A stored-value card
on deposit with the issuer
, and is similar to a debit card
. One major difference between stored value cards and debit cards is that debit cards are usually issued in the name of individual account holders, while stored value cards are usually anonymous.
The term stored-value card does not necessarily mean the funds data is physically stored on the card. In many cases the data is maintained on computers affiliated with the card issuer. The value associated with the card can be accessed using a magnetic stripe embedded in the card, on which the card number is encoded; using radio-frequency identification (RFID); or by entering a code number, printed on the card, into a telephone or other numeric keypad.
Typical applications of stored-value cards include transit system farecards
, gift cards
, and telephone prepaid calling cards
. In addition, employers are beginning to issue payroll cards to pay employees.
Closed system cards
Closed system cards have emerged and replaced the traditional "gift certificate" and are commonly known as "gift cards". Purchasers buy a card for a fixed amount and can only use the card at the merchant that issues the card. Generally, few if any laws govern these types of cards. Card issuers or sellers are not required to obtain a license. Closed system cards are not subject to the USA PATRIOT Act, as they generally cannot identify a customer. As debts owed to consumers who purchased the card, these purchases remain on their books as a liability rather than an asset. Consequently, gift certificates and gift card have fallen under state escheat or abandoned property law (APL). However, the emergence of closed system cards has blurred the applicability of APL. North Carolina and Illinois have excluded these types of cards from APL provided the card has no expiration date or a service fee. Maine and Virginia require the issuer to pay the state when the cards are abandoned. In Connecticut an issuer is required to identify the residence of the gift card owner. Since most gift cards are anonymous, the residence of the card's owner is deemed to be the state's treasurer's office.
Merchants can set up "giftco" subsidiaries in states whose laws remain friendly to issuers (currently Ohio, Florida, Washington and Virginia) permitting gift card operations to conduct business across state boundaries using their host states' more friendly escheat laws.
Presently, no law exists that requires an issuer to provide refunds for lost or stolen cards. Whether a refund is possible is specified in an issuer's cardholder agreement. In addition, most closed system cards cannot be redeemed for cash. When a cardholder redeems all but an insignificant portion of the card on merchandise, that amount is generally lost and is absorbed by the issuer.
Semi-closed system cards
"Semi-closed system cards" are similar to closed system cards. However, cardholders are permitted to redeem the cards at multiple merchants within a geographic area. These types of cards are issued by a third party, rather than the retailer who accepts the card. Examples include university cards and mall gift cards. The laws governing these types of cards is unsettled. Depending on the state, the issuer may or may not be required to have a money transmitter license or other similar license. The states that require a license include Connecticut, District of Columbia, Florida, Illinois, Iowa, Louisiana, Maryland, Minnesota, Mississippi, North Carolina, Oregon, Texas, Vermont, Virginia, West Virginia, Washington, and Wyoming. Note, these states explicitly require licensing for card issuers. Other states may have more subtle licensing laws. Under 18 USC section 1960, it is a crime for an issuer to conduct a money transmitting business without a license.
Cardholders generally suffer from the same redressability problems that closed system card holders suffer. It is unclear whether or not Chapters 7 and 11 of the Bankruptcy code are applicable to these types of cards.
Open System Purchasing Cards
"Open System Purchasing Cards", or "stored value credit card" is not really a credit card, although they are often marketed as "prepaid credit cards", as no credit is offered by the card issuer: the card-holder spends money which has been "stored" on the card via his own prior deposit.
(The value is not physically stored on the card; instead, the card number uniquely identifies a record in some central database, where the balance is recorded.) These cards are similar to gift cards, but are endorsed by a credit card
company such as Visa
and can, unlike gift cards, be used anywhere a Visa or Mastercard may be used. They are very similar to a debit or check card except that they don't require a checking account. However, they do not have many of the benefits of the credit card, such as product or service return/refund assistance and unauthorized purchase protection. They have been heavily marketed in the United States
as a safe and responsible means for parents to give their children some spending power which is why they sometimes are referred to as teen cards. These cards are also sometimes referred to as "open loop" cards. Stored value credit cards are usually not anonymous. They have to be enrolled under the cardholder's name and are mailed by the issuer to the cardholder's address. This generally carries with it a heightened level of privacy concerns among cardholders. The inception of the Patriot Act has opened the door to government intrusion, leaving cardholders wondering whether or not their activities can be tracked back to them.
These cards have been marketed to consumers with poor credit, who are unable to qualify for the line of credit that backs a mainstream credit card. The fees associated with these cards are often very high. These have been criticized as unjustified, because the issuer is not taking any credit risk. The Financial Consumer Agency of Canada describes prepaid credit cards as "an expensive way to spend your own money"
A variation on this are the PaidByCash virtual cards in the United States and the 3V cards issued in the Republic of Ireland. These consist only of a card number plus expiry date and verification number, so can only be used for customer not present transactions.
The Tobacco Card has undergone testing and is scheduled for nationwide introduction in Japan in 2008. It will contain an IC with information about the cardholder's age, and will be required for purchasing cigarettes from vending machines. It will have stored-value capability.
Generally these cards are afforded similar characteristics as "open system prepaid cards". Similar to credit cards, these cards may carry an expiration date, an account number, and a verification number. They also may carry with them service fees and other fees associated with use, or non use of the card. The money on the card can be redeemed for goods only, and is not redeemable for cash. These cards are generally issued by a "money services business"(MSB) or an FDIC banking institution. The type of issuer depends on the law governing them. MSB's are only required to obtain a money transmitter license if they sell more than $1,000 per person per day. Cards issued by an MSB generally are governed by the laws governing "closed system cards" and "semi-closed system laws". Cards issued by an FDIC bank are covered under the Federal Reserve Act and afford cardholders much more protection and opportunity to assert claims. It should be noted, however, that the cardholder should be aware of the network's agreement and rules and regulations set forth by these networks.
Open System Prepaid Cards
"Open system prepaid cards" are the most regulated of all the stored value cards. An example is the Payroll card. Payroll cards are used by employers to pay employees. The employee is issued a card that permits access to an account established by the employer. At the end of each pay period, the employee's ability to draw money from that account is increased by the amount of his or her wages. The card may be used at an Automated Teller Machine
(ATM) to obtain cash, and, in some instances, may be used at a store to pay for purchases.
The payroll card is particularly useful for employees who do not have a regular checking
or savings account
at a financial institution because they can access their wages conveniently. Also, if there is no charge for using ATM, they avoid fees charged for cashing checks. The advantage to the employer is low cost of paying wages and efficiency.
These cards are subject to Chapters 7 and 11 of the Bankruptcy Code
, as well as the Electronic Funds Transfer Act
(Regulation E). They are also subject to the Federal Deposit Insurance Reform Act
. Cardholders of these types of cards have many avenues to be redressed and seek answers to questions. However, conflict exists between the states and the Federal Government in response to the Federal Banks Preemptive rules, as well as who is eligible to receive unused money on the card, who the beneficiary of the card is, and whether or not a cardholder is insured against fraud, theft, or loss of the card.
Prepaid Card Advances
Technological advances in prepaid enable cardholders to manage their prepaid card account using their mobile phone. The use of M-Transactions functionality adds significant value to client card programs, and in turn provides cardholders with the maximum flexibility and accessibility to manage their funds. The development of proprietary technology such as AMPS
enables Prepaid Card cardholders to:
- Initially load the card
- Top-up their account
- Obtain a balance
- Transmit funds to secondary cardholder (Money remittance)
- Temporarily block a card
M-Transactions (transactions utilising mobile telephones) have yet to reach mainstream consumers in Europe. M-Transactions add significant value to prepaid card programs, but more importantly, a prepaid card delivers 'total M-Transactions'. Many customers are closer, physically and emotionally, to their mobile phones than their banks or money transfer outlet.
M-Transactions is typically available in one of following formats:
- A web portal for card holders, banks, and programs featuring card to card transfers, mobile to mobile transfers, balance inquiry, transaction history, statement summary.
- SMS service offering that provides the ability to do card to card transfers, mobile to mobile transfers, balance inquiry, card locking and unlocking.
- Java Mobile Technology - JME (Java Mobile Edition) software that provides the ability to do card to card transfers, mobile to mobile transfers, balance inquiry, card locking and unlocking with a higher level of security through private key encryption of the message data.
- 1. Hughes, Sarah Jane, Stephen T. Middlebrook, and Broox W. Peterson. "Developments In The Law Concerning Stored Value and Other Prepaid Payment Products". Business Lawyer, November 2006.
- 2. Rinearson, Judith and Chris Woods. "Beware Strangers Bearing Gift Cards". Business Law Today. Nov/Dec 2004, Vol. 14, Num. 2
- 3. Federal Reserve Act
- 4. The Bankruptcy Code
- 5. 18 USC Sec. 1996
- 6. Prof. Juliet Moringiello