Prepaid cards are grouped by where they can be used and whether cardholders can add more money to them. Cards to which consumers can add funds are reloadable cards, as opposed to one time-use, nonreloadable cards.
Closed-loop prepaid cards can be used only at one merchant. Most retail gift cards are closed-loop cards. Other examples of closed-loop cards are transit cards and cards sold to players for Internet games.
Open-loop prepaid cards connect to a network and can be used wherever the network is accepted. Branded open-loop cards carry one of the major card brands (American Express, Discover, MasterCard, or Visa). The cards draw on funds held in a pooled account at a bank.
Cards that require cardholders to enter a personal identification number (PIN) to make purchases using the NYCE, Pulse, and Star debit networks are also open-loop.
Open-loop cards are the ones used most often to provide financial services to people without bank accounts. The ability to use the cards for almost all kinds of payments means that they can substitute for cash, credit cards, and checks.
Open-loop prepaid cards can take a wide range of forms. The cards are used as general purpose, reloadable cards where consumers can load money onto the cards and use them for general payments. They can be used as payroll cards, which employers give to employees and load wages onto the cards instead of printing paychecks.
Retailers give open-loop cards as incentive cards or rebate cards instead of checks or other merchandise. Parents give reloadable open-loop cards to
children and college students as a way of providing them with an allowance and to monitor spending. Consumers use open-loop cards to pay for medical expenses using money from a Health Savings or Flexible Spending Account.
Also the federal government uses prepaid cards to distribute social security
benefits and state governments use them for unemployment insurance and child support benefits. With the addition of features like bill payment to prepaid cards, consumers may use prepaid cards as substitutes for checking accounts.