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Prepaid Card Basics

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Who needs a prepaid credit card?

Budget conscious people
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Two Types of Prepaid Cards


Two Types of Prepaid Cards: Open and Closed -System Prepaid Cards

The popularity of prepaid credit cards is rising. Visa and MasterCard are issuing prepaid, or pre-denominated, stored-value cards, as they're called, that can be used anywhere Visa or MasterCard are accepted.

The growth of electronic prepaid products is changing the way how payment systems are working. Prepaid cards have largely served as a replacement for paper-based payment instruments and related devices, such as gift certificates, paper tickets and tokens, and check-based rebates.

There are two different types of prepaid cards: closed-system and open-system prepaid cards. Closed-system prepaid cards are those issued by and redeemable at a single merchant (or merchant chain). Closed-system retailer gift card programs focus on a single application: providing a prepaid card product to consumers solely for making purchases at a single merchant or, in some cases, a group of retail merchants.

The open-system network is differentiated from the closed-system network by the fact that open-system prepaid cards are branded by a payment card network. Network branding makes it possible for open-system prepaid cards to be processed using the same “tracks” as traditional debit and credit cards. As a result, these branded prepaid cards are accepted at any merchant that accepts the network brand on the card. For example, a Visa-branded prepaid card can be redeemed by its holder at any merchant that accepts Visa-branded debit cards.Open-system gift cards are issued by a third party, such as a bank or money transmitter, and carry the brand of a card association or other payment network. They can be used at any merchant that accepts the brand on the card.

Closed-system prepaid products began in the early-1970s with transit and college campus cards. In the late 1980s, prepaid phone cards emerged in the United States, followed by closed-system gift cards in the mid-1990s. Open-system prepaid cards began in the early 1990s with Electronic Benefits Transfer cards replacing paper-based food stamps. Open-system gift cards were introduced in the mid-1990s.

Since the mid-1990s, providers have developed open-system prepaid cards designed to streamline payroll disbursements, facilitate remittance payments by immigrants to relatives through ATM networks, and simplify the disbursement of funds from pretax flexible spending accounts for health care expenses.

Overall, closed-system products have been in existence for several decades and have been relatively successful in meeting particular market needs. The most successful prepaid products would likely be closed-system gift cards, payroll/general purpose cards for the underbanked, remittance cards, and medical benefit/flexible spending account cards.

In contrast, open-system products are still developing. A variety of different prepaid business models have been developed to run on open-system networks. While these products are relatively newer than closed-system gift cards, they are becoming increasingly popular as a gift idea or a tool to help manage spending.

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