Prepaid Cards Vs Credit Cards: The Differences

Advantages of prepaid cards

1. Eligibility for everyone

There is no need for personal or company information when obtaining a prepaid card, so approval is always guaranteed. Obtaining a prepaid card is based on the minimum amount needed for activation.

This is because there is no bank nor a lender to borrow money from for activation requirements. There is no need for sensitive personal information, employee verification, or other company information when obtaining a prepaid card, so approval is simple.

2. Simple, accessible functionality

Prepaid cards work for goods and services, like credit or debit cards: swipe and go. Adding funds to prepaid cards can be done in a variety of ways. Like other cards, these include direct deposit and bank account transfers.

In addition, prepaid cards allow funds to be added through cash deposits at participating merchants. The ease of reloading and acceptance by merchants accepting VISA or MasterCards brings an added level of convenience. Prepaid cards are favoured over cash for employees who often travel, as cash tends to be harder to keep track of.

3. Spend control

Unlike credit cards that come with the opportunity for accidental overspending, a prepaid card can deter an employee from making purchases that are out of their expense policy.

Without enough available funds on a prepaid card, the transaction will simply not go through. For example, a company can add only the amount allotted per fund per trip to avoid overspend.

4. Extra security and privacy

The prepaid card does not require sensitive consumer information such as home or office address, nor is it linked to an active bank account. Since there is no sensitive information attached to a prepaid card, they are nearly untraceable if lost or stolen.

Disadvantages of prepaid cards

1. Limited funds

Since there is no bank to borrow money from, prepaid cards only have the funds that have been deposited by the cardholder. Prepaid cards, unlike credit cards, lack the ability for high lines of available revolving credit. This can be a challenge for employees who need to make emergency expenses for business ventures or for transactions that may cost more than originally planned.

2. High activation and usage fees

One-time activation fees to begin using prepaid cards are often more expensive than standard annual credit card fees. Some prepaid card companies also charge customers one-time fees if they want to use ATMs, or charge 2-4% when a purchase is made. These fees can quickly add up.

3. No lost card/fund recovery

In the event of a lost or stolen prepaid card, there is no customer support department to report the incident. At this point, all of the funds loaded onto the card cannot be recovered - including high dollar amounts.

4. Zero rewards or benefits

Cardholders cannot earn points on purchases or receive cashback when spending a certain amount when using prepaid cards. This is a disadvantage as rewards with standard credit card companies can rack up quickly. For example, cards may have redeemable travel points that are earned with every purchase - other perks come standard with different credit card companies.

5. Unused funds cannot be recovered

Prepaid cards that have been activated by a business for a specific event or purchase cannot be refunded if the purchase is no longer necessary. For example, if you activated a prepaid card with funds for an event, and the event is cancelled, the funds cannot be refunded - leaving you stuck with the prepaid card.

Advantages of credit cards 

1. Visibility over employee spending

Company credit cards allow finance teams to keep tabs on employee spending in real time. Credit cards make tracking purchases of inventory, supplies, or other business services easier by providing detailed information on transactions. Additionally, spending limits for employee cardholders can be placed based on the amount of available credit on the card.

Learn more about how your company can use credit cards to manage company spending in our comprehensive guide.

2. Easier and ordered record-keeping

Credit cards offer a detailed history of every transaction made that can be easily sorted by time, date, geographic location, or type of purchase. This makes expense auditing tasks for the finance team easier, as they can locate discrepancies with ease if needed.

Credit card accounts can also be linked to expense management software that automatically detects fraud and other compliance-related issues. This convenience can be carried over at the end of the tax year, as the detailed records can help a business recollect what money was spent on during the entire year.

3. Higher spend limit/available funds

In the event of a financial business emergency, credit cards offer a security net for such instances. Revolving credit is readily available for businesses to take advantage of - removing a multi-step process to add funds like with a standard prepaid card.

4. Higher limit purchase protection

A business credit card with higher spending limits provides companies with the ability to make larger purchases while offering higher-limit purchase protection. Should a credit card be lost or stolen, credit card companies have processes in place to freeze the account or recover lost funds should any fraudulent activity occur.

5. Unlimited business perks

Many credit card companies offer rewards on everyday purchases and business-related travel expenses, including dining, airfare, and hotel stays. This is an advantage for companies requiring multiple employees to travel for business, as the savings add up and save thousands per year, per employee. Additionally, many credit card companies offer cashback rewards on certain purchases and daily transactions, this means money can be invested back into the business at the end of the spending term.

6. Credit card security

While credit cards are more vulnerable to security breaches than prepaid cards, it creates an advantageous paradox. Because of the sensitive information that is linked back to the card, such as bank details, the bank is heavily invested in ensuring your transactions are legitimate.

What does this mean for you? Every security feature the bank provides to protect itself from losses is passed on to its users. And thanks to ever-evolving technology there are constant upgrades to credit card security features.

For example, banks employ the use of artificial intelligence to detect suspicious activity and alert cardholders. Card EMV chips create unique transaction codes that stop hackers from using the information as they would from swiped cards.

Disadvantages of credit cards

1. Potential for internal fraud

Because business credit cards have high amounts of available credit, expense fraud - intended or unintended - can be committed if there are no expense policies in place.

Some employees may find compliance policies to be unclear, and some may mistakenly use business credit cards for personal expenses simply because the transaction will go through no matter what. Learn four important steps to stop expenses fraud in your business.

2. Credit card charges

Many credit cards require annual fees, and cards with higher credit lines, like company cards, incur larger yearly fees. In addition, interest rates and late fees can make the business credit card an expensive option for financing costly business purchases.

3. Personal and business overlap

For smaller businesses, you may end up using a business credit card for personal spending and vice versa. Or, in larger teams, some team members may end up expensing personal purchases as business purchases.

Manage Your Business Prepaid Cards or Credit Cards With Webexpenses

When choosing to have a standard credit card or a prepaid card for reimbursing employees out-of-pocket spend, it will come down to each business's needs. The type of card must align with the company’s compliance policies and spending habits.

To make record keeping easier for all, consider automating your expense management with Webexpenses. Try our free demo today and receive bespoke advice relevant to your business needs.