The Draft Regulatory Technical Standards on Strong Customer Authentication and common and secure communication under Article 98 of Directive 2015/2366 (PSD2) includes specific provisions regarding the use of prepaid cards.
Prepaid cards can be divided into two main categories based on their features:
- Non-reloadable, non-credit: These cards are not reloadable, meaning that once the funds on the card are depleted, the card can no longer be used. Additionally, these cards do not have a credit function, meaning that the cardholder cannot spend more than the funds that have been loaded onto the card. This type of prepaid card is often referred to as a "gift card" and can be used for a one-time purchase or for a specific purpose. For prepaid cards that are not reloadable and that do not have a credit function, the issuer may decide to apply a lower level of authentication than the one required for SCA.
- Reloadable, credit: These cards are reloadable, meaning that the cardholder can add funds to the card once the initial funds have been depleted. Additionally, these cards may have a credit function, meaning that the cardholder can spend more than the funds that have been loaded onto the card, subject to a credit limit. This type of prepaid card is often referred to as a "prepaid debit card" and can be used for multiple purchases over a longer period of time.
The use of prepaid cards has been increasing in recent years. According to a report by the Mercator Advisory Group, the global prepaid card market was valued at $1.1 trillion in 2019, and it was projected to grow at a CAGR of 11% during the forecast period (2019-2026). In the US, according to the Federal Reserve, the number of prepaid card transactions increased by more than 100% between 2012 and 2018, reaching over $312 billion in 2018. In the UK, according to the UK Cards Association, the number of prepaid card transactions increased by more than 300% between 2007 and 2017, reaching over 2.5 billion in 2017.
Issuing banks may be less likely to approve a transaction with a prepaid card than with a traditional credit card for a few reasons:
- Creditworthiness: Unlike traditional credit cards, prepaid cards do not require a credit check. As a result, the issuing bank may not have information about the cardholder's creditworthiness, which can make it more difficult to approve transactions.
- Spending limits: Prepaid cards generally have lower spending limits than traditional credit cards. As a result, the issuing bank may be more cautious in approving transactions that exceed these limits in order to prevent the card from becoming overextended.
- Risk management: Because prepaid cards are often used by people with poor credit, the issuing bank may be more cautious in approving transactions in order to manage the risk of default.
- Fraud protection: Prepaid cards may be more susceptible to fraud than traditional credit cards, as the issuing bank may not have as much information about the cardholder's spending habits and patterns. As a result, the issuing bank may be more cautious in approving transactions in order to protect against fraud.
- Regulatory environment: Prepaid card transactions are subject to different regulations than traditional credit card transactions, and these regulations may require issuers to implement additional measures to protect against fraud, money laundering, and other risks which can increase their costs.
In conclusion, prepaid cards are a convenient and flexible way to manage your money, but they can also come with certain limitations, such as lower approval rates and spending limits. As a merchant, accepting prepaid cards can be challenging, but by understanding the regulations surrounding prepaid cards, specifically the Strong Customer Authentication (SCA) requirements, merchants can ensure that they are providing a positive customer experience while also maintaining the security of online payments. Additionally, by implementing strategies to mitigate the high rate of declined transactions, merchants can help ensure that customers can still make their purchase.