Prepaid Card
A prepaid card is a scheme-branded card that spends a balance loaded in advance rather than drawing on a bank account or a credit line — issued under an e-money licence or by a bank, run by a programme manager, and used for gift cards, payroll, travel money, expense management and the first product of most neobanks. Its economics are interchange and fees on a safeguarded float; its regulation is the e-money and AML rules.
- Also known as
- Prepaid debit card, Stored-value card, Prepaid programme
- Used at
- gift and incentive cards, payroll and government disbursements, travel and FX cards, corporate expense cards, teen and family cards, and as the card product of fintechs without a banking licence
- Binding
- e-money regulation (EMD2 in the EU, the UK's regulations, state money-transmitter and FinCEN rules in the US), the schemes' prepaid programme rules, and AML limits on anonymous prepaid (the EU capped unverified prepaid at €150 in 2018)
- Typical structure
- an issuer (a bank or e-money institution with scheme membership or a BIN sponsor), a programme manager (the fintech that owns the customer and the brand), a processor, and a safeguarding bank for the float
- Typical economics
- interchange (capped in Europe on consumer prepaid as debit; richer in the US and on commercial prepaid), load and ATM fees, FX margin on travel cards, dormancy and breakage on gift cards, and interest on the float — against per-card and per-transaction costs to the processor and sponsor
- Parties
- the customer, the programme manager, the issuer or BIN sponsor, the processor, the schemes, the safeguarding bank, and the regulator of the e-money
How a prepaid card works in practice
A customer loads €500 onto a travel card by bank transfer. The programme manager's ledger credits her balance; the e-money issuer holds the €500 in a safeguarded account; the card, issued under the issuer's BIN, is a scheme card that merchants accept like any other. At a shop abroad the authorisation reaches the processor, which checks her balance in the manager's ledger — or in the processor's, depending on the model — and approves; the merchant is paid through the scheme's settlement; her balance falls; the issuer's safeguarded funds are drawn down at settlement. The programme earned interchange on the purchase and an FX margin on the conversion; she paid no bank account fees and carried no credit.
The model is how fintechs issue cards without being banks: the e-money licence (or a sponsor's) instead of a banking licence, safeguarded funds instead of deposits, a programme manager's brand on the issuer's BIN. Its limits are the licence's — no lending, no interest to customers, no deposit insurance, and safeguarding that ties up the float — and the AML rules', which after prepaid's use in fraud and terrorist financing require verification above small thresholds. Corporate and expense prepaid, with richer commercial interchange and a business customer, became the fintech growth segment of the 2020s.
For a buyer of a prepaid programme: whose licence, whose BIN, whose processor, and what the float earns at current rates.
Example
A corporate expense fintech runs a prepaid programme: 60,000 cards for 2,000 companies, €900m of annual spend, issued by a BIN sponsor under the fintech's e-money licence, processed by an issuer-processor. Revenue: €14m of commercial interchange (1.5%), €3.6m of subscriptions, €2.2m of FX margin, and €1.8m of interest on a €45m average float. Costs: €2.4m to the processor, €1.9m to the sponsor, €1.1m of card production, €0.6m of fraud. A bank acquires it for €120m, moves it onto its own scheme membership over eighteen months, ends the sponsor fees, and converts the float into deposits — which the regulator approves because the bank's licence covers what the e-money licence could not.
Common mistakes
- Modelling consumer prepaid on US interchange in a European market where it is capped. - Float counted as the programme's cash when it is safeguarded client money. - Anonymous prepaid products designed before the AML thresholds, and redesigned after. - One BIN sponsor and one processor with termination rights and no migration plan. - Gift-card breakage counted as revenue before the rules on unspent balances are read.