How Does a Prepaid Debit Card Work?

A Customer Creates an Account and Prepays

• When a customer creates an account with a prepaid debit card company, the application process requires certain key information such as the customer's name and contact information. Once the information is supplied, but before the card is activated, the customer is asked to fund the card by prepaying an amount. Generally, customers place anywhere from $100 to $1,000 in their prepaid accounts, though some prepaid debit cards are funded with thousands of dollars while other accounts may be opened with as little as $25. Once the account is funded, the customer receives a card with a unique account number; this card is activated by the issuing bank and is ready for use.

The Customer Uses the Card

• With the card in hand, the customer can use the prepaid debit card just like any other credit card. When the customer uses the card, the transaction is sent over the Visa or MasterCard network which, in turn, routes the transaction to the issuing bank identified by the first eight digits of the card number. When the transaction is presented to the issuing bank, the institution debits the cardholder's account for the purchase amount and returns an approval code to the merchant. If the customer's account does not have sufficient funds to cover the purchase, the bank returns a decline message and the customer is asked for an alternative payment method. Other transactions, such as returns, are processed in much the same way.

The Bank Collects its Fees

• Prepaid debit cards typically carry steep fees, and the issuing bank assess fees for virtually every transaction associated with the card. Many banks charge a fee of up to $9.99 for creating and funding a prepaid debit account, and may also charge a monthly maintenance fee of between $4 and $15. In addition, financial institutions often charge transaction fees of either a flat amount (maybe $1) or a small percentage (around 0.25% of the transaction amount) for each transaction

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  The Card May be Refillable

  
  Some prepaid debit cards must be discarded when the account balance reaches zero, but many cards may be refilled and used again and again. Refilling a card may be as simple as making a deposit online or taking cash to a bank office, though some prepaid debit cards may be refilled through payroll direct deposit.