Leslie Parker writes in the Sydney Morning Herald about Prepaid Cards and talks about the differences between Closed Loop and Open Loop Prepaid Cards. Look for Open Loop cards to become more popular in the future...Get in the loop Lesley Parker - Sydney Morning Herald
December 3, 2008
The prepaid card that helps consumers set spending limits is challenging its credit and debit rivals.
The mounting popularity of debit cards is one indication that Australians are losing their appetite for credit. But there's another alternative for consumers who like the convenience of a card but find debt distasteful - prepaid cards.
Many consumers will have come across prepaid cards in the form of gift cards - cards with a set value that are branded by a retailer to be used in its particular outlets.
These are known in the industry as "closed loop" cards because you can't use them outside that store. They're also described as "disposable" cards because once you've used up the face value - $50, say - you throw the card away.
But there's another prepaid card, the reloadable "open loop" card, which can be used almost anywhere and replenished with further funds. These have been in Australia for a couple of years. These cards look and feel like a Visa or MasterCard credit or debit card but don't provide access to borrowed money and aren't linked to a bank account. You don't need a bank account to get one and generally no credit check is required. That makes them useful for people who wouldn't qualify for a credit card but who need a plastic card to pay bills, shop online or travel.
You load a prepaid card with funds, usually by transferring money online or via phone banking.
Of course, there are costs involved and these vary depending on the card issuers and the way they've structured their product. You may be up for an application fee plus transaction fees for withdrawals and deposits and possibly fees for services such as balance inquiries. Check the fine print. You'll also need to confirm that the card is reloadable and what happens if you lose it. While losing gift cards is like losing cash, reloadable cards can usually be cancelled in the same way you'd cancel a lost credit or debit card.
There has been huge growth in prepaid cards in the US - by one estimate the number of cards on issue soared from 25 million in 2004 to 1.1 billion by the end of 2006 - but that's partly because they're used for social security payments there. Also, the US has a larger population of the "unbanked" - people who by choice or otherwise don't have a bank account.
In Australia, Heritage Building Society has carved out a business running prepaid card programs with partners such as Visa and has issued 500,000 prepaid cards since 2006.
Retail Finance Intelligence business development director Charles Green says all the major banks have open-loop cards. "So, as long as [merchant] acceptance doesn't continue to be an issue, familiarity with them should grow," he says, referring to the fact Coles and Woolworths don't allow you to pay for your groceries with a prepaid card.
MWE Consulting principal Mike Ebstein says the open-loop prepaid card is in its infancy as a method of payment. However, he says, the use of the Visa-MasterCard type will probably grow.
"They're for people who want the convenience of a plastic card but without the exposure that comes from having an associated line of credit or access to deposited funds," Ebstein says. That makes them useful for giving children pocket money, "where you don't want to put temptation in their way".
Green says research shows the most common uses of open-loop cards are shopping generally, online shopping in particular and personal travel.
Travelex's prepaid card, the Cash Passport, is available in five currencies. Travelex's website says the PIN-protected card allows you to lock in an exchange rate before you travel and you can use the card in ATMs overseas.
Visa's general manager for Australia, New Zealand and the South Pacific, Chris Clark, gives the example of a young person heading overseas for a "gap year" after school. He or she can load a travel card with as much as $25,000 in funds, depending on the product, and live off that while moving around. Alternatively, parents might help their travelling offspring by feeding a prepaid card each month with, say, $1000 to help with budget control.
Ebstein says prepaid cards appeal to the budget-conscious. "You could have a number of cards for specific uses, allocating money to various 'silos'," such as holidays, clothing or entertainment.
Heritage Building Society chief executive John Minz says prepaid cards also have benefits in limiting fraud. "One of the risks when travelling is card skimming," he says. "The contents of a credit card's magnetic strip can be copied. But purchase one of these Visa cards with a certain value and . . . there are no personal details on that card, no card numbers, no account information."
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