As online sales increase year on year and contactless technology makes physical purchases quicker and easier, the way UK consumers transact has changed. Fewer people are carrying cash as many switch to electronic payments - indeed the British Retail Consortium (BRC) reported a 10% drop in cash based transactions for 2013.
Traditionally, electronic transactions have required either a debit card (linked to a current account) or credit card, but strict eligibility criteria (required due to the available credit) mean that these products are not available to everyone.
What are Prepaid cards?
Prepaid cards are a relatively new type of payment method in the UK. They offer holders the convenience of traditional credit and debit cards (online shopping, contactless, chip and pin security etc), but with one fundamental difference - only funds which have been preloaded onto the card can be spent.
As prepaid cards do not enable customers to draw on a credit facility, the cards cannot become overdrawn. Card holders are therefore required to meet considerably less stringent eligibility criteria than they would be for credit or bank linked debit cards, making prepaid cards a very accessible financial product.
How do prepaid cards work?
Because prepaid cards are a relatively new concept in the UK, there are a great number of issuers offering competing products for specific customer needs, but they tend to operate in a very similar way.
Most prepaid cards are applied for online by completing a short application form (many of the fields required for a credit card application are unnecessary for prepaid cards).
Once the application is completed, a confirmation email acknowledging successful completion is sent, and within a week the physical card should arrive.
When the card arrives in the post the customer must activate it and select a pin number of their choice. This is either done online, by phone (often to an automated line), or through an ATM.
Once the card has been activated it must be 'loaded' with funds before use (as only what is loaded can be spent). This can be done in a number of ways, including:
- Bank transfer
- Credit/debit card
- With cash at the Post Office or Payzone point
- SMS text (with additional setup)
Prepaid cards tend to be issued for use through either the MasterCard or Visa network (so they are widely accepted both in the UK & abroad). Customers can access their funds through an ATM using their pin code to withdraw cash, or the cards can be used to make purchases in-store or online in the same way a credit or debit card might be used.
What do prepaid cards cost?
Unlike debit or credit cards, prepaid card issuers do not make money by charging interest on balances or overdrafts. Instead, the costs incurred by the issuer to facilitate payments and transactions tend to be passed more directly to the consumer through numerous small charges for different activities and actions, such as:
It is not uncommon for prepaid issuers to charge an initial fee to apply for the card to discourage individuals from applying for a product they do not need or are unlikely to use.
There are a number of ways to top up the card, but most issuers charge a fee of around £1 or 3% for doing so.
Cash Withdrawal (ATM) Fees
These may be a percentage of the withdrawn amount or a fixed sum per withdrawal. The amount charged can differ for currency cards based on the country of the withdrawal.
Some issuers charge when cards are used for spending, but this is often waived as interchange (fees charged to the retailer for processing card payments) is one of the few areas prepaid issuers can make money.
Replacement Card Fees
In the event that the card is lost or stolen, the provider will replace it for a fee.
Prepaid issuers want to discourage customers from holding dormant accounts which they continue to incur servicing costs for, so many charge fees if the card isn`t used for a certain period of time.
Who are prepaid cards most suitable for?
Prepaid credit cards are available to everyone, but the unique features they offer tend to make them better suited to certain groups;
Some bank accounts offer debit cards to youngsters, but many only offer a cash card until they reach 16 or 18. Many prepaid card issuers either allow teenagers to have their own card or be a cardholder on a parent`s account - enabling younger people to buy goods, music and other items online (without parents needing to hand over sensitive credit card details).
Individuals with Low Credit Scores
Individuals with a low or bad credit score can find that prepaid cards are far more accessible than bank accounts (with debit cards) or credit cards. Some prepaid credit cards also offer credit building facilities to help improve poor credit ratings.
Newly Resident Individuals
People who have travelled to the UK to work can find that the lack of permanent residence, electoral role inclusion and UK credit score precludes them from accessing mainstream personal finance products. Given that some prepaid cards offer users an account number and direct debit functionality, they are often used as an alternative to standard bank account products.
Individuals that plan on using plastic when travelling abroad often benefit from prepaid cards. There are specific cards for overseas spending that offer reduced exchange fees and standard card security features which make plastic considerably safer and more convenient than carrying cash or Travellers Cheques to exchange for foreign currency.
Security Conscious Shoppers
Although prepaid cards are typically associated with people unable to access standard credit or debit card products (or people travelling abroad), they are also popular with security conscious individuals. Because spend on these cards is limited to the amount which has been 'prepaid', they can be useful for individuals using PayPal, Amazon and other online sites where the individual needs to limit their potential risk against security failures.
What are the main benefits of prepaid cards?
Prepaid cards offer users numerous benefits, some generic and some specific to the issuer and individual product. These benefits can include (but are not limited to) the following:
Because prepaid cards offer no credit, they require no credit check and are therefore widely available to UK residents.
Because prepaid cards are offered through the main international payment processing networks (MasterCard & Visa), they are widely accepted in both the UK and abroad.
Transparent / Fair Fee Structure
Prepaid card issuers detail all payable fees in advance. This can make them appear cost prohibitive, but it is arguably fairer to charge all individuals for the fees associated with their specific usage, than to charge certain individuals considerably more in interest and other charges.
Because spending on prepaid cards is capped at the amount pre-loaded on to them, they can be useful for ensuring individuals do not over spend.
Building Credit History
Some prepaid cards offer a credit building facility which enables individuals to build credit history with the main UK credit bureaus as they use their prepaid card. This service is often a charged optional extra, but for individuals with “bad credit” it can offer a reduced risk route to re-establishing a good credit history.
Bank Account Alternative
Wages can be paid directly onto many prepaid cards using unique customer account numbers (much like bank account numbers). Direct debits can also be arranged using these account numbers, making prepaid cards a viable alternative to some bank accounts (especially those which incur high monthly fees).
Disadvantages of Prepaid Cards
Although prepaid cards offer many unique features and are a useful tool for many individuals with differing circumstances, they are not perfect for everyone and do have disadvantages. Depending on the product, these disadvantages could include:
High Fees (Versus Free Alternatives)
Individuals who never go overdrawn or accrue interest may find that the fees they incur for using a prepaid card are higher than they would be charged by using a bank debit card or credit card product.
Less Enhanced Purchase Protection than Credit Cards
Users of prepaid (or debit card) products do not enjoy the same protection that they would be afforded (Section 75, Consumer Credit Act) if they used a credit card for the same applicable purchase. However, some redress is possible for Visa prepaid users under the chargeback scheme.
No FSCS Protection
Prepaid card balances are not to be covered by the provisions of the Financial Services Compensation Scheme (FSCS) which guarantees individual customers' balances up to Â£85,000 in the event their bank becomes bankrupt.
No Interest is Paid on In-Credit Balances
Although prepaid cards can be used like a bank account, they do not offer customers interest for in-credit balances unlike a number of bank account providers, meaning users could miss out on the income their balance might generate.
Some prepaid cards impose limitations on the types of transactions which can be undertaken with them. Gambling, for instance, is often not permitted with a prepaid card.
Prepaid cards offer no credit line whatsoever, so individuals needing emergency cash will need to arrange for additional funds to be loaded onto their card even in emergency. Most prepaid cards will also impose a cap on the amount that can be loaded onto the card and the rate at which it can be withdrawn (eg. £100 per day).
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