bank Secrecy Act
•  USA PATRIOT Act
•  Regulation E of the Electronic Funds Transfer Act
•  Federal Deposit Insurance Corp. Insurance
•  State Laws about payroll and escheatment
•  Credit CARD Act of 2009

With open-loop prepaid cards, banks face questions about requirements under the Bank Secrecy Act, The USA Patriot Act, Regulation E of the Electronic Funds Transfer Act, and state laws, such as abandoned property and wage payment laws.

The FDIC clarified one issue in November 2008 when it issued an opinion in the Federal Register that its insurance covers cardholders’ funds as long as certain conditions are met.  In the opinion issued on Nov. 13, 2008, the FDIC said that it will insure prepaid card funds to each cardholder as long as the pooled account is identified as a custodial account and the cardholders’ identities and card balances are available from the bank or the program manager.