Return to site

What Every Merchant Needs to Know About Prepaid Cards

· prepaid card,Money Management,Purchasing

There's no doubt that prepaid cards are popular among consumers. In fact, about $40.5 billion was loaded onto prepaid cards in 2010 alone, according to the Mercator Advisory Group. These numbers continue to increase year after year, as consumers take advantage of the wide range of benefits offered by prepaid cards.

According to a Federal Reserve study, cash is the most popular choice of payment among consumers and makes up 40 percent of all retail transaction activity. Debit cards account for about 25 percent of payments, followed by credit cards at 17 percent.

prepaid card

Prepaid cards provide the benefits of both cash and debit cards, combined with the fact that they are accepted anywhere major credit cards are accepted. The study also revealed that millennials tend to prefer paying with cash or cash-like payment methods such as prepaid debit cards. They also tend to use cash as their backup payment method.

Because prepaid cards are so popular among consumers, it’s important for retailers to understand the differences between prepaid cards and other forms of payment and how these differences affect profitability. Credit and debit card processing can be complex, and when combined with the varying card types - signature and PIN, rewards cards, business/corporate cards and gift cards, to name a few - understanding all the rules that apply to merchants is key. Here, we’ll discuss the main things retailers should know when it comes to accepting prepaid debit cards.

Knowing the Difference Between Debit and Credit Card Processing

On the surface, the difference between credit and debit cards are pretty clear; credit cards are funded by the issuing bank’s money and debit cards are funded by the consumer’s money. Although this explanation is simple, when it comes to merchant processing, there are several complexities to grasp.

When a customer uses a signature to complete his or her purchase, this is considered an offline transaction that doesn’t verify the availability of funds immediately. However, when using a PIN transaction, the customer completes the purchase with his or her personal identification number (PIN) instead of a signature. PIN transactions access the card issuer’s network in real time, verifying that the funds are actually available. For retailers, the fees associated with these two types of transactions are significantly different.

Generally speaking, for retailers that typically have low-value transactions, it’s better to encourage customers to use their signatures to complete purchases, since merchants tend to pay less per transaction. For retailers who have high-value transactions, it makes more sense to use PIN-based transactions.

What Debit vs. Credit Means for Merchants

For retailers, asking customers which type of transaction they prefer is usually met with indifference. Consumers generally don’t know - and aren’t impacted by - the difference between the two. However, even though the customer may not care, the retailer should, because the difference has an impact on the retailer’s profit.

When a consumer pays with credit, the card issuer is approving the transaction at the point of sale and taking the chance that the money will be collected from the consumer later. A fee is charged to the merchant for credit transactions. This pays for the resources needed to process these transactions and ensures that the merchant shares in the risk. The fee is usually a percentage of the total sale. This is why for high-value purchases, processing transactions in this manner can be very costly for merchants.

prepaid cards

On the other hand, debit or PIN transactions present less overall risk to the merchant. This is because the customer is authorizing payment be taken directly from their loaded balance in the case of prepaid debit cards - or their checking account in the case of traditional debit cards. The transfer of funds occurs immediately, and the fee charged by the issuing bank is usually a fixed amount instead of a percentage of the total sale.

Offering a Variety of Payment Options Can Be Good Business

On the surface, would seem that encouraging the use of debit instead of signatures is the right choice, but many retailers continue to offer both options. This continues to be true despite the fact that credit transactions are less cost effective. The logic is that offering a variety of ways to pay will draw in more business, thus making the associated fees worth it in the long run. Merchants should consider performing a processing analysis in order to see which method is more advantageous.

Since most customers tend to prefer using PIN transactions at the point of sale, merchants should make sure they are offering customers a variety of payment options while safeguarding against unreasonable losses. Each retailer should weigh the pros and cons of accepting PIN vs. signature transactions before deciding which is best for their specific situation.

Prepaid cards will typically be used with a PIN, but in certain cases these cards can also be processed as a credit transaction. The growth of prepaid cards over the years has proven that these cards are here to stay, and with millions of customers using them everyday, it pays for retailers to do more to attract and keep prepaid card customers. This can be done by ensuring that these cards are welcome in your establishment and by working with card processors that support as many payment methods as possible.

All Posts
×

Almost done…

We just sent you an email. Please click the link in the email to confirm your subscription!

OKSubscriptions powered by Strikingly