The benefits of prepaid credit cards and how you can use them to grow your business
In the 1970s cash was king. That gave way to checks in the early 1980s and now credit and debit card purchases dominate the market. That's not surprising since credit and debit cards are convenient and as long as consumers don't keep a balance on their credit card or don't overdraft their debit cards, they're typically free to use.
For all the convenience credit cards offer, there are disadvantages, including high interest rates and, for some, annual fees. One option that offers convenience without the fees is a prepaid credit card. Prepaid credit cards are network branded (think MasterCard or Visa logos) reloadable cards that customers can use at any merchant location that accepts those brands.
According to Synergistics Research Corp., which studies the prepaid market, in 2015 more than half of all Americans purchased a prepaid card for personal use. That's up from 19 percent in 2008.
And you're likely to continue to see an increase in prepaid credit card use. Card issuers have begun to offer consumers attractive promotions to begin using prepaid credit cards, as an alternative to debit cards, mainly because debit cards aren't that profitable to the card issuers. For example, American Express has offered a free prepaid card with the only associated fee being a $2 ATM withdrawal fee.
As a merchant, here's what you need to know about accepting prepaid cards.
Many consumer benefits
- Less risk of overspending. As stated earlier, prepaid credit cards offer less risk than credit or debit cards. With traditional credit cards, it's easy to overspend and when you keep a balance on your card, interest rate charges can compound quickly. And with debit cards, consumers run the risk of spending more than, or close to, what is in their account, which can lead to overdraft fees. With prepaid cards, consumers load a balance on the card and face no risk of spending more than what is on the card.
- Safer than cash. Prepaid credit cards are safer to carry than cash, which make them great options for travellers. And since they aren't linked to any personal data, such as social security numbers or bank accounts, there is no information for criminals to steal.
- An alternative to banks. Not everyone has a bank account. In fact, there are about 68 million people in the U.S. without a checking account. For these individuals, a preloaded credit card is a great option. And since individuals can add a balance to their cards from their paycheck, via direct deposit, they can make card-based purchases without dealing with a bank.
- Great option for those with poor credit. Individuals with poor credit might face high credit card fees or not qualify for a credit card at all. With a prepaid card, individuals don't have to worry about credit checks or spending beyond their means.
- Offer many ways to pay. Individuals can use prepaid cards for more than just making card-based purchases. They can use them to withdraw cash from ATMs, pay bills online and schedule recurring monthly payments.
- Provide consumer protection. Most of the network-branded prepaid cards offer some level of consumer protection, including deposit insurance or a zero-liability policy should the card be lost of stolen.
- Easy to reload. Individuals can reload their prepaid credit cards in a variety of ways, including bank account transfers, direct deposit, PayPal transfers or at a retail store.
- Secure alternative form of payment. We've all heard from friends or family members who use prepaid cards for the transactions they make online. For many, use of prepaid cards online provides them with an added level of assurance that personally identifiable information and account data is removed from the stream of compromise.
Issues to consider
There is no additional hardware or software required to accept prepaid credit cards. Since they are issued by the major card brands, the process is the same as taking a credit or debit card. You swipe (dip) the card and the customer is on their way. There are, however, a few things that you should keep in mind when accepting prepaid credit cards.
If you accept automatic installment payments, be aware that if your customer's prepaid card balance hits zero and they do not reload the card or if they are using a non reloadable prepaid card, you will be unable to charge the card. For this reason some merchants are cautious about taking prepaid cards for purchases made on installment. Consider requesting a backup method of payment in these circumstances.
Your payment processor might be able to segment prepaid credit cards from non reloadable prepaid cards, so you can take appropriate measures to ensure there is no payment disruption on non reloadable cards.
You might also run into a situation when a customer tries to make a purchase that is beyond the balance of their prepaid card. Unlike debit or credit cards, if the prepaid credit card has insufficient funds for the amount of the transaction, it will be declined. Then the customer will either have to reload the card or offer an alternative form of payment.
The card brands offer "partial authorization" support, which can help prevent declines in this situation. With partial authorization, you can charge the partial amount and then ask the customer for another form of payment to cover the remaining balance. Using partial authorization allows you to complete a transaction that might have otherwise been declined.
Fees are another issue you should consider when accepting prepaid credit cards. Transaction fees might vary by issuer, but most fees for prepaid cards are assessed in two ways. You'll pay a fixed percentage on the transaction charge (typically 0% to 2%) as well as a fixed transaction charge of between $0 and $2. This could eat into your profit margins for smaller transactions.
Accepting prepaid cards is another way to allow your customers to use their preferred payment method. It's also a good way to tap into a pool of potential customers who might otherwise be inaccessible, mainly those who do not carry cash and who don't have a credit or debit card.