||The examples and perspective in this article deal primarily with the United States and do not represent a worldwide view of the subject. (December 2010)|
A stored-value card refers to monetary value on a card not in an externally recorded account and differs from prepaid cards where money is on deposit with the issuer similar to a debit card. One major difference between stored value cards and prepaid debit cards is that prepaid debit cards are usually issued in the name of individual account holders, while stored value cards are usually anonymous.
The term stored-value card means the funds and or data are metaphorically 'physically' stored on the card, in the form of binary-coded data. With prepaid cards the data is maintained on computers affiliated with the card issuer. The value associated with the card can be accessed using a magnetic stripe embedded in the card, on which the card number is encoded; using radio-frequency identification (RFID); or by entering a code number, printed on the card, into a telephone or other numeric keypad.
Typical applications of stored-value cards include transit system farecards, telephone prepaid calling cards, Cafeterias, or for micropayments in shops or vending machines. Examples of country specific payment cards include Chipknip in the Netherlands, Geldkarte in Germany, Quick in Austria, Moneo in France, Proton in Belgium, FeliCa in Japan, EZ-Link and NETS (CashCard and FlashPay) in Singapore and Octopus card in Hong Kong. The German Geldkarte and the Austrian Quick card are also used to validate customer age at vending machines for cigarettes.
Typical applications of organization specific or industry specific prepaid card include payroll cards, rebate cards, gift cards, cafeteria cards and travel cards and U.S. based health schemes such as HSA cards. The U.S. Department of the Treasury manages three stored-value card programs (EZpay, EagleCash, and Navy Cash) which are used by the U.S. military as electronic alternatives to cash in areas characterized by difficult access and limited banking / telecommunications infrastructure. Some examples of non-government related stored-value cards are Aramark GuestExpress, Compass Zipthru, and Freedompay FreetoGo.
Stored value cards can save organizations a considerable amount of money by allowing customers to add a large amount of funds at one time to the card and then paying a lower transaction fee for each use of the stored value card on smaller purchases.
Closed system prepaid cards
Closed system prepaid cards have emerged and replaced the traditional paper gift certificate, and are commonly known as merchant gift cards or store cards. "Closed system" means the cards are only accepted at a single merchant. Purchasers buy a card for a fixed amount and can only use the card at the merchant that issues the card. Generally, few if any laws govern these types of cards. Card issuers or sellers are not required to obtain a license. Closed system prepaid cards are not subject to the USA PATRIOT Act, as they generally cannot identify a customer. As debts owed to consumers who purchased the card, these purchases remain on the books of a merchant as a liability rather than an asset. Consequently, gift certificates and merchant gift cards have fallen under state escheat or abandoned property laws (APL). However, the emergence of closed system prepaid cards has blurred the applicability of APL. North Carolina and Illinois have excluded these types of cards from APL provided the card has no expiration date or a service fee. Maine and Virginia require the issuer to pay the state when the cards are abandoned. In Connecticut an issuer is required to identify the residence of the gift card owner. Since most merchant gift cards are anonymous, the residence of the card's owner is deemed to be the state's treasurer's office.
Presently, no law exists that requires an issuer to provide refunds for lost or stolen cards. Whether a refund is possible is specified in an issuer's cardholder agreement. In addition, most closed system cards cannot be redeemed for cash. When a cardholder redeems all but an insignificant portion of the card on merchandise, that amount is generally lost and is absorbed by the issuer.
Such cards are increasingly becoming a way for Mexican drug cartels to smuggle money across the border without repercussions.
Semi-closed system prepaid cards
Semi-closed system prepaid cards are similar to closed system prepaid cards. However, cardholders are permitted to redeem the cards at multiple merchants within a geographic area. These types of cards are issued by a third party, rather than the retailer who accepts the card. Examples include university cards and mall gift cards. The laws governing these types of cards are unsettled. Depending on the state, the issuer may or may not be required to have a money transmitter license or other similar license. In addition to the District of Columbia, the states that require a license include Connecticut, Florida, Illinois, Iowa, Louisiana, Maryland, Minnesota, Mississippi, North Carolina, Oregon, Texas, Vermont, Virginia, West Virginia, Washington, and Wyoming. Note, these states explicitly require licensing for card issuers. Other states may have more subtle licensing laws. Under 18 USC section 1960, it is a crime for an issuer to conduct a money transmitting business without a license. Cardholders generally suffer from the same redressability problems that closed system card holders suffer. It is unclear whether or not Chapters 7 and 11 of the Bankruptcy code are applicable to these types of cards.
Open system prepaid cards
Open system prepaid cards or network branded prepaid cards are not credit cards, although they are sometimes marketed as "prepaid credit cards". No credit is offered by the card issuer and the cardholder spends money which has been prepaid to a card. Therefore, these cards are also marketed as "prepaid debit cards". The value is not physically stored on the card instead, the card number uniquely identifies a record in a central database, where the balance is recorded. These cards are similar to closed system prepaid cards, but are endorsed by a retail electronic payments network such as Visa, Visa Electron, MasterCard, or Maestro and can, unlike gift cards, be used anywhere debit cards with the same logo may be used. They are very similar to a debit card except that they don't require a checking account. Market participants such as Caxton FX, Travelex and My Travel have used these cards to stimulate the adoption and appeal of open system prepaid cards in the UK. These cards have seen a 10 – 15% growth since they appeared in the UK market in 2005. These cards are also sometimes referred to as "open loop" cards.
These cards have been marketed to consumers with poor credit, who are unable to qualify for the line of credit that backs a mainstream credit card. The fees associated with these cards are often very high. These have been criticized as unjustified, because the issuer is not taking any credit risk. The Financial Consumer Agency of Canada describes prepaid credit cards as "an expensive way to spend your own money"
While historically marketed to consumers with poor credit, in 2012 a few large institutions started marketing prepaid cards as an alternative to checking and debit products due to the Dodd–Frank Wall Street Reform and Consumer Protection Act passed on July 21, 2010, also known as the "Durbin Amendment". This amendment reduced the revenue issuing banks will receive on debit card transactions, making prepaid card a more profitable product for financial institutions to offer. Driven by the improved profitability of prepaid cards for banks and legislative pressures to reduce fees and provide better consumer protections, prepaid cards in U.S. have become more mainstream, marketed to consumers who do have access to alternative products and have above average credit. Examples of these products include Chase's Liquid and American Express' Bluebird.
A variation on this are the PaidByCash virtual cards in the United States and the 3V cards issued in the UK, Canada and Ireland. These consist only of a card number plus expiry date and verification number, so can only be used for customer not present transactions. The Tobacco Card has undergone testing and is scheduled for nationwide introduction in Japan in 2008. It will contain an IC with information about the cardholder's age, and will be required for purchasing cigarettes from vending machines. It will have stored-value capability.
Generally these cards are afforded similar characteristics as "open system prepaid cards". Similar to credit cards, these cards may carry an expiration date, an account number, and a verification number. They also may carry with them service fees and other fees associated with use, or non use of the card. The money on the card can be redeemed for goods only, and is not redeemable for cash. These cards are generally issued by a "money services business"(MSB) or an FDIC banking institution. The type of issuer depends on the law governing them. MSB's are only required to obtain a money transmitter license if they sell more than $1,000 per person per day. Cards issued by an MSB generally are governed by the laws governing "closed system cards" and "semi-closed system laws". Cards issued by an FDIC bank are covered under the Federal Reserve Act and afford cardholders much more protection and opportunity to assert claims. The cardholder should be aware of the network's agreement and rules and regulations set forth by these networks.
Another example of open system prepaid cards is the Payroll card. Payroll cards are used by employers to pay employees. The employee is issued a card that permits access to an account established by the employer. At the end of each pay period, the employee's ability to draw money from that account is increased by the amount of his or her wages. The card may be used at an Automated Teller Machine (ATM) to obtain cash, and may be used at a store to pay for purchases. These cards are subject to Chapters 7 and 11 of the Bankruptcy Code, as well as the Electronic Funds Transfer Act (Regulation E). They are also subject to the Federal Deposit Insurance Reform Act.
While there are many examples of prepaid card services marketed widely to consumers, a new focus on business customers has emerged, in turn establishing a new sub-industry within the general prepaid card market called “corporate prepaid” (,). Issuing a prepaid corporate card to an employee is attractive to business owners because:
- Concerns are minimized about issuing a company card to employees or to contractors / non-employees, a business may not feel comfortable issuing credit or debit cards to in the first place,
- Cash flow is used to fund day to day purchases to avoid tying up credit unnecessarily,
- Corporate prepaid card providers generally offer an interface so card activity can be reviewed from a single place online. Consumer accounts are individual and require separate login ids for each, making reconciliation time consuming.
Unlike traditional business credit cards, prepaid business expense card providers do not require credit checks on the business owner or the business for enrollment because there is no debt underwriting. Like other prepaid card services, accounts are “loaded” (deposited) to a card in advance of spend rather than through a company line of credit. Spending on each individual employee debit card may be limited by the account administrator to specific dollar amounts and merchant categories ().
There is growing concern that drug traffickers and other criminals worldwide are using stored-value cards to move the proceeds from drug transactions and other criminal activities across international borders. In the United States, it is legal for anyone to enter or leave the country with money that is stored on these cards, and (unlike cash in high amounts) does not have to be reported to customs or another government entity. Some members of the U.S. Congress are considering creating laws that would require travelers crossing entering or leaving the country to report these cards.
The Financial Crimes Enforcement Network of the U.S. Department of the Treasury has published a notice of proposed rulemaking on stored-value cards in the June 28, 2010 edition of the Federal Register. The proposed rules would require sellers of prepaid cards to register with the government and keep records on transactions and customers.
- Prepaid "credit" card
- Gift card
- Telephone card
- Electronic money
- SparkBase, a provider of closed-system pre-paid cards
- Decoupled debit card
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