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Friday 6.20.2014

Why Use Reloadable Bank-issued Gift Cards?

Gift Card Girlfriend answers the gift card questions you’ve been asking.

Last week, I wrote about the benefits of using store-issued reloadable gift cards from merchants such as Starbucks or Panera Bread. I explained how reload programs, when done right, enable loyal customers to swoop up rewards, earn discounts and get special treatment from the restaurants or stores they frequent. Companies, likewise, can use this type of gift card to create long-term relationships with and reward their best customers. Bank-issued gift cards, on the other hand, function similarly but provide almost a completely different set of benefits to consumers.

video explaination of reloadable gift cards

What is a Reloadable Bank-Issued Gift Card?

A bank-issued gift card carries the logo of a credit card company, such as Visa® or MasterCard®, and is redeemable wherever that credit card is accepted. A reloadable bank-issued gift card is one that allows you to add value to the card after the initial activation. These gift cards can often be reloaded as needed or automatically such as through direct deposit of a paycheck. The methods available for adding value (e.g. direct deposit, bank transfer from a debit card, cash added in-person at a service center, etc.) vary by issuing company. Activation fees and reload fees also vary.

What Customers Gain

Unlike store-issued gift cards, designed to help merchants build and maintain relationships with loyal customers, bank-issued gift cards can be used wherever the associated credit card is accepted. So you can typically use these cards to shop wherever you want, both online and offline, as long as the merchant accepts credit cards. Bank gift cards that can be reloaded offer the following additional benefits:

  1. The Convenience of Plastic. For people who don’t have (or don’t want) a bank account, gift cards can be used to conveniently shop with plastic when a debit or credit card is required—such as paying for merchandise online. Although single-use cards also provide this convenience, using remaining balances and buying new cards as needed may be more work than simply adding value to the card you already have.
  2. Recurring Payment. Reloaded cards can also be used for automatic payment of recurring monthly bills such as a cell phone bill. Adding a single card to a company’s bill payment process is easier than entering a new card (or paying by cash) every month.
  3. No Surprise Fees. While activating or reloading a bank-issued gift card may cost anywhere from three to seven dollars, depending on the issuer and the dollar amount added, some consider this known fee preferable to those that can be assessed (e.g. overdraft, balance transfer, late fees, finance charges) when payment with a debit or credit card exceeds the available balance. Since there’s no way to overspend a gift card, the most you’ll pay for the convenience of using this plastic is the fee paid up front.
  4. Everybody Qualifies. Qualifying for a bank account may require a minimum monthly balance, multiple forms of identification, or an automated monthly deposit. Qualifying for a credit card typically requires a decent credit score or credit history. All you need in order to buy a gift card, however, is the funds to pay the load amount and the activation fee. (If you order online, you’ll also need to provide contact information as well.) With minimum barriers, almost anyone who wants to buy a gift card has the ability to do so.
  5. Teaching Tool. Because they are convenient but don’t carry the overspending risks often associated with other plastic payment methods, gift cards can be used to help kids to learn how to manage funds. Since the cards can’t be overspent, parents can safely give them to their children to pay for agreed upon expenses such as gas money for a high schooler or grocery money for a college student.
  6. Teen Spending Power. In addition to “unbanked” adults, teens increasingly need a way to complete online purchases. iTunes and PayPal, for example, both require a linked credit or debit card in order to maintain an account. Putting cash earned from babysitting or mowing the neighbor’s yard onto a reloadable gift card allows teens to use these types of services without borrowing mom’s credit card.
  7. Fewer Line Items. Some people use bank-issued gift cards to track a single monthly expenditure versus several individual purchases. For example, the office assistant who buys donuts for the lobby each morning may use a reloadable prepaid gift card to expense one monthly purchase instead of several daily transactions.
  8. Great Rewards. Gift cards make ideal employee rewards because it is easier and more cost-effective to expense a gift card than it is to have the company issue a check. Reloadable gift cards make even more sense when rewarding repeat star performers because you simply add value to the existing card so your top salesperson doesn’t have to keep track of a bunch of different cards.
  9. Withdraw Cash. While this is not true of all reloadable gift cards, some allow you to withdraw cash at an ATM. Depending on the fees associated with doing this, the right card may provide all the benefits of a bank account and debit card, minus the full banking relationship.
  10. Customer Support. Since cards may have to be registered with the issuer in order to be reloaded, chances are good that the issuing company can help you out if there is a problem with the card–something not always possible with single-use gift cards if you can’t remember the card number. (Secret tip: If you can’t remember your gift card number but used it online at some point, return to the website on the same computer you used, and check to see if the website auto-stored the card number in the entry field.)

Gotchas to Avoid

From the grocery store to the bank and various online merchants, there are many places to buy reloadable prepaid gift cards. Before making the purchase, however, check the following items:

  • Can the card be reloaded? (Check the back of the card to be sure.)
  • How much is the activation fee and the reload fee?
  • In what ways can you reload the card? Online, automatically, in person?
  • Can you withdraw funds at an ATM and is there a charge for it?
  • Is customer service provided?
  • What happens if the card is lost or stolen?
  • How much will a replacement card cost?
  • Is there an expiration date? What happens to the funds if the card expires?
  • Are there non-use or dormancy fees if the card is inactive?

Retailer gift cards are free to consumers because the issuing merchant benefits most when customers come into the store and redeem their gift cards. With bank-issued gift cards, however, there is no store. There’s no designated place for consumers to visit and redeem these gift cards. So the company primarily makes money by charging fees–activation, non-use and breakage. (Read more about how companies make money with gift cards in this blog post.)

Paying for the convenience of a gift card that can be used anywhere and having a viable payment option when a debit or credit card isn’t available is a good trade. I simply suggest you investigate the terms and conditions of the card thoroughly before buying so you don’t end up paying more than is needed.

What’s your experience with prepaid gift cards? Have any insight you’d like to share?

I’d love to hear from you.

~Gift Card Girlfriend

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