A POS card reader with a card in it.

What are stored value cards?

Sunday, January 19, 2014

Here’s what you need to know

As a small business owner, you’re always looking for ways to increase your business. One way you can do that is with stored value cards. They’re a win-win, too. For customers, they allow a flexible and easy way to pay while also helping your company generate more revenue. So in this article, we’ll look at stored value cards – from what they are to how customers use them to any issues that arise from stored value cards. First, let’s answer the question: What are stored value cards?

What is a stored value card (SVC)?

While the name stored value card might not mean anything to you, you’ve heard of the premise of these cards before. They go by a few other names: prepaid card, gift card, reloadable card, to name a few. In terms of using these cards at your business, these cards are a type of electronic bank debit card. They have a specific amount of money pre-loaded onto them and some are even reloadable. Consumers utilize these non-cash payment cards in a variety of ways. While some can only be redeemed at specific merchants, others can be used to make purchases just like a normal debit card. When a consumer makes a purchase, the value of the card decreases by the purchase amount.

There are two types of stored value cards: Open-loop and closed-loop.

Open-loop cards allow the cardholder to use this type of stored value card at a variety of retail locations and for a variety of purchases. Usually, it’s the credit card networks who issue open-loop stored value cards. With open-loop cards, the holder can use it anywhere that accepts the card network. For instance, if it is a Visa gift card, the holder can spend it at any merchant who accepts Visa credit cards or debit cards. Likewise, Mastercard and American Express cards work the same way. Generally, there is an activation fee to load and then activate an open-loop card. This is how the financial institution and processor make money in the transaction. For consumers, this activation fee can be seen as the small price to pay for the freedom to utilize the card wherever they want.

In contrast, a closed-loop stored value card is a card that can only be redeemed at the merchant listed on the card. This type of card often has a company’s logo on them to help consumers recognize where the card can be spent. Therefore, a cardholder who has a coffee shop gift card could not use that gift card at your clothing store. And, if your clothing store offered closed-loop gift cards, a customer could not use that card to buy a coffee at the coffee shop. Unlike open-loop cards, closed-loop cards generally do not have an activation fee. But the money must be spent at the retailer or restaurant who issues the card. Now that you know the difference between open and closed-loop stored value cards, let’s look at their most common uses.

What are some of the most common uses for stored value cards?

So how do stored value cards work? Most often, as we’ve shown, businesses and card networks issue stored value cards as gift cards. In today’s society, they’ve replaced paper gift certificates of the past. These cards make it easy for consumers to buy gifts for their friends, family and coworkers. If they choose to buy a closed-loop gift card, they’re also supporting small businesses like yours.

In addition to their use as gift cards, stored value cards have other merits. Many businesses use them for small, repetitive purchases. Big cities use stored value card programs to contain transportation system credits and fares, making it seamless for commuters to take the bus or train. In schools, these cards hold student meal plans, making it easy for cafeteria staff to deduct from a student’s meal plan balance. You’ll also see stored value cards as phone cards, payroll cards and rebate cards.

Stored value cards can also help issue government benefits in the forms of unemployment and nutritional assistance. Prepaid cards can also help people gain access to the financial system. For example, those without cash or a bank account can use prepaid cards where others would use their credit or debit card. Open-loop stored value cards can also be helpful when customers need to make a credit card only purchase (like in ecommerce) and don’t have a credit card. Since a merchant can run a stored value card like a credit or debit card, they provide a backup plan when needed.

Another use of stored value cards that is gaining popularity is parents providing SVCs to their teens in lieu of cash. These SVCs are generally safer to carry than cash to help protect their teen’s’ safety. But, they also have another benefit for parents – the ability to track their teen’s spending habits and ensure they’re budgeting properly. That’s because they can simply login to their card account with the card information and view the transaction history, giving them immediate insight into a teen’s spending habits.

What problems come with SVCs?

With stored value cards, the risk to your business is fairly low. Since processing open-loop cards is just like processing other transactions from the card networks, there’s not too much risk for your company. If you decide to use closed-loop cards specifically for your business, then the risk is just the cost it took to design, produce and implement the cards. However, there are a few more watchouts that consumers should understand.

After purchasing or receiving a stored value card, a consumer should understand how they work and also be aware of any possible fees. Here are some of the fees consumers may incur with stored value cards: entrance/activation fees, maintenance fees, point-of-sale fees, domestic ATM transaction fees (in and out of network), transaction limit fees, bill payment fees, phone or online transaction fees, reload fees, money transfer fees, international ATM transaction fees, inactivity fees, overdraft fees, overdraft protection fees, payday advance fees, credit-reporting fees and dispute fees.

Another concern for consumers is that SVCs can cost more money than you’re actually putting on the card. Therefore, using them on a consistent basis in lieu of cash will almost certainly be more costly than just using cash for transactions. These fees can really add up.

The next concern is that while one of the greatest benefits of a stored value card is that it spends much like cash, that’s also one of the biggest downsides. For example, if you lose the card, there’s no course of action to get the money back that you’ve lost on the card. And because these cards are often very general in nature, they wouldn’t have any of your personal information on them so that a kind soul could return it. And, unlike a debit or credit card, there’s no system for you to call the card issuer/provider for a replacement. Again, there’s no personal information linking you to this SVC.

Some also believe that another danger of SVCs is that they can be used by bad actors for things like money laundering. There are some stored value cards where the limit is hundreds of dollars. Therefore, some money launders buy as many of these cards as they can using cash and then spend them.

As you can see, stored value cards are a valuable piece of the overall payment system. Encouraging and accepting the use of open-loop SVCs can help boost your business by letting consumers know you accept this form of payment. And, your company can also look at closed-loop cards in order to get the word out about your business, help bring in new customers and retain existing customers. After reading this article, you should see that SVCs are good for your customers and your bottom line.


Ready to work with a payment processor who can help you accept stored value cards?

Heartland is the point of sale, payments and payroll solution of choice for entrepreneurs that need human-centered technology to sell more, keep customers coming back and spend less time in the back office. Nearly 1,000,000 businesses trust us to guide them through market changes and technology challenges, so they can stay competitive and focus on building remarkable businesses instead of managing the daily grind. Learn more at heartland.us.