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Prepaid cards have been making a big noise lately. Their rewards programs and other features sound really appealing, don’t they? Even their advertisements tend to connect more deeply with us, partly because they aren’t using jargon and too-quickly-spoken disclaimers that you can find in the promotion of a lot of other financial products.
But the appeal is not just limited to these benefits but goes to the very root of it. When it comes to getting anything done at a bank, the first few things that pop up in most people’s heads are the long queues at the counters, loads of documents to submit, and complex forms to fill out. However, this is not the same in the case of prepaid cards and is seen as a huge benefit of using a prepaid card. As no KYC process is required for some tiers of prepaid cards, you are saved from a lot of hassle. Moreover, you can seamlessly load prepaid cards with cash or recharge your card online from the comfort of your home.
But before we delve deeper into the advantages and disadvantages of a prepaid card, let us briefly understand what it is.
What is a prepaid card?
A prepaid card is a prepaid payment instrument that you can use to access an amount that you have already loaded on it. These are reloadable and can be used to make payments at any place where other cards, such as debit and credit cards, are accepted.
Despite being a fair innovation, these are becoming highly popular across many countries.
Let us see the different types of prepaid cards available in the market.
Types of prepaid cards
Full KYC PPIs: Prepaid cards in this category can be issued only after the user goes through a KYC process. These PPIs can be used for the purchase of goods and services, funds transfer, or cash withdrawal, and they typically come with a higher limit.
Small PPIs/ Minimum-detail PPIs: You can only use these prepaid cards for the purchase of goods and services and that too only at clearly identified merchant establishments that have a contract with the issuer. Alternatively, the establishment has to possess a contract to accept the payment via a payment aggregator or payment gateway. Funds transfer or cash withdrawal from such PPIs is not permitted. However, here you only need to offer minimum details to the PPI issuer to get access to this prepaid card.
There are also two types of minimum-detail prepaid cards:
1. PPIs with cash loading facility:
These must be converted to full KYC PPIs within 24 months. Alternatively, the cardholder can also downgrade them to prepaid cards with no cash loading facility.
2. PPIs with no cash loading facility:
These can be loaded only from a bank account. Before the new RBI rule came into existence, they could also be loaded from credit cards, but not anymore).
Now that you have a better understanding of this payment instrument, we’re going to take a deeper dive into the various benefits of using prepaid cards and their disadvantages.
Advantages and disadvantages of prepaid cards
Advantages of prepaid cards
1. Ease of use
Anytime and (almost) anywhere use is one of the most popular benefits of prepaid cards, very much like credit cards and debit cards. You can use your prepaid card to pay for goods and services at merchant establishments registered with the prepaid card company’s network. You can also use your card to withdraw money or transfer funds, depending on the type of card you own.
2. Easy onboarding
The biggest advantage of prepaid cards is that some of their types- namely the minimum detail type of prepaid cards - do not require a KYC process. Many people struggle with finding the time to visit a bank and open a bank account to eventually get their hands on a card they can use. With this form of a prepaid card, you can avoid all the hassle.
3. Low limits for compulsive spenders
A lot of people rack up huge amounts of debt and end up spending more than they want, or saving less than what they planned, solely because they just cannot resist the huge credit limits extended to them on their credit cards. Prepaid cards limit your outstanding balance to Rs. 1,20,000 for the category of cards known as minimum detail cards and Rs. 2,00,000 for the full KYC cards. This allows you to stay within your limit and stick to your planned budget.
4. Collect points and rewards
Just like credit cards and debit cards, you can earn points on your prepaid card when you spend money on it. Every swipe account for some reward, which you can accumulate and later use to redeem vouchers and other offers.
Disadvantages of prepaid cards
1. Increased chances of theft
Unlike your credit or debit card, which usually has your name printed on it, and comes along with security barricades to prevent misuse, prepaid cards do not come with these features. They are almost like cash –they can be used by anyone who gets their hands on them.
2. High fees
There are many additional charges involved with prepaid cards. These include:
● Card activation charges
● Loading charges
● Charges to check your balance
● Charges involved with using the card
All of this collectively comes out to be quite a hefty amount. You may be required to shell out money unnecessarily, that you would have saved had you used alternate sources of payment.
3. Category-based and contract-linked usability
As you may have noted in our section on the different types of prepaid cards, only the KYC card can be used for all main three purposes – purchase of goods and services, funds transfer, and cash withdrawal. On the other hand, the minimum detail cards can only be used for the purchase of goods and services, and that too only at certain establishments.
4. Low credit limit
Minimum detail cards come with the following limits:
● The maximum outstanding amount cannot exceed Rs. 10,000.
● The maximum loanable amount at any given time is capped at Rs. 10,000.
In the case of Full KYC cards, the limits are:
● Rs. 2,00,000 is the maximum outstanding amount for full KYC cards. Along with this, the maximum loadable cash amount at any given time is Rs. 50,000, however, there is no government-imposed limit on other means of loading.
● The maximum amount loadable in a financial year is capped at Rs. 1,20,000.
There are many rules that are announced by the RBI, which directly or indirectly affect prepaid cards. These changes have an effect on the various disadvantages and advantages of prepaid cards that these prepaid payment options provide the customers. Let us have a look at some of these recent changes.
The recently eliminated disadvantage and advantages of prepaid cards
In a recent RBI ruling, issuers were prohibited from loading prepaid cards with a fresh line of credit. This means that the existing and new prepaid cardholders can continue to use these cards and the companies can continue to do business, but you need to load the card with your own money. This eliminates one of the many benefits of prepaid cards.
When you could load prepaid cards with a credit line extended by the card issuer, it worked out great for many users. This is because you could get access to credit without having a credit history or a good credit score. Many people who have never opted for a credit card or a loan have no credit score by default, this at least allowed them to develop a credit history.
However, this was a double-edged sword. The amount extended to you was recorded as credit extended to you before you use any of it. This might unnecessarily impact your credit score negatively. This is something that a lot of people are completely unaware of because they assume that prepaid cards work just like credit cards, where your credit score is impacted only by what you spend and what is outstanding. In prepaid cards, the whole credit amount is considered outstanding even before you use it in the first place. This is analogous to being fined for just thinking about running a red light or being fined at a library for thinking about talking.
This sums up the various advantages and disadvantages that prepaid cards come with.
The bottom line
Prepaid cards are useful prepaid payment instruments that come with a range of benefits. They allow you the use of a card in place of cash, without actually opening a bank account, and thus require lesser documentation. You can also win reward points on your use. However, these cards come with significant disadvantages as well. These include a higher risk of theft, increased additional charges, and restrictions on usage. It is thus important to deeply analyze both the pros and cons of this payment instrument and does thorough research before taking up this option.