With a growing number of options and potential applications, the many advantages of using stored value cards (SVCs) far outweigh any potential disadvantages.
In addition to being a very useful way to pay for goods and services in advance, SVCs are a vital resource for unbanked consumers. Financial industry estimates place the number of households in the United States without a bank account at somewhere between 10 – 15 percent of the marketplace.
There are a number of reasons why some may not qualify for a bank account. Many low-income families can’t afford the monthly fees or potential overdrafts associated with low balance checking accounts. Some consumers are also denied bank accounts because of poor credit or prior bank accounts being closed due to bounced checks or other problems.
With their ability to be reloaded with funds, some SVCs can act as a virtual bank for unbanked consumers. As long as a SVC doesn’t have any additional fees for loading funds or other related account maintenance fees, there shouldn’t be an associated risk of costly overdrafts or other excessive fees. All the available funds on these feeless cards are good and can be withdrawn at any time. Some SVCs may not feature all of the fund protection features of most bank accounts, however.
There are also no currently established rules or legislation that specifically protects consumers who use SVCs at the national level. The Fed is considering expanding its Regulation E, which protects consumers using electronic funds transfer (EFT) systems, to include protections for consumers who use SVCs.
Some SVCs can be used to help rebuild credit for consumers with poor credit scores. A number of SVC issuing companies advertise these “credit building” features. These companies will report positive account information on their card users to the three national credit bureaus. How much this can improve a consumer’s credit score has yet to be determined.
Other SVC advantages include overdraft protection, which is now being implemented on a number of fee-based SVCs, and cash advance capabilities, which will likely be a regular feature on many future cards.
Any company that processes employee payroll can also benefit from issuing SVCs in place of paychecks. Payroll processing cards can reduce a company’s payroll costs by up to 70 -75 percent.
There are a few potential fraud-related problems that can come from the use of SVCs. If your SVC is stolen and no ID verification is required to use the card, a thief could drain your card of funds before you know it. With signatures or PIN numbers commonly in use on many newer SVCs, the chances for fraud to occur are dwindling. You can also have the funds attached to an SVC frozen temporarily if you lose a card and need to be issued a new one. As most SVCs usually have fewer funds available than a credit or debit account, losses due to fraud are even less likely with SVCs.
As we continue our transition into a “cashless society” SVCs will continue to play an important and ever growing role in the financial marketplace of the future.