What is an Open Loop Prepaid Payment?

Open-loop prepaid cards provide consumers, businesses and governments with the efficiency, security and flexibility of electronic payments without involving credit. The cards can be used anywhere the card network (American Express, Mastercard and Visa) is accepted, including online.

According to a recent survey by Leger, 55% of Canadian consumers would consider using an open-loop prepaid card, after learning about the benefits.

In June 2016, the CPPO released the first-ever benchmark study conducted by Mercator Advisory Group entitled, Canadian Open-Loop Prepaid Market: 2015, that reveals the open-loop prepaid card market in Canada reached CAD$ 3.1 billion in total dollars loaded onto cards. The Canadian open-loop prepaid market has eight active segments compared to 17 in the U.S., showing significant growth opportunity for prepaid programs in Canada. The Canadian market is expected to follow U.S. trends, where open-loop prepaid cards are the fastest growing form of electronic payment. Mercator Advisory Group reported that the total load value in the U.S. reached USD$ 264 billion in 2014.

Open-loop prepaid cards are rapidly replacing cheques as a less expensive and more secure option for issuing payments. In addition, they can replace a direct deposit or wire transfer, giving the end user quicker access and more flexibility to use the funds.

Open-loop prepaid cards look and function like traditional credit and debit cards at the point-of-sale and offer the same fraud and loss protections offered by the card network with a significant difference — they access funds that have been pre-loaded for a consumer by a consumer, by a government or by a business.

Open-loop prepaid cards are an excellent tool to manage a family budget because a set amount of funds are loaded in advance of the purchase. Consumers can exert control over their spending and avoid interest charges and overdraft fees. According to a Leger survey, 40% of Canadian consumers would like a payment card with a set spending limit. 82% of Canadians want a payment card where they would not be charged those fees.

Open-Loop Versus Closed-Loop Prepaid Payments

A closed-loop prepaid card generally does not have a network logo on it (Visa, Mastercard, American Express, or Discover). You can only use these cards at certain locations such as a specific store or group of stores for a gift card, or a single public transportation system for a transit card.

An open-loop prepaid card is a card with a network logo on it (Visa, Mastercard, American Express, or Discover) that can be used anywhere the card network is accepted, including online. Open-loop prepaid cards can be replaced if lost or stolen per the card network’s zero liability policies

Pay Before

Open-loop prepaid cards access a set limit of funds that are loaded onto a card in advance of a purchase

 

Pay Now

Debit cards are tied to a bank account and access funds in a bank account when a purchase is made

 

Pay Later

Credit cards access funds borrowed from a financial institution to make purchases and are paid back by a consumer at a later date

 

How do Open-Loop Prepaid Cards Work?

Open-loop prepaid cards are loaded with funds before the consumer needs them.

Open-loop prepaid cards look and function like traditional credit and debit cards at the point-of-sale and offer the same fraud and loss protections offered by the card network with a significant difference — they access funds that have been pre-loaded for a consumer by a consumer, by a government or by a business.

The funds are immediately available to the consumer to make purchases at stores or online, and in many cases funds can be withdrawn from an ATM. A financial institution holds the funds until accessed.

Single Load versus Reloadable Open loop Prepaid Cards

Single-load, open-loop prepaid cards are purchased and loaded with funds for a one-time use. The most common examples include an open-loop gift card or a rebate or promotional card. Once the funds are spent the card is discarded. No consumer information is collected to purchase or use a single-use, open-loop prepaid card.

Reloadable open-loop prepaid cards are a financial tool that can be purchased and loaded with funds on a recurring basis. Funds can be reloaded through a direct deposit, online transfer or “top-up” of cash at a retail location. Reloadable open-loop prepaid cards require registration of personal information from consumers to adhere to banking regulations. Registering a card also ensures that the card can be replaced if lost or stolen per the card network’s zero liability policies.

What are the Benefits of Open-Loop Prepaid Cards?

For consumers, open-loop prepaid cards allow for better budget control and the avoidance of debt, interest and overdraft charges. According to a Leger study 15% of Canadians rarely or never stick to a budget and 12% never even set budgets. In addition, 30% find it difficult to track their spending with their credit and debit cards.

Open-loop prepaid cards can be used by anyone, regardless of credit history, and a bank account is not required. And the cards are more secure than cash.

Businesses improve efficiencies, reduce fraud and experience cost savings. They can easily pay employees their expenses or commission payments in a faster and more cost-effective manner with greater control. Open-loop prepaid cards can replace traditional company credit cards and direct deposits for immediate commission payments, expense reimbursements, or petty cash in a form that is easier for the end user to use at the point-of-sale. They also allow for more immediate expense tracking.

The Federal and Provincial governments also save time, money, and reduce fraud by issuing payments on open-loop prepaid cards versus cheques. According to a recent Mastercard Canada study, 86% of Canadian government benefit cheque recipients are aware that direct deposit is an option, yet, depending on the program, up to half of recipients are still choosing to receive benefits by cheque.