The pandemic got most of us shopping online and minimizing the use of cash. Among the digital payment modes, prepaid payment instruments have seen increased usage since the beginning of 2020. Of course, these prepaid cards can be used both online and at retail outlets. As of September 2020, over 16 crore new prepaid cards have been issued, according to Worldline India’s third quarter (July-September 2020) digital payments report published on December 1. Prepaid cards recorded 15 per cent growth in the third quarter vis-à-vis the previous three months.
These prepaid cards are being issued by banks for the retail customers. Many fintech firms have partnered with corporates to issue prepaid cards for employees.
State Bank of India (SBI), HDFC Bank, Axis Bank, ICICI Bank, Yes Bank, Bank of Baroda, etc. issue prepaid cards. Similarly, some of the fintech firms issuing these prepaid cards include Zeta, Transcorp International and EnKash.
What is a prepaid card?
Prepaid cards are issued by banks and financial institutions, and can be used for transactions in a similar way as credit cards. Unlike normal credit cards that function on borrowed funds, in prepaid cards, you have to load money as per your requirement. Generally, when you use a prepaid card, you are limited to spending money that is already loaded on the card. So, you don’t overspend while using it for shopping.
A prepaid card allows users to pay utility bills, make purchases at food outlets, shop online and swipe at point-of-sale (POS) terminals.
Ayan Agarwal, Vice President-Payment Systems, Transcorp says, “Prepaid cards are the safest methods of transacting, as the liability is limited to the balance in the card, as opposed to one’s entire bank account linked with a debit card or the entire limit of a credit card.” Also, it comes with a PIN and one-time password (OTP). These are sent to the registered mobile number for all merchant-based transactions and online purchases.
Also read: Banks record increase in digital transactions as customers maintain distance from branches
Prepaid cards were primarily used for online transactions
According to Digital Payments Report from Worldline India, the number of prepaid card transactions processed at point of sale (POS) terminals was 86.2 lakh. The figure for e-commerce transactions, card-to-card transfers and digital bill payments through ATMs, etc. was 26.7 crore.
In terms of value, Rs 2,275 crore was processed at POS terminals through prepaid cards while Rs 7,589 crore was processed for online and other transactions.
Sapna Tiwari, Co-founder and COO, Rupeewiz Investment Advisors says, “These numbers show that consumers are taking measures to restrict their spending by taking to prepaid cards for regular day-to-day transactions and for online shopping in these pandemic times.”
“Using prepaid cards for e-commerce transactions also limits the risk of fraudulent transaction to amounts loaded, which may be a much smaller amount compared to your credit card limits and your debit card linked with your savings bank account, which will have higher balance,” says Ashish Apte, CEO at AAA ResearchOne Financial Consultants.
What works for prepaid cards
Contactless usage on prepaid cards is limited to Rs 2,000 per transaction, according to RBI guidelines; for regular and online transactions, the limit is Rs 1 lakh. Cardholders are also secured with an insurance cover as an additional benefit by some of the banks and fintech firms issuing such cards.
The prepaid meal card issued by your employer will give you tax benefits. For instance, if your employer loads up to Rs 2,500 per month on your prepaid meal card, it becomes a non-taxable income for an employee as per the income tax act. This amount can be spent only for purchases of food and beverages from e-commerce websites and shops accepting the card.
What doesn’t work
Banks and fintech firms issuing the prepaid cards are not liable to pay any interest on the balance outstanding in the prepaid card at any point in time. “You shouldn’t maintain a balance of more than three months’ expenditure on such prepaid cards. Use the balance on this prepaid card while shopping or paying utility bills on priority,” says Apte.
Also, the user has to utilise the balance amount on the prepaid card within the validity period mentioned while issuing the card. In case it lapses, then the outstanding balance on the prepaid card will be transferred for compliance into a separate fund categorised by the bank as per the regulatory guidelines. Tiwari says, “The procedure for claiming this outstanding amount from the separate fund after expiry of the card will be a tedious and long process.”
There are charges and fees for holding the prepaid card. Issuance, annual, loading, transaction and card replacement fees may be charged.
What if I lose my prepaid card loaded with money?
In case the prepaid card is lost, you can report it to the issuing bank branch or customer care (email / call centre) and a replacement card can be requested. A replacement card will be issued, and the balance amount will be transferred to the replacement card.