Prepaid cards are one of the fastest-growing payment methods in the country. The Bureau of Consumer Financial Protection expects the market to grow from
$561 billion in 2019 to $897 billion in 2023. But what are prepaid cards, and why are so many people using them? Read on to learn everything you need to know. Plus, find out how to choose the best prepaid for your specific needs.
What is a prepaid card?
A prepaid card is a physical card linked to an account that you fund with cash upfront. You can spend as much as you load onto the card. When you spend the balance, you can reload the card and use it again.
There are two types of prepaid cards: open- and closed-loop cards.
What's the difference between open-loop and closed-loop prepaid cards?
Both open-loop and closed-loop prepaid cards are cards that you pre-load with funds to spend at retail locations. However, their use-cases differ.
Closed-loop cards, like gift cards and transit cards, can only be used with specific merchants or in closed systems.
Open-loop cards, on the other hand, are more flexible. You can make purchases with an open-loop prepaid card at the point-of-sale terminals of most retail locations. Or you can even use them to take cash out from ATMs. As such, open-loop cards are the more popular choice.
One of the most common types of open-loop prepaid cards is the general-purpose reloadable (GPR) card. Other open-loop examples include payroll cards, government benefit cards, and cards to disburse loans or insurance proceeds. We also see the emergence of digital and mobile wallets.
As the prominent prepaid product on the market right now, let's dig deeper into GPR cards.
How do GPR prepaid cards work?
You can buy a GPR prepaid card at a retail store, directly from your financial institution, over the phone, or online. Typically, you'll pay an upfront purchase fee to activate the card, plus the amount you want to load onto your new card. Depending on your vendor, the card may become active immediately, or you may have to take additional steps, such as activating it over the phone.
To use all of a card's features, such as ATM withdrawals and reloading, you'll need to register it. To do so, you'll typically have to provide your full name, address, date of birth, and social security number.
After registration, you will usually receive a card with your name embossed on it. At this point, you can reload your card in a variety of ways, including direct deposit, cash payment at a retail store, check deposit, and more. Then, you can continue to reload, use, and repeat.
Common uses of GPR prepaid cards
Why do people use prepaid cards? The two most common purposes are as a checking account or a credit card alternative.
1. Checking account alternative
Prepaid cards provide a great alternative to checking accounts and credit cards for people who can't qualify for them.
When you apply for a checking account, banks and credit unions often check your banking history. Likewise, when you apply for a credit card, you'll undergo a credit check. If you have an inconsistent banking or credit history, your application may be denied.
Prepaid card accounts present little risk to issuers since prepaid card users draw from their own funds rather than spending bank-issued credit. As such, most require very little or no screening. This makes them a great option for people who can't get approved for traditional credit or bank accounts. That explains why according to a Consumer Financial Protection Bureau report, 41% of prepaid card users didn't have a checking account, and 33% of open-loop prepaid card users had never used a credit card.
2. Limited-use product
Prepaid cards are also used as a limited-use product, even for people who do have bank accounts and credit cards.
Why would you need a limited-use product? You could use a prepaid card as a budgeting tool to isolate funds for your grocery bill or limit your spending on vacation. Or maybe you're sending your child away to college and want to give them some convenient, accessible spending money. Either way, a prepaid card is a great way to harness the convenience of a credit card without the risk of spending beyond your means.
New protections for prepaid cards
In the past, prepaid cards suffered from one major drawback: they lacked the protections offered by debit cards. But times have changed. As of April 2019, the Consumer Financial Protection Bureau (CFPB) implemented comprehensive regulations that extend those protections to prepaid cardholders. These include:
- Access to account information: A complete, accurate, and timely view of all account activity.
- Limited liability and error resolution, including provisional credit: Protection of funds if there are billing errors or your card is lost or stolen.
- Pre-acquisition disclosures: Issuers must provide short- and long-form disclosures, making it easier for people to understand fees and comparison shop.
- Submission and posting of prepaid account agreements: Issuers must submit their user agreements to the bureau and make them available to the public.
- Overdraft credit feature regulation: Card issuers must structure overdraft credit features as a separate or sub-credit account. The cards are referred to as hybrid prepaid credit cards.
These new protections ensure that prepaid card issuers are open and honest about their operations.
How to compare GPR prepaid cards
In recent years, the improved protections and new features of prepaid cards have raised their popularity, driving more competition in the market. As a result, their cost has dropped, and there has been an increase in product transparency.
Are you shopping around for a GPR prepaid card? Here's what you should consider.
Accessibility
Find out where you can use your prepaid card and how you can withdraw cash. Common options include:
- Obtaining cash via bank teller transactions.
- Using a personal identification number (PIN) to get cashback from merchants during POS transactions.
- Making purchases at vendors that accept the card's payment network.
- Making withdrawals at ATMs.
Ensure that you'll be able to use the card in ways that are convenient for you.
Reload options
How easy is it to reload the card? Check each card's reload methods to make sure that they suit your preferences. Additionally, find out if there is a fee to reload, as those can quickly add up.
Fees
How does the issuer compare to the competition regarding its fee schedule? Look at all of the fees the issuer charges, as well as the cost of each fee. Common fees include:
- Monthly service fee.
- Activation fee.
- Card reload fee.
- Signature purchase transaction fee.
- PIN purchase transaction fee.
- In-network/out-of-network ATM withdrawal fee.
- Customer service fee.
- Balance inquiry fee.
- Inactivity fee.
- Paper statement fee.
- Transfer fee.
- Bill payment fee.
- Additional card fee.
- Foreign transaction fee.
- Cancellation fee.
Prepaid card providers must disclose their fees before you buy their card.
Consider that a study of 66 major GPR cards found that cardholders paid an average of $10 to $30 each month. This cost depended on the cardholder's understanding of the card's fee structure. Those who understood their card's fees were better equipped to minimize these costs.
Be sure to review and compare the fees of at least three cards before making a decision. Look for one that suits your budget.
Payment network brand
Choose a payment network brand that will be accepted where you plan to use it. Popular payment networks include Visa, MasterCard, American Express, or Discover.
Which is better, Visa, or MasterCard?
Visa and MasterCard are both accepted widely in 200+ countries. In most cases, if one is accepted, so is the other. However, Visa does come in first in total purchase transactions worldwide. In 2018, Visa came in at 165.3 billion, while Mastercard had 90.2 billion.
Customer service
What is the card issuer's customer service like? Do you have to pay to get help? Are they available through multiple channels such as online chat, email, and phone? Are past customers happy with the service they received?
When you need help, it's important to have a team that is pleasant and efficient. Check the customer service hours and channels, as well as reviews from past customers.
Rewards
Look for rewards that will help you earn money back when you use your card. For example, a card may offer you points, cashback, or miles when you spend at restaurants, gas stations, or retail stores. By matching a rewards package to your usage habits, you can get the most out of your card.
ATM network
Check if the card has a network of ATMs where you can withdraw money for free. This is especially important if you plan to withdraw cash on a regular basis.
Maximum balance limit
Card issuers often limit how much money you can load onto a prepaid card. This maximum balance limit ranges from $2,500 to $25,000. Pay attention to this limit if you need to load large amounts onto the card.
Other features
Look for other features and benefits that add value. For example, the right prepaid card may offer you the ability to transfer money to friends and family on your phone, 24/7 mobile account management, or a savings account option.
Pros and cons of prepaid cards In summary, here are the pros and cons of GPR prepaid cards.
WEIGH THE RISKS & BENEFITS
Here is a list of the benefits and the drawbacks to consider.
Pros
- No credit check.
- Easy to get.
- Fewer or no overdraft fees than checking accounts.
- Many options to choose from.
- New protections increase transparency.
- Safer than cash.
- Growing features and capabilities.
- Merchants in 200+ accept Visa and MasterCard brands.
- Pay for purchases and withdraw cash from ATMs.
- Rewards are available with some cards.
- Extra features and benefits.
- Reload and use on a long-term basis.
Cons
- No interest earned.
- Doesn't help you build credit.
- No access to credit.
- Fees apply.
- Maximum balance requirements apply.
- Certain issuers charge for customer service.
- Registration is required for reloadable functionality.
Which prepaid card is best for you?
The best prepaid card for you depends on your needs.
For example, if you want to maintain a balance of $10,000, you should look for cards with a maximum balance limit that fits your needs. Or if you'll be making many PIN transactions, you'll want a card without a PIN transaction fee.
Use the comparison guide above to identify what you want in a card. Then, find the card that best serves your needs. We make it easy with side-by-side comparisons, filters, and with real-user reviews. Review the prepaid cards below to get started!
