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Why Skeptical Merchants Should Accept Prepaid Debit Cards

· money,Business,funds,Spending,E-commerce

Prepaid debit cards are a convenient way for consumers to manage cash flow, make purchases in person or online, or avoid fees associated with checking accounts. Since prepaid cards are not linked to a bank account, there is never any worry about costly overdraft fees or derailing your budget.

Over the last decade, prepaid cards have seen a steady increase in usage among consumers from all ages and backgrounds. In fact, prepaid debit cards are the fastest-growing noncash payment option, according to the 2010 Federal Reserve Payments Study. The same study found that consumers spent $140 million and completed 6 billion prepaid card transactions in 2009 alone.

With statistics like these, you would think that all merchants would be on board with this flexible, secure payment option, but sometimes that’s not the case. Here, we’ll take a look at a few industries that have been reluctant to accept prepaid cards and review some ways that merchants can get on board and start accepting them.
 

Prepaid Cards and the Service Industry

The service industry—particularly restaurants, hotels, and spas—has at times shied away from prepaid debit cards. In the service industry, tips are common and an initial charge to a card will likely not be the final charge. Since prepaid cards are loaded with a preset amount, some service industry merchants are reluctant to accept this payment method for fear that the customer’s available balance will not cover the final charge.

Some restaurant owners likely decline prepaid debit cards out of concern for their staff, to ensure they receive the tips they’ve earned. While this is understandable, service merchants may be doing their businesses a disservice by barring an entire segment of paying customers.

coffee business restaurant

However, businesses like restaurants are absolutely able to guarantee that a prepaid card will cover the cost of a meal, plus the tip, with a simple process. Since prepaid cards are branded with the logos of top card processors, the same rules generally apply. All a merchant would need to do is add the tip to the authorization when running the card, and as long as the prepaid card has a balance that covers the tip, the transaction will be completed without incident.

Any problems with this may lie in the merchant’s point of sale (POS) system. Merchants can configure some POS systems so that they automatically add gratuity to a bill when processing an authorization. The final charge will post in a few days, so even if the patron elects to tip less, the transaction will still go through just fine.
 

Businesses with Recurring Subscriptions

Businesses with recurring subscription models have also gained a somewhat infamous reputation for rejecting prepaid debit cards. This problem has also been seen with some businesses that take automatic payments from bank accounts or credit cards, such as cable providers and other utilities.

One of the biggest selling points for prepaid cards is that they are accepted nearly everywhere the branded logo (e.g., Visa, MasterCard, etc.) is accepted. However, merchants still have the ability to accept or reject certain payment cards even if they bear the logo. For example, a merchant can elect to accept credit cards only and no debit cards whatsoever, including prepaid debit cards, even if they are bank issued and connected to a bank account.

While the decision to accept prepaid cards for automatic payments or recurring subscriptions is up to the merchant, it often causes inconvenience for the consumer and eliminates an entire segment of revenue for the merchant. A business that chooses not to accept prepaid debit cards is essentially missing out on a large number of potential customers.

For some subscription-based businesses, the decision to shun prepaid cards is due to the nature of the cards themselves. Since reloading is left up to the consumer, it may be difficult to collect on recurring subscriptions if the consumer has not reloaded their card in time. Merchants would then have to contact the customer directly to get updated payment information. Alternatively, the merchant could simply pause the subscription, notify the customer of the issue via email, and then restart once sufficient funds are loaded.
 

Shunning Prepaid Cards Can Hurt Business

While it’s certainly the right of a merchant to accept or reject prepaid debit cards, it can alienate prepaid cardholders. Some businesses don’t make it clear that they don’t accept these cards, particularly for e-commerce. In this case, a customer makes a purchase they believe was authorized, only to later find out that the transaction was declined. Many times, the customer does not receive an explanation why the transaction was not processed. This vagueness is not good for business and could lead to a consumer deciding to never patronize that business again.

For businesses with recurring subscriptions, the problem may not lie in the prepaid card itself. Recurring subscriptions require a customer who is willing to purchase a product or service over and over. If a subscription-based business is having problems with customers canceling or not having funds at the scheduled withdrawal time, it may be wise to rethink the product offerings, business model, or subscription terms. For example, instead of only offering yearlong subscriptions, the merchant could also offer three- or six-month subscriptions, or even subscriptions on a month-to-month basis. These options may allow the merchant to reach those consumers who are interested in the product, but unable to commit to a long subscription period.
 

The Future of Prepaid Debit Cards

The choice to accept prepaid debit cards is one that all merchants need to make. They should consider what’s best for their business and employees, as well as what’s convenient for the consumer. The easier it is for a consumer to make a purchase without arbitrary rules, the more likely they are to patronize a business. The opposite is also true—banning certain payment methods will likely lead to a loss of business. Going forward, it will be up to the merchant to decide what will work for both their business and their customers.