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General spending card programs are offered by both financial
institution and nonbank program providers or sponsors and are
typically targeted to a particular consumer segment. Nonbank
program providers usually sell this type of card and may have a
relationship with a money service business or retailer, who, in
turn, acts as agent for a nonbank program provider. See
Figure 9 for a typical structure. Check-cashing businesses
and convenience stores are examples of agents used by nonbank
program providers. All network-branded prepaid cards must be
issued by a partnering financial institution that is a member of
the Visa or MasterCard networks or by American Express or
Discover. There is a growing group of market participants
associated with these programs and a developing range of potential
General spending card program offered by nonbank providers
Prepaid card transactions typically follow the "four
corner" pattern in Figure 10. The consumer purchases a
prepaid card (Step 1 and Step 2). When the consumer pays for
goods or services with the card, electronic notations or tokens
transfer from the card to the merchant's cash register (Step 3,
Step 4, and Step 5). The merchant contacts the computer
network of the financial institution that issued the prepaid card
and presents the tokens for payment (Step 6). The network
notifies the consumer's financial institution to pay the
appropriate sum to the merchant's financial institution, and net
settlement occurs at the end of the business day (Step 7).
The financial institution keeps a percentage of the payment (the
discount) as compensation for the services provided.
Legend: Solid lines represent the flow of information and dashed
lines represent the flow of funds.
Figure 10: Stored Value Card Clearing and Settlement
There are many configurations of third parties and
financial intermediaries, and there is a significant number of
prepaid cards in circulation for which the four-corner diagram is
not sufficient. The financial intermediary may hold the funds
supporting the circulating stored value in a pooled account, with a
third-party keeping the record of the individual
transactions. Financial businesses that are not traditional
financial institutions may be the issuers and may distribute the
cards through retailers.
If the prepaid card is not a smart card, the associated funds
are kept in a separate account. When a customer uses the
prepaid card, the merchant sends a message to the record-keeping
entity to determine whether the balance is sufficient to cover the
transaction. If funds are available, the third party or
financial institution processes the transaction.
This account arrangement may be used for smart cards also, with
the accounts debited when the merchant presents tokens for
payment. Although financial institutions issue prepaid cards
and maintain account records, third parties may be involved in
maintaining individual account records also.
Three general-spending prepaid card programs that increasingly
are offered by financial institutions include branded remittance
cards, teen cards, and gift cards.
With the growing demand for global person-to-person money
transactions, an increasing number of bank-issued cards are being
used to make remittances. In many cases, the sender of the
remittance lives in the U.S. and uses a financial institution to
electronically transfer money to a pre-established, branded prepaid
card account. A financial institution in the sender's or
recipient's country issues a prepaid card to the recipient.
The recipient can use the card to obtain cash at an ATM or goods
and services at a merchant POS. Alternatively, the sender may
use a branded prepaid card to send funds to a recipient via the
Internet. The recipient receives the funds either in cash or
in credits made to an existing prepaid card account or a bank
Another stored-value product gaining favor among consumers is
the teen card that is marketed to help parents instill financial
responsibility in their children while monitoring and supervising
their spending. The consumer typically funds the prepaid card
with the issuing financial institution through a withdrawal from a
deposit account or by charging a credit card.
Gift cards were initially offered by retailers as a replacement
for paper-gift certificates and operated in closed-loop payment
systems. In recent years, financial institutions noted the
rising popularity and market potential and included gift cards in
their product offerings thereby competing with retailers.
Gift cards issued by a financial institution typically are card
network branded and operate in an open-loop payment system, making
them functional at ATMs and at any POS that accepts network debit
and credit cards.