What is a prepaid card? Differences from credit and debit cards

Key takeaways:

• Prepaid cards transfer funds from a preloaded balance rather than connecting to a bank account or credit line.

• They make online payments like a credit or debit card but don’t have credit lines. This protects personal credit lines and prevents overspending.

• Prepaid cards are ideal for increased security (no personal bank ties), sticking to a budget, and separating your business spending from personal accounts.

The average number of digital payments made by a person increased by 85 percent between 2012 and 2021.¹ People want easy ways to pay in person and online, and this is especially true for businesses that need flexible and safe ways for employees to make purchases.

Prepaid cards are digital payment alternatives to credit and debit cards that make payments from a preloaded balance. They're great for budgeting and security but don’t have the same perks as corporate credit cards, like rewards points and cashback.

The preloaded balance is the key differentiator, but there are other differences to know before opening a new card.

What is a prepaid card?

A prepaid card is different from a credit or debit card. It’s a digital payment card funded with a preloaded balance. You open a card, load funds, and then use it for payments like any other card. You can even create multiple cards for different employees or departments and manage their funds accordingly.

Depending on the card, prepaid cards work with in-person card readers, online shopping, and even ATMs for withdrawals. So, what are the benefits of a prepaid card over other digital card payment methods? Here’s the gist:

Prepaid cards vs. credit and debit cards

The most important difference is how you fund your card transactions. Prepaid cards don’t have access to your individual or business account like debit cards or an individual line of credit, like credit cards.

This prevents you from overspending and can protect from fraud since lost cards or stolen details have finite funds.

Providers like Airwallex also offer single- and multi-use Virtual Cards. These debit cards help prevent overspending like prepaid cards, but they come with extra fraud protections and let you earn cashback as you spend. The card details are stored digitally, and you can cancel them anytime to prevent misusage. Also, you can spend in those currencies without incurring foreign exchange fees if you have multi-currency balances.

In contrast, traditional business credit and debit cards are linked to your business's private banking details, which can introduce added risk. While Canadian financial institutions may offer certain fraud protections on these cards, they are not regulated by the Financial Consumer Agency of Canada (FCAC) like personal cards, as the FCAC's mandate focuses primarily on consumer protection. As a result, business cards might not have the same regulatory safeguards. Businesses should consult their financial institutions to understand the protections and liabilities of their business credit and debit cards.

How do prepaid cards work?

Prepaid cards are simple. First, you choose a card and a dollar amount you want to preload for spending. You’ll cash out and pay that preloaded amount plus any card opening fees. Then, your prepaid card is loaded with the preapproved balance and is almost instantly ready for purchases.

Once the card is loaded, employees can make purchases in person and online to complete business expenses as they would with a credit or debit card. Even international payments are permitted, though there are better ways to save money on cross-border payments.

You can purchase prepaid physical and virtual cards online and in person at local grocery and convenience stores. However, this can be troublesome and inefficient as the process must be repeated every time you run out of funds.

Prepaid card alternatives

Businesses like the transparency of using prepaid cards. However, prepaid cards have their own limitations. Sometimes you might need a credit or debit card, especially for more frequent and larger purchases.

• Secured credit cards with a collateral cash deposit are a good alternative for people with low credit who can’t qualify for traditional credit cards.

• International business debit cards are a flexible alternative for businesses to simplify spending and transact in multiple currencies.

• Virtual credit and debit cards allow businesses to create single- or multi-use cards that help protect the business’ finances and eradicate the need for reimbursements.

How to choose the right card for your business

All cards have different rules and requirements depending on the card type and provider. Some have perks like free ATM withdrawals, while others charge inactivity fees. Here’s a rundown of key features to pay attention to:

Card perks:

• Liability protections (often more comprehensive with credit and some debit cards)

• Cashback rewards

• Expense management features

• Ability to assign cards for specific uses or purposes

• Spending controls

• Multi-currency features

Common fees:

• Monthly maintenance and service

• Prepaid card reloading

• ATM withdrawal

• Foreign transaction

• Inactivity

• Overdraft

Beyond the fees and user benefits, consider the card’s expiration date and any included security protections. In Canada, prepaid card balances are not covered by Canada Deposit Insurance Corporation (CDIC) insurance, even if the card issuer is a CDIC-member bank. It’s essential to check with the card issuer regarding any specific security features or protections they may offer.

Credit and debit cards generally have additional protections, particularly for fraud and unauthorized transactions. If you’re considering credit, debit, or virtual card options, you’ll also find a range of business-specific cards tailored to meet different needs, such as expense management or multi-user support.

Prepaid cards: Frequently asked questions

Do prepaid cards expire?

Prepaid cards typically have an expiration date, though they’re good for several years. You can also renew active cards and may automatically receive one before your current card expires.

But, the funds loaded onto a prepaid card don’t expire. Those can be transferred to a new card if your existing card is about to expire. You can also request a refund for an existing balance by contacting the card provider directly.

How much money can you put on a prepaid card?

Limits on prepaid card balances in Canada vary by provider and card type. For consumer-focused prepaid cards, the maximum balance is typically lower than $10,000, though some specialized cards may allow higher limits. Check with your provider for specific balance limits that meet your needs.

Beyond the card’s overall balance limit, Canadian prepaid cards often have daily spending and reloading limits that control how much you can load or spend within a given timeframe. These limits can differ significantly across providers, so reviewing these details when selecting a card is important to ensure it aligns with your intended usage.

What are the benefits of prepaid cards?

Prepaid cards are best for managing expenses with a little extra security since they aren’t tied to your personal bank or credit line. Depending on the card, you can set a spending limit with the preloaded amount and even add spending controls for sub accounts.

Because it’s independent of your personal banking details, strangers can’t access your full funds if it's lost or stolen. On top of that, you don’t need a credit check or security deposit to open a prepaid card.

What are the disadvantages of prepaid cards?

While prepaid cards offer flexibility, they also come with some drawbacks. Many prepaid card providers charge various fees, including monthly maintenance, inactivity, and ATM withdrawal fees. These costs can add up, reducing the card’s overall value.

Prepaid cards are also not ideal if you're looking to build credit, as they don’t report spending activity to credit bureaus. Additionally, consumer protections on prepaid cards in Canada are generally more limited than those on traditional credit or debit cards. Unlike bank accounts, prepaid card balances are not insured by the Canada Deposit Insurance Corporation (CDIC), even if issued by a CDIC-member bank. It’s essential to check the card’s terms to understand the specific protections and fees that apply.

Stay flexible with virtual business debit cards

Prepaid cards are credit-free options for business spending. They’re easy to use and reload, though there are many limitations and a ‌few fees to be aware of. And those fees add up fast, especially if you regularly reload the card for ongoing business expenses.

Instead, explore Airwallex’s Business Account and our financial solutions, like the Airwallex Borderless Card with Expense Management features built in. With cross-border business, you can save on foreign exchange and transaction fees, issue employee cards globally, and streamline your business spending.

Sources

1. https://www.bis.org/statistics/payment_stats/commentary2301.pdf