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Why prepaid? What you need to know about prepaid cards

May 5 2016 | By Helen Baginska

Prepaid debit cards have been around for over 10 years were promoted as a convenient alternative for people who don't have a bank account. This is not the case anymore as more consumers choose to add prepaid cards to other payment options they already use. The market has been growing fast, rising at a double-digit pace in recent years. The Boston Consulting Group estimated the market to reach $421b in the U.S. and $19b in Canada by 2017. Just what is it that makes prepaid card so appealing? Let's have a look.

There are two types of prepaid cards: open-loop and closed-loop.

An open-loop prepaid card is a card with a network logo on it (Visa, MasterCard, American Express, or Discover) that can be used at any location that accepts that brand.

A closed-loop prepaid card generally does not have a network logo on it (Visa, MasterCard, American Express, or Discover). You can only use these cards at certain locations – for example, a specific store or group of stores for a gift card, or your public transportation system for a transit card.

Open-loop cards function like debit cards that are not connected to checking account and because they run on the same networks as major credit card brands, they can be used at any store that accepts credit cards.

An open-loop prepaid card is different from a credit card even though it has a card network logo like Visa, MasterCard, American Express, or Discover on it. When you use a prepaid card, you are spending the money that you have put on your card and not borrowing the money like with credit card.

Major benefits:

  • Control over finances
  • No overspending
  • No overdraft fees
  • Convenience of a credit card without debt
  • No interest charges
  • No need for credit check
  • Easy access for teenagers and new immigrants
  • Lower processing cost

Some prepaid debit cards may carry fewer consumer protections in the event of loss or a disputed charge than do credit cards, but regulators are working on changing it in order to limit consumers' liability when their cards are used without authorization.

For many people who are trying to get rid of credit card debt and people who use cashless in general, prepaid cards are a convenient and cost effective electronic payment solution. This great product fills the gaps between traditional debit and credit cards.

It is interesting to see what is happening on the payment card market and which new products are going to appear in the future. One thing is certain though, cash transactions are coming closer and closer to extinction as more people make the choice to use electronic payments.

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