If you’re issuing cards, you’ve likely heard about prepaid cards. But why are so many fintechs offering these products? And why is the prepaid card market valued at over $1.73 trillion¹?
Prepaid cards can be used just like a debit or credit card, but they’re not tied to any bank account and work a little differently behind the scenes. Unlike debit cards, your money is loaded on the card itself (rather than a bank account) and you can generally only use the card to spend up to the amount you loaded.
You may have heard these cards referred to as stored value cards or prepaid debit cards. The latter can be a little confusing — are they debit cards or not?
To better understand the world of prepaid cards, it helps to understand the Prepaid Rule — a set of special regulations put forth by the CFPB.
In this blog, we break down prepaid cards and the Prepaid Rule.
What Are Prepaid Cards?
When you use a prepaid card, you’re spending money that’s been added (or “loaded”) onto the card.
This makes prepaid cards different from debit cards, which use funds from a connected bank account. With prepaid cards, you’re spending money that’s stored on the card itself.
This also explains why they’re sometimes referred to as “stored value cards.” You can’t spend with a prepaid card if you don’t first load money on it, so, in a sense, you need to “prepay” the card (hence the name).
A quick caveat: whether a card is prepaid for the Prepaid Rule is different than whether it’s funded on a prepaid basis (which we’ll discuss below) or whether it’s a prepaid card for bank identification number (BIN) purposes².
For example, a card could be funded on a prepaid basis and not fall under the Prepaid Rule.
While the rules surrounding prepaid cards may seem like a hurdle, many fintech entrepreneurs are able to navigate them. Let’s walk through the main considerations.
What’s the Prepaid Rule? What does it cover?
The Prepaid Rule is a set of special regulations for prepaid cards that are issued to consumers. That means it doesn’t apply to card programs where the cardholders are, for example, small businesses.
A card can be subject to the Prepaid Rule if it falls into one of these buckets and it doesn’t fit into an exclusion (discussed below):
- Marketed as Prepaid: A card marketed or labeled as “prepaid” that can be used at ATMs and/or different businesses.
- Loadable & Spendable: A card that is (1) issued on a prepaid basis (see below), (2) is mainly used at different businesses, at ATMs, or for P2P transfers, and (3) is not connected to a bank account.
- Payroll Cards: Cards used by employers to pay wages, salary, or other compensation.
- Certain Government Benefits: Cards for government benefits that aren’t needs-based (e.g., unemployment benefits).
Being issued “on a prepaid basis” means that the card itself holds the funds instead of just being a pass-through tool. For example, a debit card is a pass-through tool for a bank account because the card itself doesn’t hold funds; they’re held elsewhere. A digital wallet is also a pass-through tool for the same reasons.
The CFPB also has this handy flow chart to help decide whether a card falls under the Prepaid Rule.
Exclusions
Several types of cards explicitly don’t count as prepaid for the Prepaid Rule, like:
- Gift cards and promotional cards (which have their own Gift Card Rules)
- Medical saving and spending cards (like HSAs and FSAs)
- Transit or parking reimbursem*nts
- Cards for needs-based government assistance programs
- General use prepaid cards marketed as gift cards
Disclosure Requirements
The Prepaid Rule requires that the card issuer provide two disclosures, a long form and a short form, before a cardholder receives a prepaid card. Both forms describe fees, FDIC insurance, and contact information in varying detail.
While prepaid card providers need to tailor Prepaid Rule disclosures to their situation, Lithic is happy to provide template disclosures.
Additional Resources
[1] Allied Market Research: Global Opportunity Analysis and Industry Forecast, 2021-2030
[2] BINs are the first several digits of a card, which identify the bank that issued the card.
[3] CFPB prepaid account coverage chart
[4] CFPB: Executive Summary of the Prepaid Rule
[5] CFPB: Executive Summary of the 2018 Prepaid Amendments
[6] CFPB Guide to preparing the short form disclosure for prepaid accounts
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If you want updates on regulatory fintech news (written for non-lawyers) check out Reggie Young’s FinTech Law TL;DR.
Disclaimer: This post is for information purposes only and is not legal advice. Every situation is unique, so you should consult a lawyer; Lithic’s legal team can recommend fintech attorneys if you need.
