General Spending Reloadable Cards
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 functionality.
Figure 9: 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 account.
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.
Online Person-to-person (P2P), Account-to-Account (A2A) Payments and Electronic Cash