What does someone do if they want or need to pay with a card, but they don’t have a checking account and don’t have the credit history to open a credit card account? What about people who don’t want to have access to all their funds with a single swipe or who want to give a debit card to their child without giving them access to clear out their whole bank account? These are just a handful of situations where a prepaid debit card can be a valuable solution.
Prepaid debit cards allow people to pay with either a physical card or virtual wallet account that they can load money onto as needed. These cards are not quite debit or credit cards and not quite gift cards — they have their own unique functionality and, therefore, need their own regulations. We’re going to discuss some current prepaid card regulations and take a look forward to where this market is heading. Fintechs have a great opportunity right now to issue prepaid cards, as long as they have the right tools to do it.
Prepaid Card Rules in the U.K.
In the United Kingdom, prepaid card issuers must abide by the regulations for electronic money issuers (EMIs), created by the Financial Conduct Authority (FCA). First, a U.K. business that wants to issue prepaid cards needs to have authorization from the FCA. They must also abide by the current regulations. The current regulations to pay attention to are the Second Electronic Money Directive and the revised Payment Services Directive.
Here are some of the newer regulations to be aware of:
- Ring-fencing: In the case of insolvency, a prepaid cardholder could lose their money to other creditors that have a claim on the EMI’s funds. This is why the FCA requires prepaid card issuers to have their users’ money ring-fenced. In other words, users’ money must be safeguarded so they can access it, even if the card issuer goes bankrupt. Chapter 10 explains the details of how to properly safeguard people’s money.
- No time limits: Another change is the EMIs are no longer able to set an expiration date on when users can redeem their money using their prepaid card. If money sits dormant for a long time, and the EMI is incurring costs to retain records or, in some way, maintain it, they can issue a fee that covers their costs. The details of this regulation appear in Chapter 8.
- No rewards: Another issue the FCA addresses in Chapter 8 is that electronic money issuers cannot award benefits, such as interest, that are tied to how long people keep their e-money. This regulation marks the distinction between a prepaid card and a debit card attached to a checking or savings account, where the user can accrue interest or other rewards over time.
Prepaid Card Rules in the U.S.
In the U.S., the Consumer Financial Protection Bureau (CFPB) lays out specific regulations for prepaid cards that fall under the Truth in Lending Act (Regulation Z) and the Electronic Fund Transfer Act (Regulation E). This set of regulations is also referred to simply as the CFPB prepaid account rule. Essentially, this rule provides protections to prepaid accounts. These include:
- Transparent fees: If a customer is considering buying a prepaid card at a store, they should be able to see a standardized fee chart, so they can make an informed decision. The costs on this chart must include the initial cost to buy the card, any monthly fees and customer service or inactivity costs, as well as fees to withdraw money from an ATM, check your account balance, or load cash onto the card. You also need to have this information available online or over the phone for consumers.
- Loss protection: If someone steals a customer’s card, and the customer reports it within two days, they are only responsible for paying up to $50 of the resulting charges. The card issuer needs to look into fraudulent charges and credit the customer’s account for any unauthorized charges.
- Free balance checks: Prepaid card issuers are allowed to charge fees for a cardholder to check their balance at an ATM. However, if the customer wants to check their balance online, over the phone, or by mail, the card issuer must offer this service for free. The only exception is if a customer gets regular account summaries in the mail.
- Limited overdraft costs: Some prepaid cards allow users to make purchases that exceed what they have in their account. To issue these cards, a company must evaluate a user’s financial situation before granting them credit. These cards are subject to the same rules as credit cards, which put a cap on overdraft fees. The exact regulations specify certain percentages and the amount of time users should have to pay before adding late fees.
Prepaid Cards Are the Future
The use of prepaid cards has increased over time, which is why governing bodies have had to create regulations that pertain specifically to prepaid cards. Prepaid cards are continuing to gain traction because of the helpful role they can play for diverse groups of users. By 2022, the global market for prepaid cards is expected to reach a value of $3.1 trillion.
Prepaid cards are showing up in consumers’ physical wallets and in their virtual mobile wallets, as well. This can make prepaid cards even more convenient to use for some consumers. As the financial world continues to evolve, the features people can enjoy from prepaid cards will likely evolve and expand, as well. As prepaid cards take on a more prominent role, industry leaders and governing bodies will continue to come up with ways to make using prepaid cards the best experience it can be for customers and issuing companies.
There are some challenges to overcome with prepaid cards. One of these challenges is a lack of standardization of fees, though that will likely change over time. For now, consumers are at least able to see fees clearly displayed, so they understand the terms of using a particular prepaid card.
Another challenge is security, since prepaid cards that are akin to gift cards lend themselves well to users who want to conceal their illegal financial dealings. The U.K. and Canada are trying to address these security concerns by discouraging the anonymous use of prepaid cards. Rather than being able to issue cards with little to no information about the user, EMIs will increasingly have users register their cards with their personal information in order to gain access to its features. In this way, prepaid cards will function less like gift cards, and more like debit cards.
Issue Virtual Prepaid Cards With Help From Hydrogen
If your fintech company wants to issue prepaid debit cards to your customers, Hydrogen can help. We are here to answer your questions about prepaid cards and get you started creating a platform for issuing cards to your users.
Our tools, no-code widgets, and applications can help you create a professional, user-friendly platform for issuing prepaid cards. You can use our configurable API platform for virtual card issuance and so much more. Start building your card product or component today with our simple onboarding process.