“Prepaid card” is a very general term that can be used to describe a variety of different types of payment vehicles used for varying, and often very specific, purposes. This article is designed to clarify the subtle differences between each type of prepaid card, enabling consumers to better understand industry jargon and avoid misuse.
In the most basic sense, prepaid cards differ based on usability, reloadability, and acceptability. In terms of usability, prepaid cards range all the way from serving as an alternative checking account to a means of accessing mass transit. When it comes to reloadability, some prepaid cards allow users to add funds over time, while others do not. Finally, certain prepaid cards can be used anywhere their affiliated card network (e.g. Visa or MasterCard) is accepted, while others can only be used at a specific retailer or group of merchants. These cards are known as “open-loop” and “closed-loop,” respectively.
All in all, the following are the most common types of prepaid cards.
Like traditional debit cards, prepaid debit, or general-purpose reloadable (GPR), cards can be used perpetually so long as you deposit, or “reload,” cash in advance. Such cards are tied to a prepaid account that you can manage online just like a checking account, sans the paper checks.
Open-loop prepaid debit cards work for a wider variety of transactions than prepaid gift cards and at a greater number of merchants than closed-loop prepaid debit cards. The cardholder can use an open-loop GPR card wherever the affiliated card network is accepted, such as at grocery stores, gas stations and hotels as well as for other transactions such as paying bills or shopping online, by phone or by mail.
Some GPR cards can be used only for specific purposes. Examples of such cards include money-remittance cards, events and meetings cards or business travel cards. Closed-loop prepaid debit cards have limited acceptance and also are used only for certain transactions. Some closed-loop GPR cards include prepaid gas cards and prepaid movie cards.
As gifts, prepaid retailer gift cards can be given to anyone aged 13 or older for different occasions such as birthdays, holidays or graduations. The recipient can use the card for various purchases and experiences, including apparel, music, movie tickets, spas, golf resorts, meals and more. They work when shopping at stores, online, by mail order or by phone. Closed-loop store gift cards with no network logo are limited to the store or store chain that issued the card. Open-loop gift cards, however, can be used wherever the credit card network logo is accepted.
Keep in mind that a prepaid gift card is a gift that doesn’t keep giving. Gift cards are non-reloadable and have a preset value, most commonly ranging from $25 to $500. But unlike prepaid debit cards, gift cards no longer can be used or reloaded once the full value of the card has been consumed.
If the card is lost or stolen, the issuer can replace it so long as you can provide your account number to the issuer.
For the convenience of government benefits recipients and unbanked employees, governments and businesses provide prepaid cards specifically to those groups. Payroll cards and government benefit cards, which are generally open-loop and reloadable, offer the flexibility of prepaid debit and traditional debit cards. The user can make purchases, pay bills or withdraw money from an ATM. Government benefit cards allow users to receive food stamps, child support, unemployment benefits, veteran’s benefits, pensions or Social Security payments, among other types of payments.
The cards serve as an alternative to paper checks and direct deposit to a checking account, though employers should still offer those payment options. Payroll cards and government benefit cards increase the efficiency of administration of government assistance programs and payroll processes. They also contribute to environmental sustainability.
To get a payroll or government benefit card, your employer or government agency providing the benefits must make arrangements with a bank or other financial institution to load your funds to your card and negotiate terms and conditions.
Like prepaid gift cards that are not tied to a credit card network, transit cards also are closed-loop, reloadable cards with limited usability. You can obtain them from your public transportation system and add value to them online or at on-site reload machines, or point-of-sale (POS) terminals. Transit cards may be used solely for purchasing transit fares and at the issuing transportation system.
Unlike other prepaid cards that require identity verification of the cardholder before activation, a transit card can be issued to anyone without the need for a rider’s personal information.
These cards are similar to prepaid debit cards. But as the name suggests, prepaid travel cards, also known as prepaid currency cards, are designed for travel reservations and transacting during trips. Before departing, you’ll load money in your home currency, and all transactions abroad automatically will be converted to the local currency. But keep in mind that you could be charged a foreign transaction fee for using your prepaid currency card and should refuse Dynamic Currency Conversion (DCC) offers from foreign merchants. Instead, always choose the local currency. Most prepaid travel cards are reloadable.
Some issuers offer prepaid travel cards that allow you to select a foreign currency and lock in a specific exchange rate the day you load money onto the card. By doing so, you’ll avoid paying the prevailing exchange every time you make a purchase. But a fixed exchange rate may not always be the best deal as exchange rates fluctuate on a daily basis.
Most prepaid travel cards are tied to a credit card network and can be used wherever the brand is accepted. You may encounter instances, such as paying for highway tolls, in which the card will not be accepted. Many cards also come with built-in security features. You’ll receive a PIN for an added layer of defense. If your card is lost or stolen, you can get a replacement card for free or a fee. Whatever unused funds are left on the original can be transferred to your replacement card so long as you notify the issuer immediately.
If you plan to use a prepaid travel card, shop around for the best deal. You may even find a card that offers cashback rewards.
If your employer offers a flexible spending account (FSA), also known as a health savings account (HSA), you may receive those benefits through a reloadable prepaid card. Such accounts allow employees to set aside part of their wages or salary to pay for eligible medical expenses. The clear benefit of a health savings account is its tax-free feature. Payroll funds are transferred to the health savings account card before taxes are deducted, so an employee’s overall tax burden is reduced.
In addition, anyone, including your employer, can contribute to your health savings account up to the maximum limit of a given year. Once your account reaches a threshold amount, you can choose to earn interest. You also can withdraw money from your health savings account card at an ATM. All of the above are tax-free. You can use your prepaid health savings account card to pay your health care bill online or at various doctor’s offices, pharmacies or ATM machines that accept the credit card network logo tied to your card.
Some universities and colleges offer student ID cards that serve multiple purposes. These days, many of them double as reloadable prepaid cards. Previously, prepaid student ID cards were closed-loop and could only be used for making purchases or paying for services on campus.
Recently, other schools have begun forming special arrangements with banks and other financial institutions that allow students to link their bank accounts to their student ID cards. Some load financial aid disbursements, work-study funds or payroll onto the prepaid ID cards as well. Banks are offering open-loop prepaid student ID cards, expanding the flexibility of the card. Now students aren’t limited to using their student ID cards on campus — they can withdraw funds from ATM machines and make purchases wherever the credit card network brand is accepted.
Just as with other prepaid cards, standard fees for maintenance, ATM withdrawals, inactivity and such apply to prepaid student ID cards. The steepest fee you might incur is replacement. Colleges and universities can charge between $10 and $25 to issue a new card. But often, the issuer will replace the balance.
Businesses tend to be the largest providers of prepaid incentive cards, which generally are rewarded to employees for satisfactory work. They also may be given to clients, vendors, dealers and consumers for recognition, rebates and promotions or to influence behavior. Prepaid incentive cards represent a more cost-effective method against issuing checks and vouchers or providing merchandise.
Some insurance companies offer prepaid insurance cards mainly to benefit commercial clients. By issuing prepaid insurance cards, insurers can reduce their administrative costs of printing paper checks as well as improve the efficiency and speed of claims disbursements. The payments can be one-time for single incidents such as motor vehicle accidents, or recurring for different claims such as regular disability or worker’s compensation payouts. Most prepaid insurance cards are used to pay for property and casualty insurance and worker’s compensation claims.
Businesses that cannot or does not wish to provide corporate credit or debit cards to their employees, contractors or vendors turn to prepaid business cards as an alternative. As one would with a corporate credit or debit card, prepaid business cards are intended for financing business-related expenses, including equipment, consulting services, office supplies, meetings and many others.