How are credit cards and prepaid cards different?
Our world is becoming increasingly digital. Nowhere is this shift more apparent than in the marketplace. Consumers around the word in the 21st century are much more likely to swipe a card than count out cash. This trend is great news for the world economy, as both consumers and merchants benefit from the easy access digital solutions provide. Debit and credit cards, prepaid cards, and mobile payment options eliminate barriers and reduce transaction costs, which improves the flow of goods and services and, in turn, causes economies to grow.
Credit cards and prepaid cards have been leading the charge in this wave of digital payments. Their surface similarities often find them confused with one another, but, with just a little digging below the surface, it becomes apparent that these two digital payment solutions are very different.
Credit Cards—The Basics
Credit card transactions are, at their core, basically loans. When a consumer uses a credit card to make a purchase, they are using someone else’s money. The credit card issuer pays the merchant immediately for the purchase and the cardholder incurs an obligation to repay the debt to the issuer at a later date. When the credit card statement arrives, the cardholder either pays the card issuer the loan in full or chooses to keep the loan longer by making a minimum payment plus interest. Because credit cards are a form of debt, it’s not surprising that they require the cardholder to meet minimum financial thresholds similar to what might be required for obtaining a bank loan: reasonable credit history, regular reliable employment, and an active bank account, just to name a few.
These requirements put credit cards out of the reach of many consumers who still want to participate in the marketplace. Though it’s certainly true that credit card issuers strive to make card options available to meet the needs of a variety of consumers, many people remain outside the regular banking system and cannot qualify for any credit card. That said, the ease, convenience, and ubiquitous nature of credit cards continue to make them one of the primary payment options for consumers around the world, especially in well-established markets.
PREPAID CARDS—A BETTER SOLUTION
Prepaid cards are an emerging force in the digital landscape. While these cards may look just like a credit card, underneath they are the complete opposite. When consumers use a prepaid card, they only spend money they currently have. Money is loaded onto the card electronically and managed much like cash in a bank account. Cardholders can continue to spend only while there is still money in the account; when the balance goes to zero, more funds must be loaded before it can be used again. Because prepaid cards have more in common with cash than with a credit card, there are no limits to who can hold one. Credit checks or regular employment are not required, there will never be any interest charges or overdraft fees, and, since prepaid cards are not tied to a bank account, they are available to anyone who wants one, regardless of the individual’s current economic status.
In addition to being a boon for consumers, prepaid cards are providing business owners with considerable advantages. Prepaid cards make easy work of any number of payments, reducing transaction costs and making it easier to control spending. It’s fast and easy to load a prepaid card with funds for travel expenditures. The employee can access those funds immediately and cannot spend more than the allotted amount. Paying contractors, suppliers, and outside agencies is simple with a prepaid card that doesn’t require bank account information or a check with multiple signatures.
International payments are significantly simpler with prepaid cards. The funds can be loaded onto the card electronically in the currency required without the need for complicated, expensive and slow bank transfers. Many businesses previously opted to make corporate credit cards available to handle many of these expenses, which only led to high fees and unexpected charges. Prepaid cards eliminate the unexpected and provide a seamless way for businesses of all sizes around the world to get money where it needs to go.
Prepaid cards, plastic and virtual, are on the rise. With prepaid cards, payments can be made at the touch of a button to anyone around the globe, and, with just the swipe of a card, the touch of a phone, or even the flick of a wrist, consumers can use those funds straightaway to do their jobs and improve their lives. Prepaid cards open markets, making global commerce a reality for billions of people in every corner of the world. As the use of prepaid card solutions rises, economies everywhere will see significant growth and development, and more people will be able to participate in the global economy.