Prepaid Cards Explained

What a prepaid card is

A prepaid card is a payment card that draws on money loaded onto it in advance, rather than on a line of credit or a bank account. The card looks and behaves like any other card at the point of sale, but the difference is underneath: there is no credit line, and no overdraft is possible because there is no account to overdraw. When the balance reaches zero, the card simply declines.

• Funds are loaded in advance and spent down
• No credit line, so no interest and no debt
• A declined transaction is a balance problem, not a credit decision
• Issued by banks, by retailers and by programme managers

How prepaid differs from debit and credit

The three card types are separated by where the money comes from at the moment of authorisation. It sounds like a small distinction, but it changes what an approval means, why a transaction is declined, and how a dispute is handled.

Who issues them

The same product arrives in three very different wrappers. Retail gift cards are closed-loop: the value is locked to one merchant and is often never seen as a card number at all. Closed-loop prepaid cards work at a small network of accepting merchants. Open-loop prepaid cards carry a network mark and work anywhere that network is accepted, which makes them the closest relative of a virtual card.

Loading and spending

Money reaches a prepaid card in one of two ways. A physical card is bought with value already on it, or value is loaded onto it at a till, over the phone or through an app. After that, the balance falls with each authorisation. The subtlety is that an authorisation is not a final spend: a hotel deposit, a car hire booking or a fuel pump will hold an amount well above the eventual bill, and the difference is released later.

• Value is loaded at purchase, at a till, or through an app
• Each authorisation reduces the available balance
• Authorisations may hold more than the final amount, and the difference is released
• A card with no balance declines immediately, usually with a specific reason code
• Some programs allow a negative balance with an overdraft facility

Why they are used

Prepaid cards exist for reasons that have nothing to do with the card format itself. They control where money can go, which makes them useful for a parent setting a budget, an employer paying a contractor, a traveller avoiding a foreign transaction fee, or a service that needs to hold a customer balance without giving the customer a card.

• Parental controls, with a limit a child cannot exceed
• Corporate and contractor payments, tied to a project budget
• Travel money, on a known exchange rate
• Holding a balance on a marketplace without issuing a card
• Prepaid accounts for people who cannot open a bank account

Prepaid and the BIN data

A prepaid card is issued by a real issuer, so its prefix is in the BIN data with a product type of PREPAID. That matters more than it sounds: a prepaid card declines when the balance is empty in a way a credit card never does, and a transaction against one that appears to have been approved can be reversed days later when the final amount differs from the authorisation. Knowing the type lets a system treat it correctly.

• PREPAID is a distinct product type in the BIN data
• An empty balance produces a decline, not a credit decision
• Authorisation holds can exceed the final spend and are released later
• A dispute is often a balance question rather than a merchant question