Debit 201 Lesson 1: Prepaid Landscape

Debit 201(Required. Debit 101 prerequisite): Is Prepaid “Debit-Lite?”

Lesson 1 Discussion Board: What is the fastest growing segment of prepaid product today, and why? Click here to respond.

It Starts With a Gift: Prepaid cards began as a simple way for merchants and operators of closed business systems to eliminate cash reimbursements and disbursements in their internal processes. Merchants found it more convenient to deliver store credits and refunds via prepaid cards that could only be used in that retailer’s location, eliminating cash promotions, discounts and refunds at the customer service counter. A prepaid store card loaded with return merchandise credit offers the combined benefit of reducing cash management in customer service, containing refund and exchange value to a product that may only be re-used within the store, tracing access for program management and reporting, and realizing potential residual value from “breakage” on the product — that is value that was loaded onto the card but never fully depleted.

As consumers became more familiar with the cards, retailers began offering them as pre-purchase payment vehicles, primarily in the form of gift cards that replaced gift certificates as the way consumers could buy value at the store and gift it to someone else in the form of a stored-value plastic card. As merchants built these programs, specialty marketers of prepaid programs appeared to extend the distribution of merchant closed-loop prepaid programs by creating merchandising centers within major retailers for gift cards from multiple merchants. As they expanded, these programs grew in scale and scope to include reloadable applications for general purchases at a specific merchant, where a consumer would buy a “gift” card for herself and then use that card in lieu of cash at the point of sale, loading more value onto that card at the register -from a general purpose credit or debit card, cash, or check-whenever she needed more funds. Reloadable store cards became a great way for retailers to replace small value cash transactions at the point of sale, and were rapidly adopted by small ticket merchants such as McDonald’s and Starbucks.

General Purpose Joins the Party: So prepaid cards were growing from simple cash replacement within specific stores to purchase vehicles for those same retailers to broader multi-merchant retail distribution, becoming a substantial business in their own right. It’s no wonder that the prepaid card merchandising unit of Safeway became an independent manager of prepaid distribution and marketing now called Blackhawk. The cash-replacement side business was becoming a real business. The next logical step was to make those individual store cards more valuable to consumers by making them usable across multiple merchants. But how? While some prepaid merchant processors were positioned to manage access to one card from multiple merchants, it was tough to communicate that benefit to consumers. And how to manage the rules and value exchange for issuance and acceptance across multiple merchants? Kind of complex, that. Had anyone ever set up a system to do that before?  Hmm….And so entered the general purpose card networks into the prepaid business.

Business Grows and Segments Emerge: Program managers began to drive issuance of multi-merchant reloadable cards onto general purpose acceptance networks, changing the industry radically. Safeway could now sell a Visa-branded gift card, earn a load fee as before, but sell many more cards every day as consumers saw the opportunity to give gifts of cash usable at multiple merchants. Corporations began to get into the game, providing incentive payments to employees and to customers in the form of multi-merchant gift cards on the Visa and MasterCard networks. From this beginning, the industry application of prepaid cards expanded rapidly into three major categories of business today:


  • Gift and Incentive: For a long time the bread and butter of the prepaid business, this segment continues to be a solid business of general merchandising and processing for prepaid program managers. The traditional gift business provides retailers with revenues from merchandising and selling gift cards that can be used at millions of merchants. Corporate programs that provide incentives to employees, partners, and customers in the form of prepaid cards create a strong supplement to this business. These cards tended to be one-use products distributed for a fixed amount.



  • General Purpose Reloadable (GPR): When tied to a reload capability, a prepaid card on a general purpose acceptance network becomes a highly flexible and valuable asset. Many networks have coupled the debit capabilities of core GPR with the merchant-category spend controls and daily limits of commercial products, creating a powerhouse product with strong central-control capabilities attractive to commercial enterprises. In all of this, the key to these products have been their PoS and ATM supplemental load capability, supported by general purpose and private label networks deployed at merchant and financial institution points of interaction. These load capabilities create a network of access points for additional “deposit” into the core prepaid purse by the consumer – in the form of cash or check-from other income streams. By combining these assets, the industry has created a powerful alternative to traditional retail deposit accounts, through a card product that replicates the benefits of electronic deposit access via alternative delivery channels. As can be imagined, the opportunities for deployment of this product have been phenomenally diverse, such as:



o   Payroll: For commercial applications, particularly with employers who have a large population of high-turnover hourly workers, it can serve as a direct-deposit replacement, providing a way for companies to pay employees directly, swiftly, fairly, and economically with an access vehicle that gives consumers without ready deposit accounts a way to hold and track funds while accessing the benefits of electronic payments.

o   Government Disbursement: On the state and federal level, both in the US and increasingly in international markets, prepaid products have seen high utility as a way for state agencies to distribute funds to beneficiaries in a way that is swift, secure, leaves an audit trail for taxpayer reconciliation, and provides for acceptance controls to ensure, as in the case of food programs, that the funds loaded on the product are being used as and where intended.

o   Healthcare: The combination of GPR prepaid capabilities deployed in payroll and the spend control capabilities of government disbursement prepaid programs create the optimal product construct to capture the growing trend in health benefits toward consumer-directed healthcare. Through the provision of 1) health savings accounts for general healthcare benefits, and 2) flexible spending accounts for supplemental health plan benefits such as vision, dental, and prescription, employers have seen a significant decline in cost of care for benefit plans in concert with a rise in employee engagement in the management of those costs.


Summary: Prepaid programs have evolved from relatively simple closed-loop retailer programs to complex, and highly lucrative, businesses and a host of new industries have sprung up around the current “killer app” for prepaid products: general purpose reloadable prepaid. That application has found a host of ingenious uses in segments that were tough to serve with traditional credit, debit, and commercial products. Along the way, a diverse set of stakeholders have engaged in the provision, distribution, and servicing of those product applications, building significant businesses around the complex evolution of a piece of plastic built to replace gift certificates and store credit receipts. In the next section, we will review how the largest distributors of prepaid products -retailers, governments, employers- may see major change in the adoption of their prepaid programs as regulatory changes in the traditional debit marketplace may introduce a new era of opportunity for prepaid.

Lesson 1 Discussion Board: What is the fastest growing segment of prepaid product today, and why? Click here to respond.

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