Prepaid: 10 Common Myths Busted
Myth #1: Prepaid products are not safe to use because they’re unregulated
It is not true to say that all prepaid products are unregulated. In fact most prepaid products, that can be used in much the same way as a credit or debit card, must abide by EU Payment Services Regulations.
Examples of regulated prepaid products are travel money cards, general purpose prepaid accounts that are used instead of a traditional bank account and multi-store gift cards that can be used in multiple retail outlets.
All products, except those that do not fall under the ‘Limited Network’ exemptions (which means that they can only be used in a single or ‘limited’ number of outlets) must be authorised and regulated by a National Financial Regulator, such as the UK’s Financial Conduct Authority and issued by an Authorised E-Money Institution (EMI) or Small E-Money Institution (SEMI).
Furthermore, regulation requires all e-money institutions to safeguard the funds they receive from customers by placing them in ring-fenced accounts. This means that funds are protected and can be repaid to the customer in the unlikely event the issuer of the product becomes insolvent.
Using a prepaid product can be much safer than paying with cash, especially when they are used to store money when travelling overseas on holiday or on business. If a card is lost or stolen, any loss of funds is limited to the amount loaded into the prepaid account, protecting the user against losing everything in their bank account or credit card account if they were to have been using their debit or credit card.
Myth #2: Prepaid products do not offer customers protection such as coverage under the Financial Services Compensation Scheme
Prepaid products are not covered by the Financial Services Compensation Scheme because all regulated prepaid product providers must keep 100% of the value lodged in a client account which is available to customers should the card issuer become insolvent.
In short, the customer is totally protected.
Myth #3: Prepaid accounts are more expensive than banks to use and they charge hidden fees
Whether financial services are provided by a bank or an alternative to a bank these services are rarely entirely ‘free’.
For example, banks as well as alternative providers generally charge a fee for some foreign transactions, such as using your card to withdraw cash from ATMs abroad.
Traditional current accounts provided by banks have a variety of charge structures associated with them. These can range from fully transactional fee-based to “free-in-credit” models where all non-standard transactions attract very high fees. In almost all cases the total cost of operating a bank account is relatively high over the course of a year. Indeed, one of the criticisms of the banks’ approach to pricing is that it lacks transparency.
A report published by the Financial Inclusion Commission*, states that “the ‘free-in-credit’ banking model makes the true cost of traditional banking complex and difficult to understand”. At present, the report says, “banks recover the costs of offering ‘free-in-credit’ accounts by charging in other areas including stiff penalties for unauthorised overdrafts or withdrawals.”
Conversely, prepaid accounts are generally exceptionally transparent. While most prepaid accounts charge fees, these costs are shown on the providers’ website or in the terms and conditions. This means that customers have a genuine opportunity to see this important information before they commit to opening a prepaid account.
Because prepaid account customers cannot spend more than they have loaded into an account there is no risk of them being hit by overdraft charges and fees.
There are many types of prepaid products available for different purposes. The services each one provides may be charged for in different ways. Some of the most common charges are a purchase or application fee to set up the account and fees for certain types of transaction, such as using your prepaid card to withdraw cash from ATMs abroad. Some providers may charge a fee to load additional funds and these may vary depending on how or where prepaid products are topped up.
Myth #4: Prepaid cards can’t be used in the same way as debit and credit cards
With certain types of prepaid account, you can do just about everything a traditional bank account allows you to do, including using your prepaid card to shop in store and online.
Prepaid products are generally termed 'closed' or 'open' loop.
Open loop prepaid products are branded by one of the card schemes such as Mastercard and Visa and can be used at multiple locations, at retail outlets, online and in many cases to withdraw cash at ATMs.
Examples of open loop prepaid products are travel money cards, general prepaid card accounts that are used instead of a traditional bank account and multi-store gift cards that can be used in multiple retail outlets.
A closed loop prepaid product can be exchanged for goods and services only in a limited or pre-defined number of outlets, for example, store cards, fuel cards and transport cards such as London’s Oyster Card.
Myth #5: Prepaid products are only for people on low incomes or who can’t get a bank account
This is not true. Prepaid products can be used by people who have had difficulty opening a bank account but they are also used by people with bank accounts and credit cards as well, as they offer them the choice of another convenient and controlled way to pay for goods and services.
For example, prepaid products are a popular choice for people who are worried about using their debit or credit card to shop online. Any loss or fraud is limited to the value stored on the product, thus protecting the customer from losing everything in their bank account.
For parents looking for a budgeting tool for children, there is a growing number of specialist prepaid products designed for young people that offer them freedom and security without the risk of overspending. For students, too, prepaid products offer all the convenience of a credit card without the risk of getting into debt.
The security and convenience of prepaid products also means that they are a popular choice for travellers who are worried about carrying cash and who want to be able to budget what they spend on holiday and take advantage of often favourable exchange rates.
And it’s not just consumers who use prepaid products. Businesses use prepaid payment solutions every day to reward and incentivise employees, control expenses and pay out insurance claims. Prepaid payment solutions are also used by governments to disburse welfare payments and by humanitarian organisations to disburse aid to refugees and asylum seekers.
Myth #6: Prepaid cards are old fashioned. There are newer, more modern ways to pay such as contactless and mobile
This couldn’t be further from the truth.
The prepaid sector is one of the key innovators in financial services, making paying both online and in-store convenient, modern and secure. Many providers of prepaid products are spearheading the implementation of new technologies to create new mobile, wearable and internet-based payment products.
This innovation is driving competition between financial services providers and providers of goods and services, which is rapidly translating into benefits to consumers.
It is thanks to these developments that consumers are no longer restricted to traditional bank-issued financial products and those without an electronic means of payment are no longer restricted to shopping on the high street as they can now reap the benefits such as convenience and lower cost through shopping online.
Myth #7: Prepaid cards are anonymous and used by criminals to perpetrate their crimes
Prepaid products are rarely truly anonymous.
The common misperception that prepaid products increase the risk of criminal activity such as fraud, money laundering and terrorist financing due to their anonymity is an inaccurate portrayal of a highly-regulated sector which is providing prepaid products responsibly and investing heavily in transaction monitoring systems.
For prepaid products that are used by customers as an everyday payment account the products are fully personalised to the customer and are subject to customer due diligence checks.
Even in cases where the customer is not fully identified, prepaid products, unlike anonymous cash, provide an electronic footprint. This footprint can be used by providers to identify, monitor, manage and report unusual or suspicious use, allowing law enforcement agencies to gather necessary evidence to prosecute individuals who use these products for unlawful purposes. In fact, monitoring and use of such data has already led to successful police investigations of money laundering and terrorist financing in the past.
Myth #8: Prepaid cards are given to children who can use them to purchase age-restricted goods
There is no evidence to suggest that using prepaid cards gives young people access to age-restricted goods more than any other payment means.
In fact, there are several specialist prepaid accounts designed with young people in mind that allow parents to control what their children spend and where.
Far from being a risk, prepaid products are giving parents a safe and secure environment to teach their children about the value of money and how to manage it responsibly.
Myth #9: Prepaid products are only used by consumers for specific purposes, such as gift cards and travel money
Prepaid products are rapidly transforming the way people pay and get paid, utilising new technologies that allow providers to meet evolving customer needs. People want more control over their spending and more choice.
As a result, more and more people are opening prepaid accounts to manage their everyday finances because they are safe, quick and easy to open, simple to use and offer added functionality such as budgeting tools, loyalty programmes and mobile apps.
Myth #10: Prepaid cards can’t be used everywhere like debit or credit cards
Most prepaid cards that are branded by one of the card schemes, such as Visa or Mastercard, can be used online and in-store in millions of locations around the world wherever these brands are accepted. In this respect, prepaid cards are no different to debit or credit cards.
Prepaid products are issued for many different purposes so there may be some exceptions such as when products have been designed to address certain consumer or business needs. This means that some prepaid products may have specific inbuilt controls limiting where they can be used. A typical example is a youth account where spend at certain types of merchant both online or in-store will be denied.