How Do Prepaid Card Companies Make Money?

Prepaid cards, whether they’re general-purpose cards or store-specific gift cards, have become increasingly popular for consumers looking for flexibility, convenience, or a budgeting tool. From businesses to consumers, prepaid cards provide various advantages, but the companies that offer these cards are primarily focused on one thing: profitability. Prepaid card issuers and companies have developed several revenue streams to ensure they make money, even though the cards themselves may seem like a straightforward transaction.

In this article, we will explore how prepaid card companies generate income and examine the various ways gift cards become profitable tools for businesses.

How Do Prepaid Card Companies Make Money?

Prepaid cards work by loading a set amount of money onto the card, which can be used similarly to a debit or credit card at participating retailers. However, while the transaction may appear simple, prepaid card issuers employ various mechanisms to turn a profit. Some of the primary ways they make money include:

1. Fees for Consumers

One of the most significant ways prepaid card companies make money is through fees charged to the cardholder. These fees can take many forms, including:

• Activation Fees: Consumers often have to pay a fee when they purchase or activate a prepaid card. This fee can range from a few dollars to upwards of $10, depending on the type of card.
• Monthly Maintenance Fees: Some prepaid card issuers charge a monthly fee for maintaining the card, particularly if it remains unused for a long period. This fee encourages users to regularly spend the balance, while still giving companies a way to collect money even if the card sits idle.
• Transaction Fees: Companies can charge a fee for every transaction made with the prepaid card. This fee is typically small, but over time, it adds up, especially if the card is used frequently.
• Reload Fees: In the case of reloadable prepaid cards, consumers may be charged a fee each time they add more money to their card.
• ATM Withdrawal Fees: Prepaid cards often come with ATM access, but withdrawals typically come with high fees. Users can be charged both by the ATM operator and the card issuer, resulting in multiple charges for a single cash withdrawal.

2. Merchant Fees

When a consumer uses a prepaid card at a retailer, the merchant typically pays a small fee to the prepaid card issuer. This fee is known as an interchange fee. It’s a percentage of the transaction and is similar to the fees merchants pay for accepting credit or debit cards. While this fee may be small per transaction, the sheer volume of prepaid card transactions means that issuers can collect substantial revenue from merchants over time.

3. Inactivity and Expiration Fees

In some cases, prepaid cards have expiration dates or periods of inactivity that trigger fees. If a card remains unused for an extended period, the issuer may charge an inactivity fee, which reduces the balance on the card. In some jurisdictions, laws require that unused funds revert to the state, but until that happens, companies can collect fees for inactivity. Additionally, while many gift cards no longer expire thanks to consumer protection laws, some prepaid cards do have expiration dates, and any remaining balance after that date can be forfeited.

4. Interest on Unspent Balances

Prepaid card companies benefit from the money that consumers load onto the card but do not immediately spend. While the consumer considers this money as theirs, the card issuer can earn interest on these funds while they remain unused. In aggregate, the unspent balances across millions of prepaid cards provide a sizable pool of money that issuers can invest, earning a return before consumers eventually use their funds.

5. Partner and Co-Branding Agreements

Prepaid card issuers often partner with other businesses, such as retailers or financial institutions, to create co-branded cards. These partnerships can involve revenue-sharing agreements where both parties benefit from the fees and transaction volume generated by the card. For example, a retailer may offer a co-branded prepaid card with a particular card issuer, and the two entities share the merchant fees collected on purchases made with the card.

How Do Companies Make Money Off of Gift Cards?

Gift cards are a type of prepaid card that are restricted for use with a specific merchant or group of merchants. From large department stores to small businesses, gift cards are a common way for companies to drive sales and engage customers. But how do companies make money off gift cards when they seem like a mere exchange of value?

1. Breakage

“Breakage” is the industry term for gift card funds that are never spent by the consumer. Surprisingly, a significant percentage of gift card balances go unredeemed. This can happen if consumers lose the card, forget to use it, or let it expire. Companies make a considerable profit from this unused balance because it’s essentially free money—once the gift card is sold, the company doesn’t have to provide any goods or services for the unredeemed amount.

2. Early Cash Flow

When a consumer purchases a gift card, they are essentially giving the business an interest-free loan. The company receives cash upfront but doesn’t have to deliver the product or service until the gift card is redeemed, which could be months (or years) later. In the meantime, the company can use the cash for other purposes, including investing in operations, inventory, or marketing campaigns.

3. Increased Sales

One of the biggest advantages of gift cards for companies is that they often lead to increased sales. When someone uses a gift card, they frequently spend more than the card’s value, leading to additional revenue for the company. For instance, a customer with a $50 gift card might make a $75 purchase, contributing an extra $25 in revenue that they may not have spent otherwise.

4. Promotion and Brand Loyalty

Gift cards can also serve as a form of promotion. When someone receives a gift card to a particular store, they are more likely to shop there, even if they wouldn’t have done so otherwise. This brings new customers into the store, where they might become repeat customers. Additionally, gift cards encourage customer loyalty by keeping shoppers engaged with a particular brand.

Why Do Companies Give Gift Cards Instead of Cash?

Gift cards are often used as rewards, promotions, or bonuses in various business settings. But why would a company prefer to give gift cards rather than cash when rewarding customers or employees?

1. Encouraging Specific Spending Behavior

When a company gives out cash, the recipient can use it anywhere, which doesn’t guarantee that the money will be spent on the company’s products or services. A gift card, however, ensures that the money will be spent at a specific business, boosting sales and customer engagement.

2. Budget Control

Gift cards allow companies to control the exact amount they give to consumers or employees. If a company gives out cash bonuses or promotions, there might be pressure to increase the amount over time. With gift cards, the business can cap the value while still offering an attractive reward that feels more significant than its monetary equivalent.

3. Perceived Value

Many recipients perceive gift cards as more thoughtful or generous than cash. In particular, gift cards to popular retailers or restaurants feel like personalized gifts, whereas cash can feel impersonal. This perceived value makes gift cards a popular choice for businesses looking to reward customers, employees, or partners.

4. Locking in Customers

By giving out gift cards, companies can lock in future customer visits. Someone who receives a gift card will most likely return to the business to spend it, and that visit could result in a new long-term customer relationship. Additionally, recipients of gift cards might explore more of the company’s offerings during their visit, potentially becoming loyal customers in the process.

Conclusion

Prepaid card companies and businesses that issue gift cards have developed multiple strategies to ensure that these products are not just convenient for consumers but profitable for the companies themselves. From fees and unused balances to increased sales and customer loyalty, prepaid and gift cards offer businesses a way to generate revenue while providing value to the consumer. The various ways that prepaid card companies and retailers make money may seem hidden, but they are crucial to the overall success and sustainability of these products in the marketplace.