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Prepaid Debit Card

December 29, 2013

I got two gift cards for Christmas, one for a book store and the other for a grocery store.  I also have a card for a coffee shop.  What are these, technically?  They are not credit cards.  If they were, I’d get a bill at the end of the month for all my purchases.  They must be debit cards.

Actually, they are prepaid debit cards.  There’s a good explanation here.  They are just like an ordinary debit card that causes a withdrawal from my bank account for every purchase I make with them.  They are handled by the banking system just like any other debit card.  There’s a payment processing company interposed between the merchant and the bank.  Associated with each of these cards, by the information stored on the magnetic stripe, is a bank and an account at that bank.  Of course, the holder of the card doesn’t know about the bank or the account number.  Many of these banks are in Europe or the middle east.  Just like with an ordinary debit card, any purchase is debited from that account.  A deposit is made to that account when the card is activated.  The same thing happens when I add funds to my coffee shop card.  A difference, though, is that there’s no security on these cards.  My ordinary debit card is a smart card with an embedded chip.  I have to enter my PIN when I use it.  Prepaid debit cards only have a magnetic stripe with the bank and account information recorded on it.

These cards come in two types.  Gift cards are only good for purchases at a specific store.  They are a popular gift, replacing gift certificates issued by the store.  Cash cards can also be used to withdraw cash at an ATM.  They are used by social service agencies to give to clients who don’t have bank accounts.  They’ve replaced cheques for this purpose.

Because they have no security, the cash cards in particular have been used to commit bank fraud.  This article describes a recent case.  There are two parts to this one.  The first was theft of card data.  The second, described in the article, was compromise of the computer system belonging to the payment processor.  The result was near-simultaneous withdrawal of cash from hundreds of ATM machines around the world.

So, these things that people call gift cards are actually prepaid debit cards, although that aspect is generally hidden from the purchaser or the holder of these cards.

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  1. The End of Cash | jgmills

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