Pay with prepaid cards - what to look out for?

Pay with prepaid cards - what to look out for?


    What is a prepaid card and how does it work?

    In order to pay with a prepaid card, the customer must first buy a card and then load the desired amount of money onto the card. Prepaid cards are available to customers with a preloaded amount which can be used to pay in both offline and online shops. The value loaded onto the card is often offered in amounts of 5, 10, 25 or 50 euro.

    Once credit is loaded onto the prepaid card, it is ready to be used. During the payment process on online shops, the user must choose the prepaid card provider option and enter the information and PIN of the card in the checkout form. The card is then checked for value and, if approved, the amount is subtracted from the total value of the card and the order is confirmed.

    Reloadable vs non-reloadable

    Prepaid cards can be open-loop or closed loop and reloadable or non-reloadable.

    Most prepaid cards are open-loop. These cards are issued by a card network, like Visa or MasterCard, and feature its logo. These can be used at any location accepting cards of the associated network. In contrast, closed-loop prepaid cards can only be used at certain locations, e.g. a specific store or group of stores, or a public transportation system. These usually do not feature a network logo.

    Reloadable prepaid cards, also known as general purpose reloadable cards or GPR cards, allow users to load more credit onto them. On the contrary, one cannot add money onto non-reloadable prepaid cards. Some cards non-reloadable can be reloaded once the customer completes a registration process.

    PayPal prepaid cards

    PayPal users can order a prepaid MasterCard. Money can then be transferred from the PayPal account to the card account, through a no-cost direct deposit service or PayPal transfers. The PayPal prepaid MasterCard is accepted everywhere where debit MasterCard is accepted. The card is supported by the PayPal Prepaid mobile app, which allows users to check your account balance, review recent transactions, load checks, find a nearby reload location, or receive real-time activity alerts, all on the go.

    Advantages of prepaid cards

    Anonymity in the payment process and fraud protection are clear advantages. Prepaid credit cards are similar to gift cards - the user or buyer can load a certain amount of money on the card at a cash register in a grocery store, a pharmacy, gas station or other similar stores. This transaction is anonymous.

    The payment process is an uncomplicated process when compared to other methods such as by credit card, as there is no possibility of chargeback after the payment is processed.

    Because prepaid cards have only a certain amount of money loaded onto the account, fraudulent payments are not possible. Certain prepaid cards cannot be loaded past a certain limit.

    This method is optimal for minors, as they cannot pay with credit cards and often have no bank account.

    Disadvantages of prepaid cards

    Although there are some clear advantages to prepaid cards, there are also a few negative sides that should be discussed. The main disadvantage is the high fees in the payment process that can amount up to anywhere from 8 to 15% of the revenue. Another disadvantage is the amount limit on the card that prevents money laundering schemes.

    There is no way to check the age of a customer that uses a prepaid card. Minors are able to purchase certain products that are meant for adults over 18, which is also a problem for certain online shops.

    A further disadvantage is the small amount of payment service providers that offer to process prepaid cards at a global level. Retailers must adjust to the desired payment provider depending on which countries they conduct business and cross-border transactions in.

    Prepaid cards for teens

    Companies with a younger target audience, such as the gaming industry, should consider issuing non-reloadable prepaid cards. While credit cards are common for customers with strong credit scores, prepaid cards offer a special solution for customers with weak credit scores. Younger consumers often do not have a credit card, therefore, prepaid cards are an relevant alternative among this demographic group.

    Reloadable prepaid debit cards are a practical solution for teens, as they offer flexibility in reloading funds and allow parents access to the card for younger teens. As they get older, teens with a part-time job and responsibility for their cell phone bill may also benefit from features such as bill pay and direct deposit. The ability to check their account balance online or through a mobile app is also a plus.

    Prepaid credit or debit card for travel

    Travelers can choose to buy and load prepaid cards before leaving their home country. Prepaid cards can be set in various currencies, matching the destination. This way, variations in the exchange rate won’t affect the credit loaded onto the card.

    Branded prepaid cards, e.g. with MasterCard or Visa logos, are accepted by cash machines and retailers who are signed up to these card scheme networks in the same way as debit and credit cards.

    A prepaid card is similar to having cash on you but it’s safer than carrying around too much or leaving it in your hotel even if it’s in the room safe. The credit is safe, whether the card is stolen or lost. This is the main advantage of using prepaid cards to travel. Much like a credit card, the card company can block the card so that it can’t be used by anyone else. Depending on the issuer and the customer’s location, the card may be replaced quickly or after returning home.

    Prepaid card expiration date

    Gift cards have been criticized for the ability of the issuer to set rules that are detrimental to the purchaser or card recipient. For example, gift cards may be subject to an expiry date, administrative fees and restrictions on use.

    In the first year after receiving them, 27% of gift card recipients have not used them, according to a Consumer Reports survey. Where they apply, over time fees may render the value of a gift card zero.

    In the event of the bankruptcy of the issuing retailer, the outstanding value on gift cards is considered unsecured debt, and as such gift cards may become valueless.

    However, some of these issues have been addressed in recent years in some jurisdictions.

    Expiration law

    All Canadian provinces have passed legislations to ban expiry dates and fees collected on gift cards. In Canada, provincial regulations do not apply to sectors that are regulated under federal laws. Therefore, gift cards resembling credit cards, e.g. with network branding, such as Visa or MasterCard, and prepaid phone cards are regulated by the federal government. The federal Prepaid Payment Products Regulations, effective May 1, 2014, federally regulated gift cards may only charge maintenance fees under certain conditions. Funds on those cards may not be subject to an expiry date.

    In the United States, the federal Credit Card Accountability Responsibility and Disclosure Act of 2009 (the CARD Act) provides consumers several protections, including limits on expiration dates and fees. Money on store-issued and bank-issued gift cards cannot expire before 5 years from the date of purchase or when money was last loaded onto the card. Also, inactivity fees (fees for not using the card) are prohibited unless cards have not been used for 12 months. Gift cards and non-reloadable prepaid cards with a network logo, are protected by the CARD Act.

    The exact terms of the legality of expiration dates for gift cards and prepaid card are however set at the state level. California, Connecticut, Florida, Maine, Minnesota, Montana and Rhodes Island have completely outlawed expiration dates on prepaid and gift cards, without any exception.

    Prepaid card processing

    Compared to other payment methods, the number of PSPs that process prepaid card payment is small. E-Commerce is only successful when the online shop offers payment methods that cover the largest number of customers in as many different targeted regions possible.

    Prepaid cards function similarly to cash - the customer must have the amount at hand in order to use it to purchase products. While credit cards are common for customers with strong credit scores, prepaid cards offer a special solution for customers with weak credit scores. Prepaid cards function similarly to cash - the customer must have the amount at hand in order to use it to purchase products. This means that this is risk free and profitable for banks.

    Get informed about the choice of prepaid card providers

    PayLife, Paysafecard, CASHU and Postepay - the amount of PSPs that offer processing for prepaid cards is much smaller when compared to PSPs that process credit cards and other methods of payment, yet the providers still offer different fees and conditions. Which prepaid payment option is the best for your online shop? Which payment methods are the most popular in your industry? What does cross-border business look like for your business?

    When choosing the right PSP, you will encounter many questions. Find the most important information about payment service providers at Paylobby and discover the best solution for all of your online payment processing concerns.

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