Pre-paid cards - An outdated concept with a lot of innovative potential

In most industries there is an evolution from pre-paid to post-paid, i.e. instead of having to acquire products or pay costly subscriptions or licenses upfront (with a lot of unnecessary features), there is a tendency to pay more based on usage. This trend of "Everything as a Service" is converting massively CapEx into OpEx, which finance departments in most firms can only applaud.

Following this trend you would assume that pre-paid cards and pre-paid accounts will soon also be a thing of the past, although today they are still quite common, with a strong usage in the telecom industry (for pre-paid phone cards), for gift vouchers and in pre-paid credit cards.
The reason they are so popular is their convenience and the sense of control they give to the user, i.e. instead of having to take a subscription or open a bank account (which is typically a lengthy process with a lot of due diligence steps), an anonymous sum of money can be deposited and in return you get a card (note that this card can also be a virtual card). Due to the misuse by criminal organizations and terrorists, the anonymous nature has already considerably been reduced (in many countries you are required to execute a KYC process on a pre-paid card before being able to use it), but the ease of use is still a plus.
Furthermore the "sense of control" of a pre-paid card makes sure you never spend more than the pre-paid amount on the card. This protects the user not only against himself (spending too much money), but also against criminals, who can never steal more than the deposited pre-paid amount, which in a time of continuous cyber-threats is not an unnecessary luxury.

However with PFM tools becoming more powerful (allowing to get more control over your spending), cyber-security improving and onboarding processes becoming more and more frictionless and digital, the above advantages of pre-paid cards and accounts will soon be depassed by standard debit and credit cards and normal banking accounts.

Fortunately for the industry dealing with pre-paid accounts and cards, they come with an additional advantage, as they can also be an interesting tool to enforce a pre-defined spending pattern, by limiting the merchant, region, sector and/or amount of its associated transactions. While a standard card or account aims to provide maximum flexibility and liquidity to consume the underlying money, a pre-paid card or account can be prescriptive in nature.

Already today there are many use cases where such a spending pattern is enforced on a pre-paid account or card, e.g.

• Expense management in companies. Instead of employees having to advance an expense, followed by a complex, post-expense validation process (potentially leading to discussions about the validity of an expense), firms can also pre-approve an expense, by approving to spend a specific amount at a specific merchant. The money can then be made available via a pre-paid (virtual) debit or credit card, which enforces the agreed spending restrictions (e.g. Spendesk has an offering to manage this).

• Gift vouchers could also be restricted to a specific city (city gift voucher), merchant or sector

• Vouchers regulated by the government, such as meal vouchers, eco vouchers, taxi/mobility vouchers, service vouchers…​ are typically also handled via pre-paid cards or accounts, which enforce the legislative restrictions set by the government.

• Corona relaunch measures: with the Corona crisis heavily impacting certain sectors and certain individuals, governments are turning towards pre-paid cards to ease the financial impact of the crisis. Initiatives like offering food support to people receiving social support from the government or vouchers which can only be used at merchants most impacted by the crisis are just 2 examples. Buying a pre-paid gift card of a local merchant can furthermore provide some well-needed short-term liquidity for the merchant in these difficult times.

While these type of use cases, limiting the usage of money based on product type, sector of the merchant (e.g. MCC code) or location (e.g. city voucher), are already well-established, the prescriptions could even evolve to more complex rule-based systems (potentially even based on AI algorithms), which manage the transaction authorization. The so-called smart contracts running on the Ethereum blockchain aim to deliver such a concept, but a similar logic is also possible on a traditional payment architecture, based on pre-paid cards and accounts.

Some interesting examples could be:

• A building syndic, who is only allowed to spend the money of the association of co-owners, based on the rules defined during the annual meeting.

• An account used as a collateral for a loan: money from the account can only be spent when there is sufficient collateral for the remaining loan amount (meaning more can be spent when a bigger part of the loan has been reimbursed) or when the money is spent on buying financial assets, which can be (automatically) blocked by the bank as alternative collateral

• Sponsorship and donated money could be put on an account, governed by rules that limit the type of spending (e.g. don’t spend the money on alcohol, gambling…​)

• Money received via a credit, governed by the rules of ethical or religious banking, could be put on an account, enforcing that money is only used for products and services in line with the ethical or religious prescriptions

• Payment of advances to construction contractors can also be put on account, with a rule that money can only be used for buying building materials.

• Inheritance: instead of compiling a complex testament describing specific rules of an inheritance, the money could also be automatically put on an account, with rules to ensure that the money is spent by the heir apparent in line with intended purpose of the deceased person.

• Consumer credits without an object are typically expensive credits as the bank has no control on the usage of the disbursed money. An alternative could be that the money is paid out on an account, which limits the spending for products, which keep some residual value (allowing to increase the potential for recovery by the bank in case of loan default, thus reducing the credit risk for the bank and allowing to reduce the credit pricing).

• …​

The bank can facilitate these use cases, by managing the configuration of the rules. This extra value-added service enforces the role of the bank as a trusted advisor, which is important in this age where banking is becoming more and more an automated, self-service, online activity.

The downside of a growth in this type of prescriptive pre-paid accounts or cards is of course that it can lead to a sprawl of cards in your wallet. An abstraction layer, like offered by e.g. Curve, can help here. Instead of having to select the right card yourself, all pre-paid cards are virtualized and linked to 1 single card. When using this card (based on another rule set), automatically the right eligible virtual card is selected from your wallet and indirectly used .

The above examples show that pre-paid cards and accounts, are clearly not a thing of the past, but instead might even become more popular, when the technology becomes more powerful and flexible to support in a quick way the continuous flow of new innovative use cases.