Prepaid Cards vs. Gift Cards | Hydrogen Blog
Prepaid Cards vs. Gift Cards

Prepaid Cards vs. Gift Cards

“Cash or card?” It’s a common question when people are completing a purchase in-person. Depending on the size of the purchase, card is usually the answer. Today’s consumer has more options than ever before when paying by card. They can use a credit card, a debit card, a prepaid card, or a gift card.

Although physical prepaid cards and gift cards are both made of plastic and contain unique numbers, there are notable differences between the two. If you’re considering offering prepaid rewards cards versus gift cards, knowing how they are similar and how they differ can help you choose the option that best meets the needs of your payees.

What Is a Prepaid Card?

A prepaid card isn’t the same as a credit card. It’s also not the same as a debit card a consumer might have from a bank, although it shares some similarities with a debit card. Prepaid cards tend to be free-standing, meaning money is loaded onto the cards themselves and isn’t deposited into a bank account. Someone who is unbanked can use a prepaid card to minimize their use of cash or to reduce their reliance on check-cashing stores.

Some of the features prepaid cards have in common with other plastic payment methods are:

  • Account number: Prepaid cards have a unique, 16-digit account number connected to them. When a person uses the card to make a purchase online, they type in the number to pull funds from the card. Prepaid cards also often have a PIN connected to them.
  • Expiration date: Like credit cards, debit cards, and some gift cards, prepaid cards usually have an expiration date on them.
  • Uses: You can use prepaid cards to make purchases at stores that accept credit or debit cards or when ordering online. You can also use a prepaid card to withdraw money from an ATM.
  • Reward options: Some, but not all, prepaid cards are also rewards cards. You can collect points to redeem for cash back or to get credit for certain purchases when you use the card.

Many prepaid cards are reloadable, meaning you can add money to them as needed. There are also non-reloadable prepaid cards, which can’t be used once the balance on the card is depleted.

One of the things a prepaid card has in common with gift cards is that you can only spend the amount you load onto the card. If the card has $250 on it, you can’t make a purchase worth $300 without loading another $50 onto the card. For that reason, some people prefer to use prepaid cards to help get their spending under control.

What Is a Prepaid Gift Card?

Gift cards have some things in common with prepaid cards and other plastic card payment options. One of the biggest differences between prepaid cards and gift cards is that gift cards are often connected to a particular brand. For example, if someone gives you a prepaid gift card for Retailer A, you can only use the card to buy things from that retailer. Gift cards that only work at certain locations are called closed-loop gift cards.

Some gift cards are issued by a payment processor, such as Visa or Mastercard gift cards. These are open-loop gift cards, meaning you can use them at any retailer or merchant that accepts Visa or Mastercard card payments.

Generally speaking, you can’t reload gift cards. Once the value of the card is used, it gets thrown away.

It’s also worth noting that the fees charged for a prepaid debit card vs. a gift card are likely to be different. Retailers typically don’t charge fees for gift cards but cards from a payment processor might charge an activation fee. A prepaid card might have an activation fee as well as monthly fees. Some prepaid cards also charge fees when you use them at ATMs.

Gift cards might be less secure than prepaid cards. Although some retailers let customers register their gift cards to their account, if a card is lost, generally the value of the card is also lost. Prepaid cards typically require a person to register the card and create a PIN to limit access to it. After registering the card, a person can report it lost or stolen if necessary, then transfer the remaining funds on the card to a new one.

Prepaid Cards Use Cases

Prepaid cards don’t require a person to have a bank account to get access to their money. They can also streamline the process of issuing payments to individuals. Instead of having to collect a person’s bank account information to pay them via direct deposit, a payer can simply issue a prepaid card to the individual. If the company is making recurring payments to a person, it can reload the card as needed. Some uses for prepaid cards include:

  • Payroll: Some employers have opted to use prepaid cards for payroll, rather than issuing paper checks. After getting paid via the card, a person can withdraw the cash at an ATM or use the card itself to make purchases. In some cases, an employer might exclusively use prepaid cards for payroll or might also offer employees the option of getting paid via direct deposit.
  • Government benefits: People who receive government benefits can get paid on a prepaid card, too. For example, unemployment payments might be issued to a card. Some people receive their tax refunds on a prepaid card instead of by check or direct deposit.
  • Gig worker payments: Individuals who work as gig workers for ride-hailing or food delivery companies often get paid via prepaid card, as well. Using prepaid cards makes it easier for the companies to issue smaller, more frequent payments to the people who drive or deliver for them.

Additionally, some people prefer to use prepaid cards to manage their expenses and to help them with budgeting. For example, a person might purchase a prepaid card to use for groceries. Each month, they might load $500 onto the card. Once the $500 is spent, they have exhausted their grocery budget for the month.

Prepaid cards can also provide a secure way to shop online. Since the cards aren’t connected to a bank account, there is less of a risk of theft. If an unauthorized individual gets access to the card’s number and uses it, they can only spend up to the amount loaded on the card.

Issue Prepaid Cards for Your Customers

If you’re looking for a streamlined way to manage payroll, issue payments to gig workers, or otherwise make regular payments to customers, prepaid cards are a useful tool. Hydrogen makes it easy to create virtual and physical prepaid debit cards and issue them to your employees, vendors, or customers. To learn more, request access to our no-code platform today.

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Visa® Prepaid Cards are issued by MetaBank®, N.A., Member FDIC, pursuant to a license from Visa U.S.A. Inc. Visa Cards may be used everywhere Visa debit cards are accepted.
Mastercard® Prepaid Cards are issued by MetaBank®, N.A., Member FDIC, pursuant to license by Mastercard International Incorporated. Mastercard is a registered trademark, and the circles design is a trademark of Mastercard International Incorporated. Mastercard Cards may be used everywhere Debit Mastercard is accepted.
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