A stored value card is a type of payment card that stores funds directly on the card, rather than providing access to funds in a separate account or from a line of credit. These cards are pre-loaded with money and can be used for purchases until the balance is exhausted.

Stored value cards have a major market presence. Gift cards, which are one type of stored value card, have a global market value that’s expected to grow from $984 billion USD in 2023 to $5 trillion USD by 2033. Below, we’ll explain how stored value cards work, how businesses can use them, and the benefits and challenges that come with them.

What’s in this article?

• Types of stored value cards
  
• How does a stored value card work?
  
• What are stored value cards used for?
  
• What types of businesses use stored value cards most often?
  
• Benefits of issuing stored value cards as a business
  
• Challenges that can come with stored value cards
  

Types of stored value cards

Stored value cards can come in several forms, including:

• Pre-paid debit cards: These function in a similar way to debit cards, but they are pre-loaded with funds. Users can reload them as needed. They are especially useful for people who do not have bank accounts or those who want to manage their spending very carefully.

• Gift cards: These are issued by retailers and pre-loaded with a specific amount of money to be spent at the corresponding store or service. They are popular as gifts and promotional tools.

• Transit cards: These are used in public transportation systems to pay for rides. Users can pre-load these cards with funds, which are deducted from the card as they travel.

• Payroll cards: These are cards that employers provide employees with to pay their wages or salary by loading the amount onto the card. They are commonly used for employees who don’t have bank accounts.

• Government benefit cards: Government agencies use these to distribute benefits such as social security, unemployment compensation, and other support funds directly to beneficiaries.

• Health savings account (HSA) cards: These are linked to HSAs, and they allow users to pay for eligible medical expenses directly from their accounts.

• Telecommunication cards: These cards let users pay in advance for mobile phone services such as minutes, texts, and data.

• Flexible spending account (FSA) cards: These are used to pay for eligible healthcare and dependent care expenses with pre-tax dollars directly from linked FSAs.

How does a stored value card work?

A stored value card stores a specific amount of money directly on the card, typically in a chip or magnetic stripe. This distinguishes it from debit or credit cards, which draw funds from an external account linked to the card.

Here’s how it works.

• Loading funds: The card is initially loaded with a predetermined amount of money, either by the issuer or by the user. This value is stored within the card’s embedded technology.

• Making purchases: When an individual uses the card to make a purchase, the terminal reads the card’s data and verifies the stored value. If sufficient, the transaction amount is deducted from the card’s balance. No external account or network authorisation is needed for closed-loop cards, which can be used only at specific businesses. Open-loop cards (such as Visa or Mastercard gift cards) function similarly to debit cards as they require network authorisation for transactions.

• Checking the balance: You can usually check the remaining balance on the card by visiting online portals provided by the issuer, using ATMs or point-of-sale (POS) terminals, or calling a customer service number.

• Reloading funds: You can reload additional funds onto some stored value cards to increase the available balance for future use. You can do this through online methods, at designated reload locations, or sometimes at the point of sale.

• Ensuring security: Many stored value cards have similar protections as debit cards. If the card is lost or stolen, you can usually report the card to the issuer, which might then block the card and issue a replacement with the remaining balance transferred.

What are stored value cards used for?

Stored value cards are versatile tools. Here are some common use cases for stored value cards.

Gifting and personal spending

• Gift cards: Gift cards (both physical and digital) are a popular gift for birthdays, holidays, or other special occasions. They allow recipients to choose their desired products or services at specific retailers or from major card networks.

• Pre-paid debit cards: Pre-paid debit cards are used for everyday purchases or online shopping. They can make it easier to manage spending and budgeting, especially for individuals who might not have bank accounts or want to avoid overdraft fees.

• Phone cards: Phone cards can be used to pay for long-distance or international calls.

Transportation and travel

• Transit cards: Transit cards are widely used for public transportation. They store fare information or passes for travel on buses, trains, and subways.

• Toll cards: Toll cards facilitate faster, easier electronic toll collection on highways.

• Travel cards: Some companies offer pre-paid travel cards for specific destinations or airlines. They provide a secure way for customers to carry funds and manage travel expenses.

Business and payroll

• Payroll cards: Employers issue payroll cards to pay wages or salaries. These cards are especially beneficial for employees who do not have bank accounts or those who prefer a card-based payment method.

• Incentive and reward programmes: Companies use stored value cards to reward employees or customers.

• Expense management: Businesses use stored value cards to control and track employee spending. This can make expense reporting and reconciliation easier.

Education and campus life

• Campus cards: Students use campus cards for identification; access to facilities; and payment for campus services such as meals, laundry, or bookshop purchases.

• Meal plans: Meal plan cards are pre-loaded with a set amount of dining credits. They provide a convenient way for students to manage their meal expenses on campus.

Government and social programmes

• Benefit disbursement: Governments use stored value cards to distribute benefits such as unemployment compensation or food assistance.

• Disaster relief: Stored value cards can provide quick and secure access to funds for individuals affected by natural disasters or emergencies.

What types of businesses use stored value cards most often?

Stored use cards are valuable tools for a wide range of businesses. Here are some business types that use them most often.

• Retailers: Big-box stores, department stores, and speciality retailers all use gift cards to drive sales and encourage customer loyalty. Retailers can issue their own branded stored value cards to promote repeat business and track customer spending patterns. These cards are particularly popular as gifts during holidays and special occasions.

• Restaurants and cafés: Restaurants and cafés often issue gift cards, and cafeterias and quick-service restaurants often use stored value cards for faster transactions. Campus dining halls often use meal plan cards (a type of stored value card) for students to manage their meal expenses.

• Transit and transportation companies: Public transportation systems rely heavily on stored value cards (fare cards or transit passes) for quick, contactless payment. Some toll roads and bridges use pre-paid toll cards for quicker passage and reduced congestion at toll booths, and airlines and travel agencies sometimes offer stored value cards to cover travel-related expenses.

• Entertainment and leisure venues: Cinemas, amusement parks, and entertainment complexes sell stored value cards or gift cards for admission, food, and merchandise purchases. Arcades and gaming centres also frequently use reloadable cards for customers to play games and track their winnings. Some gyms and fitness studios offer membership cards with stored value to access facilities and purchase additional services.

• Telecommunications companies: Some telecom providers offer stored value cards for purchasing data or additional minutes on mobile devices. People who lack traditional phone plans or who need to pay for international calls might also use pre-paid phone cards.

• Employers and payroll providers: Many companies use payroll cards as an alternative to traditional pay cheques, particularly for employees without bank accounts. They might also use stored value cards for employee incentives, rewards, or expense reimbursement programmes.

• Government agencies and non-profit organisations: Government entities often issue stored value cards to distribute benefits such as unemployment compensation or food assistance. Some non-profits use these cards to fundraise or provide financial aid.

• E-commerce and online platforms: Digital gift cards are increasingly used for online purchases. Online gaming platforms and virtual worlds often use stored value cards for in-game purchases and transactions.

Benefits of issuing stored value cards as a business

Here are some of the benefits that stored value cards offer businesses.

• Expense management: Businesses can issue cards with preset spending limits and restrictions on specific business categories. This ensures compliance with company policies and prevents unauthorised spending. Businesses can monitor transactions made with stored value cards in real time, providing immediate visibility into employee spending and enabling prompt identification of any discrepancies or potential fraud. Stored value cards can also mitigate administrative costs and free up valuable time for finance teams by reducing manual expense reports and reimbursement processes.

• Cash flow: Businesses receive funds from stored value cards immediately upon card activation or reloading, which boosts cash flow and provides financial stability – especially for smaller businesses. With pre-paid balances, businesses can also better forecast revenue streams and make more informed financial decisions based on anticipated spending patterns.

• Customer loyalty and engagement: Businesses that give rewards or discounts through stored value cards can incentivise repeat business and customer loyalty. Customers are more likely to return to a business where they feel valued and appreciated.

• Market reach: Stored value cards provide an accessible payment option for individuals who might not have traditional bank accounts or credit cards, opening up new customer segments and potential revenue streams. Businesses with open-loop cards linked to major payment networks can accept payments from customers worldwide and expand their reach beyond geographical boundaries.

• Fraud risk: Stored value cards typically use advanced security features such as encryption and tokenisation to safeguard sensitive cardholder data and mitigate the risk of data breaches. In the event of loss or theft, businesses can typically limit their liability to the remaining balance on the card.

• Brand awareness: Branded stored value cards serve as an ongoing reminder of the business every time a customer uses one. This increases brand exposure and recall among customers and potential customers. Businesses can also create positive associations with their brand by providing a convenient and secure payment option.

• Revenue streams: Depending on the card programme and applicable regulations, businesses might be able to generate additional revenue through activation fees, monthly maintenance fees, or transaction fees. In some cases, businesses might earn interest on the unused funds held on stored value cards, an additional source of passive income.

• Customer data: Businesses can analyse transaction data from stored value cards to gain valuable insights into customer demographics, spending habits, and product preferences. They can use this data to create targeted marketing campaigns and promotions that increase conversion rates and customer engagement.

• Improved customer experience: Stored value cards offer a fast, secure, and contactless payment option. They also make it easy to reload funds and can help customers avoid overdraft fees they might face with debit cards.

• Competitive advantage: A stored value card programme can differentiate a business from competitors; it can attract customers seeking alternative payment options and a high level of convenience.

Challenges that can come with stored value cards

While stored value cards provide a high level of value, they also come with complications. Here are a few potential drawbacks of stored value cards.

Challenges for users

• Fees: Some stored value cards come with high fees including activation fees, monthly maintenance fees, reload fees, and inactivity fees. This can erode the value of the card.

• Limited use: Some stored value cards are only usable at specific retailers or for certain services.

• Security risks: If a stored value card is lost or stolen, and it is not adequately protected by PINs or other security measures, anyone with access to the card can use it to make purchases.

• No credit building: Stored value cards don’t help users build credit.

• Balance issues: Users might struggle to keep track of their remaining balance, and they could end up with low residual amounts that are hard to spend.

Challenges for issuers

• Regulatory compliance: Issuers must navigate complex regulatory environments including Anti-Money Laundering (AML) laws and regulations concerning unclaimed property.

• Fraud risks: Stored value cards are susceptible to different types of fraud including cloning and unauthorised loading. This can lead to financial losses and damage to the issuer’s reputation.

• Technical issues: Issuers must implement and maintain the technological infrastructure required to support issuing, reloading, and processing stored value cards.

• Market saturation: New entrants can struggle to differentiate their offerings in markets such as retail, which are already saturated with gift cards and other pre-paid options.

• Customer dissatisfaction: Stored value cards can come with high fees, expiration dates, or service issues that lead to customer dissatisfaction and can damage a brand’s reputation.

• Redemption liability: Issuers must manage the accounting and financial implications of unspent funds on cards, known as breakage. This can affect financial reporting and revenue recognition.