An issuing bank is a bank or financial institution that issues debit or credit cards to consumers or merchants. Through a card issuer, individuals or businesses can get cards from the most well-known card networks like Visa, Mastercard, and American Express.
In this article, we will talk about how prepaid cards differ from typical credit or debit cards, and the essential services a prepaid card issuer provides to individuals and merchants who want to shift to a more flexible yet controlled card payment system.
What is a prepaid card?
Prepaid cards, unlike typical debit or credit cards, are not linked to a specific bank account. Owners of prepaid cards can only spend the money they have loaded onto their card ahead of time and do not have access to overdraft benefits like in the case of debit cards.
Some prepaid card programs frequently used by businesses include
- Corporate payments: Businesses need to make payouts for expenses, incentives, payroll, procurement, and more
- Employee and contractor expense management
- Gift card programs
- VIP customer payouts and rewards
The prepaid card programs are widely used by payment managers, HR, and payroll teams, and in industries such as gaming, multi-level marketing, and shipping.
Benefits of prepaid cards
Prepaid cards have many benefits for cardholders.
No bank account needed
Users of prepaid cards do not need to have a bank account. The cards are pre-loaded by the prepaid card issuer and the user can receive and use the funds without linking them to a bank account. This is an advantage as the unbanked population can access the benefits of a credit or debit card. Additionally, since the card can only be used if loaded, it limits the risks involved in lost or stolen cards.
Anonymity
Non-reloadable prepaid cards can be issued without a cardholder name on them, allowing the user to make payments without going through stringent identity verification processes. This makes them appealing for cardholders seeking a higher level of payment privacy, especially when using virtual cards.
No credit checks required
Prepaid cards can be issued no matter what the user's credit score might be, giving an opportunity to certain consumer segments to make purchases using payment cards. Additionally, since there is no borrowing involved, prepaid card activity is not reported to credit bureaus.
Global usage
Prepaid cards can be used anywhere where the card network they belong to can be used globally. For example, prepaid Visa cards can be used anywhere that Visa cards are accepted, including for contactless payments. Although many cardholders and merchants wonder what country of issuance means in terms of limitations when a prepaid card is used, the limitations are the same as those applied to a debit or credit card.
Country of issuance refers to the country in which a prepaid, debit, or credit card was issued. In certain situations, for example in travel, merchants prefer that local cards are used as a way to mitigate risk and foreign exchange exposure. Or in certain geographies, transactions get declined by default if local cards are not used to make purchases online.
Why do businesses opt for prepaid card issuing programs over other payment methods?
There are several reasons and benefits for opting to leverage an issuing bank's prepaid card program for payouts in business.
- A more economical and speedier alternative to high-cost banking solutions, with lower processing fees
- Improved efficiencies in processing corporate payments
- Increasing the reach of those that businesses can make payouts to, such as making payouts to the unbanked segments, or customers that strongly prefer payment privacy
- Leveraging branded prepaid card programs to drive brand awareness and customer loyalty
- Reduction of payroll costs
What is a prepaid card issuer?
A prepaid card issuer is a bank or financial institution that issues prepaid cards to customers.
Before diving deeper into their exact roles and responsibilities, let’s understand what an issuing bank is and does.
What is an issuing bank?
The issuer offers credit to its customers and is charged with the responsibility of ensuring the validity of transactions made with the card. For example, during an online purchase, the customers enter their card details to buy a product or service. If the transaction is valid, the issuer will transfer the money to the merchant acquirer (also known as the acquiring bank) to complete the sale. Both an issuing bank and an acquiring bank, as well as the credit card schemes, are thus very important in the card transaction flow.
The responsibilities of a typical card issuer
Even though some people might think that Visa and Mastercard are responsible for issuing a cardholder's credit or debit card, that's actually an action performed by an issuing bank. The reason for this is that the risk involved in such a process requires the bank's involvement to underwrite risk. For instance, when a cardholder disputes a chargeback due to a suspicious transaction that appears on their card statement, it's the issuing bank who will decide if the chargeback will be processed or not. Or, in another case, when a cardholder doesn't have enough funds in their credit card to complete a purchase, the issuer contacts the customer and not the card network (e.g., Visa, Mastercard) to resolve the issue.
Now, let's see the role it plays in the payment process.
In an eCommerce environment, the card issuer receives a request from the merchant's payment terminal, initiated by the payment processor and the card network, to either approve or decline the transaction. After a check of the cardholder's card balance, if the funds are enough to cover the transaction, the issuing bank will send an approval code back to the merchant's payment terminal.
All approved transactions are added to the merchant's batch, a group of transactions which are processed but not settled yet. When a batch closes, the merchant’s credit card processing company will receive the processed funds from the card issuer and will transfer the total batch amount to the merchant's bank account. That is the precise moment when a merchant gets paid from customers.
What do prepaid card issuers do?
In addition to issuing a specific type of payment card to customers, prepaid card issuers also manage the preloaded funds deposited by the cardholders rather than extending credit.
Even though some responsibilities overlap with those of traditional card issuers, prepaid card issuers can have some additional duties due to the unique ways how prepaid cards work.
Prepaid card issuers manage the distribution of prepaid cards through various retail and online channels and oversee the activation process, which may not always require extensive KYC procedures, especially for non-reloadable cards.
In the payment process, both types of issuers play a crucial role. After approving transactions, prepaid card issuers, like traditional issuers, add approved transactions to the merchant's batch for processing. When the batch closes, the merchant’s acquirer receives the processed funds from the prepaid card issuer and transfers the total batch amount to the merchant's bank account, completing the payment cycle.
In terms of fund management and transaction processing, issuers of prepaid cards have to maintain accurate balances and ensure that transactions do not exceed the available funds on the card at any time, under any circumstance. This is important because prepaid cards don’t come with any room for overdrafts.
Even though there is no credit limit to impose, prepaid card issuers often do have stricter limits on transaction amounts and reloading due to certain regulatory requirements designed to prevent misuse and ensure consumer protection.
Conclusion
While prepaid card issuers share several responsibilities with traditional card issuers, certain unique responsibilities make them an important service provider, especially for individuals and businesses seeking a controlled, budget-friendly payment method without the complexities of credit management and annual fees.
Businesses in many industries offer and manage prepaid card programs, in effect issuing cards to their client base, employees, or partners. In many cases, businesses collaborate with a payment service provider such as payabl., who in turn works with a number of regulated EMIs or issuing banks to provide such programs.
If you are a business looking to adopt a prepaid card program, do not hesitate to contact us for more information on the different issuing bank prepaid packages that payabl. provides access to.