What is a prepaid card and how is it different from a credit card?

You have probably heard (or had your streaming playlist interrupted by) advertisements for prepaid cards in India like Jupiter, Slice, and Fi. You probably slotted them in the same category as credit cards, either consciously or subconsciously. That’s not surprising, especially since they often scream from the rooftops about their amazing points, rewards, and credit limits, all of which we tend to associate with credit cards or debit cards.

You have probably also heard that the RBI came down fairly hard on prepaid payment instruments - including prepaid cards - in India recently. PPIs include prepaid cards, payment wallets, and mobile wallets and the RBI has pulled them up for loading credit from existing credit lines.

Some prepaid cards have pulled the plug on customer transactions temporarily since the RBI’s new mandate at the end of June.

What does all of this mean for you as a user? Maybe you were planning to opt for a card and had even done your research on the best-prepaid cards in India, but with all the drama you are now re-evaluating your enthusiasm for them. After you read this post, you will feel much more sure-footed about the concept of prepaid cards: We are going to tell you what they are and how they are different from credit cards. We’ll also explain what the RBI is attempting to do and how the new rule is supposed to help you.

What is a prepaid card?

A prepaid card is essentially a card that comes preloaded with capital for you to spend (but some cards also allow you to transfer funds and withdraw money).

The prepaid card is loaded with capital that is your own, and until the recent RBI ruling, you could also open a line of credit with a prepaid card - very much like a credit card.

Under the credit line alternative, the amount granted to you was recorded as soon as it was extended to you.

Now let’s dive into the difference between prepaid cards and credit cards.

Prepaid cards vs credit cards: Credit fundamentals

Although “recorded” sounds innocent enough, it means that if you have a prepaid card with a credit line of Rs 200,000, the amount is considered as already borrowed - as far as your credit score is concerned - even before you actually use it. This is very different from a credit card, where the amount is considered as borrowed only after you swipe your card. The amount does not get recorded against your credit score.

PPIs are popular because they do not necessarily need to be linked to a bank account - users tend to like the idea of less paperwork and the whole process of visiting a bank and setting up a bank account. That said if you opt for a heavier PPI with a limit that exceeds Rs 10,000, you still need to go through a complete KYC and verification process. That brings us to the next difference between prepaid cards and credit cards.

Prepaid cards vs credit cards: Types

If you have ever explored the universe of credit cards, you know that there is a stunning variety of cards depending on your lifestyle and your most significant areas of spending. Shoppers use a certain type of card, frequent fliers have dedicated cards; some cards are best for grocery discounts and others give you fuel discounts, right? All credit cards call for a KYC process.

The world of prepaid cards is a lot less expansive. You have:

1) Full KYC PPIs: The PPIs are issued after going through a typical KYC process. These PPIs can be used for the purchase of goods and services, funds transfer, or cash withdrawal and when it comes to prepaid cards in India, this would be considered by most as the best type of prepaid card.

2) Small PPIs/ Minimum-detail PPIs: Here you only need to offer minimum details to the PPI issuer. However, you can only use these prepaid cards for the purchase of goods and services at a group of clearly identified merchant locations/establishments. These establishments have a specific contract with the issuer (or contract through a payment aggregator/payment gateway). Fund transfer or cash withdrawal from such PPIs is not permitted.

Minimum-detail PPIs are differentiated based on whether they can be loaded using cash or not.

- PPIs with a cash loading facility must be converted to full KYC PPIs within 24 months. Alternatively, the cardholder can also downgrade them to PPIs with no cash-loading facility

- PPIs with no cash loading facility, which means they can be loaded only from a bank account (previously they could also be loaded from credit cards, but not anymore - we’ll get to this as we promised.)

Prepaid cards vs credit cards: Credit limits

You can have credit cards for just about any limit, provided you have the creditworthiness to match. Rs 400,000? You got it, provided you earn a reasonably fat salary and have not defaulted on prior payments.

PPIs work if you need smaller credit limits because the limits are -

Minimum detail cards:

● Rs 10,000 maximum outstanding amount for the minimum detail cards

● Rs 10,000 maximum loadable amount at any given time

Full KYC cards:

● Rs 200,000 maximum outstanding amount for full KYC cards

Rs 50,000 maximum loadable cash amount at any given time (no government-imposed limit on other means of loading).

● Rs 120,000 maximum amount loadable in a financial year

Prepaid cards vs credit cards: Usability

You can use your credit card at most establishments for most types of shopping, fuel, and travel.

However, as you may have noted above for prepaid cards - particularly the minimum detail variety, companies need to have tied up with a merchant for you to use your prepaid card there. PPI companies might have a fairly widespread network, but it should be noted that a certain establishment may or may not be part of their network.

Moreover, credit cards can be used (although you might have to pay a lot as fees in some cases) to withdraw money from ATMs. Not all prepaid cards allow for this.

Why are prepaid cards in the news?

The new RBI ruling changes the game quite drastically for prepaid cards because previously, prepaid cards added credit lines for users to enjoy as a benefit and the amount was considered as borrowed against the user’s credit score.

With the new mandate, prepaid cards can still be issued and used, but they need to be loaded with cash, or using your own debit card, or using electronic means. Either way, it's your money that will be loaded on the card going forward. The issuer cannot start a credit line linked to the card any longer, as was the case before the ruling. As the RBI puts it, they are not permitted to “load credit lines” on the PPI.

This is aimed to protect banks that need to put customers through heavy-duty KYC to open accounts and borrow capital.

The move is also aimed at protecting users because many are not aware that their credit score is impacted as soon as they accept a loaded card, instead of only at the point when they use the card.

The bottom line

A prepaid card is a card that is preloaded with your own money and allows you to make payments at any time. You cannot, as per the new RBI ruling, get a credit facility on your prepaid card. When you could, it wasn’t necessarily the best thing because you were accepting borrowings that would reflect on your credit score before you even actually used the sum extended to you.