The industry often talks about payments as if it’s one, homogeneous group. But in actual fact, that couldn’t be further from the truth. A ‘payment’ is simply the action of paying or being paid. But the method this action chooses in order to complete itself is completely variable. Today, customers are presented with a wealth of methods. Options include debit, credit, and prepaid cards, mobile wallets, buy now, pay later (BNPL) integrations, or even open banking-initiated transfers – the list goes on.
Each of these off-shoots deserve their own spots in the limelight. That’s why Moorwand has decided to create ‘The History of Payments’ series, where our team will dig deeper into a handful of payment types. Crucially, we’ll dispel common myths, review the headway they’ve made since they started out, and highlight their individual benefits.
We’re going to start with prepaid cards, a payment group which has experienced huge growth. Particularly following the emergence of the post-2015 UK fintech cohort, many of which rolled out prepaid cards as part of their initial offerings. Globally, the prepaid card market was valued at $1.8 trillion in 2019. And it’s projected to reach $5.5 trillion by 2027.
What is a prepaid card?
A prepaid card works a lot like a gift card, and acts as a good cash substitute. All transactions are approved and authorised by the prepaid card provider. Which means users can’t fall into debt or an overdraft, like they can with credit or debit cards. So you can only spend what you have. But unlike cash, there’s an extra security layer to get through if it’s compromised, making it safer.
And unlike a debit or credit card, a prepaid card can be loaded with funds from sources other than a bank account, such as online, through an ATM, at a retailer, or – at least in the UK – through a PayPoint or Post Office. Their loadable nature makes them handy for travelling abroad, because consumers can avoid carrying cash. And they can also lock in their foreign exchange rate before they fly, avoiding fluctuating exchange fees on each transaction.
PaymentSource splits prepaid cards into three kinds. An ‘open-loop’ card, which is issued with a set, redeemable value. A ‘general purpose reloadable’ card, which has an initial load and can be reloaded upon registration. And a ‘payment voucher’, which is usually a card that can only be used at certain online retailers.
In the UK, prepaid cards – unlike debit cards – can charge a monthly administration fee. If they’re free up front, then they will likely charge transaction and withdrawal fees. Prepaid card providers in the UK include the likes of Cashplus, goHenry, thinkmoney, and Revolut.
The rise of prepaid cards
Whilst the prepaid card has historically been perceived as the lesser accomplished of its two comrades, credit and debit cards, this perception has since evolved. Now comprising a wealth of different propositions, and used by more than just countries’ unbanked and subprime demographics, prepaid cards have come a long way.
As we’ve already established, the market is only set to triple in the next six years. And its evolutionary pace, compared to credit and debit cards, has been more exponential – having emerged later than its peers and innovated more in its shorter lifespan.
So, what does this timeline look like? Back in the 1980s, prepaid cards grew out of a single purpose – i.e. to behave like an early gift card, able to be spent at certain locations. In the US, the telecom industry was the first to adopt them en masse. After which, big retail chains followed suit in the early 1990s.
In the UK, Cashplus claims it launched the UK’s first prepaid card in September 2005. Though arguably London’s first Oyster card in June 2003 prequelled this, copying the prepaid Octopus card in Hong Kong, which landed some six years before it, in 1997.
Then just before 2010, various airlines including Thomas Cook and Ryanair started unveiling their self-branded ‘Cash Passports’. In the years that followed, these prepaid cards saw more and more currencies added to them.
Circa 2015, UK challenger banking services such as Monzo, Revolut, and Monese founded themselves on the basis of prepaid card offerings, following in the footsteps of Cashplus.
And with the rise of wearables, new, innovative uses of prepaid payment methods have emerged which still avoid connecting to a current account – such as Costa Coffee’s Clever Cup, and Lucozade’s bottles with a built-in free Tube ride. As Cyber-Duck CEO Danny Bluestone tells The Drum, “it’s a long time since bankers dug chips out of their Oyster cards and superglued them to their watches”.
Benefits of a prepaid card
FIS encapsulates the most commonly cited benefit of a prepaid card well: “They offer the utility of credit and debit cards without the commitment of setting up an account with a financial institution”. A consumer might not want to set up a bank account if they lack a credit history, for example.
But there are other reasons why this payment method is popular. With no risk of debt or overdraft fees, users don’t have to worry about overspending. Which means these cards act as an effective budget tool for those worried about spending more than they can afford.
Prepaid cards are also safer than cash, which is why travelers like using them abroad. They’re easier to set up than a bank account, which is why kid-focused banking services such as goHenry offer them. And they don’t give fraudsters access to more than the amount on the card, making them more secure than credit and debit cards.
Traditionally, prepaid cards have been used by brands to boost customer loyalty. Today, gift cards – virtual or physical – are still a popular present. And for those buying for themselves, prepaid cards can rack up on-going loyalty rewards which later convert to cash.
Prepaid cards have also proven handy in emergency situations. Most recently, various governments have deployed prepaid cards via third-party vendors as a way to disburse COVID-19 funds.
And whilst prepaid cards, like any payment method, carry their risks, Moorwand works with its partners to ensure they operate in compliance with the most up-to-date legislation at all times.
Then to now
It’s clear, from the pace of innovation and projected growth, that although the prepaid card currently holds a smaller portion of the overall wallet compared to its peers, the payment method has achieved a hell of a lot in its short lifetime.
Prepaid cards aren’t dead just because debit and credit cards exist. The very fact they emerged after both debit and credit cards were adopted attests this. Prepaid programmes still hold huge global growth potential, and the enhanced legislation being brought in around them is paving the way for that growth.
Discover more insights from Moorwand by reading our other articles.