An Introduction to B2B Prepaid Products
There are endless use cases for prepaid cards!
Cliche? Yes. But it’s absolutely true. Prepaid cards have been increasingly used in all variety of areas traditionally ruled by merchandise, paper checks, and even traditional gift cards. The selling point is simple: consumers increasingly want access to cash and technology infrastructure has matured to the point that delivery and use of these cash equivalent product is seamless and easy for the consumer. Prepaid products include everything from physical cards sold to consumers to digital products that act more like traditional bank accounts. And with the growing popularity of Banking as a Service (BaaS) applications and embedded finance solutions, the opportunity for prepaid products to appear in new and novel places is only growing. To meet this market demand, there is a seemingly endless number of products, offerings, and providers. The sheer volume of options can be confusing. I’m here to help you make sense of it.
In this article I will give a brief introduction into prepaid products for businesses looking to level up their knowledge when it comes to offering these products. I want to help you understand the different offerings available to you, and more importantly the reasons why they are different.
The Basics
First, let’s start with some simple definitions. Prepaid cards, what are they?
These are physical or digital products, pre-loaded with a defined balance that can be used anywhere that accepts the network printed on the card front. Think Visa or Mastercard. We are not talking about branded cards that are good only at the given brand’s locations. Those are typically referred to as gift cards, branded products, or closed loop. Separate gift and prepaid cards in your mind (even though prepaid cards can be given as gifts. I know, confusing.) I’ll go into further detail about closed loop products in a later article, for now lets focus on prepaid or open loop.
Prepaid products are financial tools that enable the owner to initiate transactions using funds held in an account at an issuing bank. They’re not dissimilar to a debit account in that way. These products are enabled through partnerships with major transaction networks such as Visa, Mastercard, Discover, or American Express allowing seamless fund movement and transaction processing. While restrictions may apply regarding cash access and international use, prepaid cards can generally be used anywhere the affiliated payment network is accepted.
A bank (often referred to as the issuing bank or issuer) is responsible for accepting and safeguarding the funds, maintaining the accounts, and ensuring settlement of payments made by the account holder (i.e. that the merchant’s bank receives the funds from the consumer’s account). A technology partner often called a “processor” or “Payment Service Provider (PSP)” connects the bank to the transaction network and facilitates the transaction and fund settlement processes.
In this relationship the bank is ultimately responsible for any compliance or regulations surrounding the products. However, banks will often enlist the assistance of third party organizations to help manage the distribution, administration, and service of these products. These organizations are called program managers. In future articles I’ll dive deeper into these networks of partnerships that enable these products because there’s a million ways to skin that cat.
Revenue Generation
Okay, so now that we’ve identified all the pieces of the puzzle, let's get to the good stuff. How do these products make money? I’m not talking about merchants who accept these transactions. I mean how do program managers, banks, processors, and the transaction networks make money? They’re the ones doing all the work to enable these products. The simple answer is Breakage. Breakage is any unused amount left on the product after all redemptions have occurred. The issuer of the product is entitled to this unused portion, however, program managers will typically build their contracts with their banking partner to receive all or a portion of these revenues.
Like I said, breakage is the simple answer, but there’s always a more complex answer. And since the goal here is to make you more informed, we’re going to welcome complexity! The more complex answer is that there are multiple revenue streams. I’m going to categorize these into two groups: typical transaction costs and breakage-related revenues.
Typical Transaction Costs include the fees a merchant pays in order to access the payment networks. These include interchange and network fees. I won’t get into these now, but go read Marcel Van Oost’s post on this for a great breakdown. Every time you swipe a card for a purchase, the merchant pays a percentage of the transaction to these companies. These fees are typically shared between the network (Visa, Mastercard, etc.), the bank, and the processor. The consumer is not impacted by these fees directly.
Breakage-Related Revenues are revenues generated from unspent funds. I typically include revenues from fees charged against the balance of the account (dormancy fees, maintenance fees, or any recurring fee) as well as expiration revenues (one time charge for the remaining balance) in this category, but breakage revenue can be recognized from liabilities not reduced via fees or expirations as well. For non-fee, non-expiring products, breakage must be estimated and the liabilities derecognized. Derecognition is an accounting technique used to convert a liability to revenue. It was introduced by FASB in 2014 with the introduction of ASC 606. I’ll go into further detail on this topic in a later post. Revenues from unspent funds are typically recognized by the program manager in exchange for distributing and administering the program.
Understanding the Categories of B2B Prepaid Products
It’s important to understand that because of the rapidly expanding market, the lines between types of B2B prepaid products can often be blurred. Features like reloadability, expiration timelines, and fee structures can be added or removed to meet a client’s demands. And like I called out earlier, the growing innovation with these products will only continue that trend. For simplicity, B2B prepaid cards can be categorized into three primary use cases, each serving distinct business needs and compliance requirements:
1. Business-Funded Prepaid Products for Expense Management
The simplest form of B2B prepaid cards, business-funded prepaid products, are designed for managing corporate expenses. These cards provide businesses with better financial control, allowing employees or teams to make purchases within preset spending limits. Providers of these products include traditional business banking services, as well as third-party financial platforms such as Ramp, Bluevine, and Netspend.
2. Payroll Prepaid Products
Payroll prepaid cards are an alternative to direct deposit or paper checks, enabling businesses to pay employees efficiently. These cards are often reloadable and frequently used, making them more costly to issue. Businesses sourcing payroll cards typically pay a fee per card in addition to a small percentage charge for each credit transaction.
3. Loyalty, Award, and Promotional (LAP) Prepaid Products
LAP prepaid products serve as incentives in employee recognition, customer rewards, and promotional campaigns. These cards are often available at face value or even at a discount (usually dependent on volume of sales), making them attractive options for businesses looking to distribute incentives efficiently. The types of use cases for LAP products are wide and varied. Some traditional use cases are promotional marketing incentives and survey response rewards. Affectionately referred to as “Do a thing, get a cookie”. However, the use of these products has continued to expand, in particular to areas like employee engagement and recognition, healthcare benefits, and filtered applications.
Why Use Cases Matter
The last thing I want to cover in this piece is use case. A program’s use case will dictate which products can be used, which provider to partner with, and what the economics involved will be. This is the most important aspect to understand when sourcing prepaid products, and I’ve seen deals fall apart because a key overlooked detail. Like I mentioned earlier, the bank is responsible for the compliance and risk associated with these products. Therefore, the bank will want to have a crystal clear understanding of the use case, and assurance that it falls within their guidelines. A few key areas your bank will be interested in are as follows:
Compliance and Regulatory Requirements: Issuing banks must adhere to different diligence and compliance programs depending on the intended use of the card. All businesses sourcing prepaid products will need to provide key documentation such as their DUNS number, tax ID, and in some cases, Beneficial Owner information.
Bank Due Diligence and Approval Processes: The intended use case influences the level of scrutiny banks and platforms apply. For products offered by a business to its employees, banks may have less stringent Know Your Customer (KYC) requirements. However, businesses using prepaid products for incentives and rewards should anticipate more rigorous reviews by banking partners.
Funding Source Considerations: All three prepaid product types are considered business-funded, meaning funds originate from a business entity rather than an individual consumer. This distinction is critical, as consumer-funded products have entirely different compliance requirements and do not qualify for these types of prepaid solutions.
Ownership of Funds and Legal Considerations: The ownership of the funds on the prepaid card varies based on the use case. In the payroll use case, the employee owns the funds, which means any unused balance may be subject to escheatment laws—state-level regulations governing unclaimed property. This legal complexity does not typically apply to LAP or business-funded expense products, making payroll cards unique in this regard.
By understanding these core categories and their implications, you can make informed decisions about selecting and sourcing the right prepaid solutions for your needs. Future discussions will dive deeper into specific market players and strategies for optimizing prepaid card usage.
And as always, if any part of this explanation left you confused or with more questions than answers, or if you want to go a level deeper on any topic, please reach out or set a meeting and we can dig into your questions.