What Is Considered a Prepaid Card?

Prepaid cards are a widely used financial instrument for managing funds. They provide an alternative payment method for various needs, from routine purchases to specific disbursements.

Defining Prepaid Cards

A prepaid card operates on a fundamental principle: funds are loaded onto the card before use. Unlike a credit card, which offers a line of credit, a prepaid card uses only available money. Similarly, it differs from a debit card because it is not directly linked to a traditional bank checking account.

This financial tool functions as “stored value,” with the balance acting as a spending limit. Once the balance is depleted, the card cannot be used until additional money is added.

Prepaid cards can be categorized by their acceptance networks, specifically as “closed-loop” or “open-loop.” Closed-loop cards are typically restricted to use at a single merchant or a specific group of affiliated retailers. Examples include store-specific gift cards.

Conversely, open-loop prepaid cards are accepted more broadly, functioning across many merchants that participate in major payment networks. These cards often bear the logos of networks such as Visa, Mastercard, Discover, or American Express, allowing them to be used wherever these brands are accepted. This wider acceptance makes open-loop cards versatile for various purchases.

Types of Prepaid Cards

• General Purpose Reloadable (GPR) cards function much like a debit card but without a direct link to a traditional bank account. These cards are reloadable and widely accepted at various retailers, online platforms, and for ATM cash withdrawals. Many consumers use GPR cards as an alternative to bank accounts, allowing for direct deposit of paychecks and bill payments.
• Gift cards are typically designed for specific retailers or general spending within a particular network. While some gift cards are tied to major payment networks, many are closed-loop and not usually reloadable once their initial balance is spent. They are commonly used for gifting or promotional purposes.
• Payroll cards are issued by employers to disburse wages to employees, providing an electronic alternative to paper checks or direct deposit. An employer loads an employee’s pay directly onto the card each payday. This method is particularly useful for employees who may not have a traditional bank account.
• Government benefit cards facilitate the distribution of government aid, such as unemployment benefits, child support, or food assistance. Federal and state agencies use these prepaid cards, often referred to as Electronic Benefits Transfer (EBT) cards. The benefit amount is loaded onto the card.
• Travel cards are designed for managing expenses while traveling, allowing users to load funds in a specific currency or multiple currencies before a trip. These cards function like debit cards but are not linked to a personal bank account, offering a secure way to carry funds abroad. They are accepted wherever major credit card networks are.

Understanding Prepaid Card Features

Reloadability distinguishes different prepaid cards. Some cards are non-reloadable, meaning they are single-use and cannot have additional funds added once the initial balance is depleted. Many prepaid cards, especially General Purpose Reloadable cards, permit multiple reloads through various channels like direct deposit, cash at retail locations, or bank transfers. This flexibility enables ongoing use and financial management.

Prepaid cards operate on major payment networks, including Visa, Mastercard, Discover, and American Express. The affiliation with these networks dictates where the card can be used, with network-branded cards generally accepted wherever their respective network’s debit cards are. This widespread acceptance provides convenience for cardholders, enabling purchases in various retail and online environments.

Many prepaid cards, particularly those designed for broader use like GPR cards, require personal identification and registration. This requirement is due to regulatory measures, such as the Customer Identification Program (CIP) rules under the USA PATRIOT Act. These regulations mandate financial institutions to verify the identity of individuals opening certain types of accounts, including name, date of birth, address, and a taxpayer identification number. The purpose is to prevent money laundering and other illicit financial activities.

Prepaid cards are subject to specific financial laws, most notably the Electronic Fund Transfer Act (EFTA) and its implementing regulation, Regulation E. These federal laws establish a framework for electronic fund transfers, encompassing various aspects of prepaid accounts. Regulation E outlines requirements related to disclosures, periodic statements, and error resolution procedures for prepaid accounts, treating them similarly to traditional consumer asset accounts in certain contexts. This regulatory oversight defines how these cards function within the broader financial system.