What’s the Difference Between a Gift Card and a Prepaid Card?

With over $100 billion spent each year on gift cards, and over two thirds of Americans receiving at least one gift card annually, it’s amazing to think that gift cards have been around for just 19 years.

The first mass-produced gift card program was created by Blockbuster in 1994 with most major brands following suit throughout the late 1990’s. Prior to the gift card, gift certificates had been used since the 1930’s but were not heavily marketed by most companies.

Today, you can buy gift cards at millions of locations from your local gas station to the grocery store, as well as online.  But consumers seldom know that there are different types of gift cards and prepaid cards—each limited in where they can be used and each associated with potential fees that can be assessed.

Below we’ll look at four types of gift and prepaid cards from the perspective of the card recipient. Most of these “rules” we discuss were defined by the Credit CARD Act of 2009, and implemented in August 2010.

Retailer Gift Cards (a.k.a. Closed-loop)

When most consumers think of gift cards, they think of the cards you buy for one particular retailer like Target or Sears. These merchant-specific gift cards are called ‘closed-loop’ because they can only be used in a closed environment (i.e. just at the retailer’s locations.)

Contrary to popular belief, retail gift cards can have an expiration date of 5 years from when the card was purchased.  However, most national branded gift cards don’t expire.

3 Things to know before buying a retailer gift card:

  1. In-store Only. Some retailers, including Staples and Pier 1, only allow their gift card to be used for in-store purchases, not online. So if your gift recipient likes to shop online, check for this possible restriction before buying.
  2. Expiration. Many local retailers have not updated their gift card program since the Credit CARD Act law went into effect in 2010. Therefore, their cards or gift certificates may have short expiration dates listed on them. Be sure to check the packaging, front, and back of the card for an expiration date before buying.
  3. Out-of-Business. Beware of businesses that are struggling and may go bankrupt. There have been numerous examples of large brands filing for bankruptcy, leaving customers with gift cards that are difficult to redeem.

Network-Branded Gift Cards (a.k.a. Open-loop)

Network-branded cards include Visa®, MasterCard®, Discover® or American Express® gift cards. These bank-issued gift cards are called open-loop cards because you are not limited, or closed, to using the card at just one retailer. They can be used at any merchant, provided the cashier accepts credit and debit cards for the applicable network.

Unlike retailer gift cards, network-branded cards will almost always have a small purchasing fee in addition to the value being added to a card.  For instance, you may pay $55 for a $50 MasterCard gift card.

3 Things to know before buying a network-branded gift card:

  1. Only in America. Most network-branded gift cards can only be used in the U.S.  Prior to a federal law change in 2011, these cards used to be redeemable internationally. Not anymore.
  2. Online Option. Open-loop cards can be used for online purchases.  However the purchase amount must be less than the balance on the card, or it will decline.
  3. No Cash Out. These cards may say “debit” or “credit” on them, but cannot be used at an ATM or within a bank to obtain cash. Anti-money laundering laws prevent this as an option because gift cards can be purchased anonymously.

Corporate Prepaid Cards

The aforementioned Credit CARD Act of 2009 clearly defined rules for expiration dates and fees for gift cards. But it also carved out a separate category for corporate reward programs. Prepaid cards received through a reward, loyalty, or promotional program can have limited expiration dates and fees, provided they are not called a ‘gift card’ and the fees and expiration dates are clearly disclosed.

When you receive a card for a reward program through your work, for example, it likely has an expiration date on it. If the card is not used by the deadline, it will expire, and you may not be able to get the funds back. Fortunately, the expiration term is usually at least one year from issue. Our data shows that over 90% of reward cards received are used within the first 90 days.

Filtered Cards (a.k.a. Restricted Authorization Network)

Filtered or Restricted Authorization Network (RAN) cards limit the spending to a product category, specific retailer, categories of retailers, or even a single location. For instance, a Walgreens Flu Shot gift card can only be used at a Walgreens Pharmacy and only to get a flu shot. Harrah’s created the Total Rewards gift card that can only be used at retailers within one of their locations.  For instance, you can use Harrah’s Total Rewards card at a Starbucks located in one of Harrah’s hotels & casinos, but not at any other Starbucks locations. Limited flexibility allows customers some choices, while ensuring the gift card is redeemed in a way that still benefits the issuer.

Maximize Your Cards

When gift cards replaced gift certificates, life for consumers and retailers got easier in several ways. Gift cards are easier to carry, to store, and to issue than paper certificates. Gift cards can be used at a variety of locations, can be purchased online, and can often be redeemed online as well. But life also got a little more complex in that consumers can be confused about how, where, and for how long a gift card can be redeemed. The good news is that answers to those questions must be clearly written on the gift and prepaid cards you receive. To benefit the most from the cards in your wallet, check the back of the card immediately for details about expiration, fees, and limitations. Then, just to be safe, use the card as soon as possible.

– Mark Romanelli, VP of Products

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