For many business professionals, credit cards are the standard payment for everyday transactions. But, there is another type of card that can be found in the hands of millions of business professionals worldwide - prepaid cards.
For businesses, there are three main types of cards available - personal cards that are reimbursed, company cards where finance departments directly pay the bank, and prepaid cards that a company also funds.
As discussed in our previous blog “Evolution of a business tool: How to use credit cards to manage company spend,” personal and business credit cards come with readily available lines of credit. Prepaid cards must be preloaded with funds prior to activation.
However, both types of credit cards fall into the following category of advantages and disadvantages:
Advantages of prepaid cards:
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 not a 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.
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 along with being accepted by merchants accepting VISA or MasterCards brings an added level of convenience. Prepaid cards are favored over cash for employees who often travel, as cash tends to be harder to keep track of.
Unlike credit cards that come with the opportunity for accidental overspend, 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 of allotted per diems per trip to avoid overspend.
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. Should you opt to not attach sensitive information to your prepaid cards, they are nearly untraceable if lost or stolen.
Disadvantages of prepaid cards:
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.
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 ATM machines, or charge 2-4% when a purchase is made. These fees can quickly add up.
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.
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 - there are other perks that come standard with different credit card companies.
Unused funds cannot be recovered:
Prepaids cards that have been activated by a business for a specific event or purchase cannot be refunded in the event that the purchase is no longer necessary. For example, if you activated a prepaid card with funds for an event, and the event is canceled, the funds cannot be refunded - leaving you stuck with the prepaid card.
Advantages of credit cards:
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.
Easier and more organized 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 tasks for the finance team easier, as they are able to 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.
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 multistep process to add funds with a standard prepaid card.
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.
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.
Credit card security:
While credit cards are more vulnerable to security breaches than prepaid cards, it actually 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
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. Compliance policies can be unclear for some employees, and some may mistakenly use business credit cards for personal expenses simply because the transaction will go through no matter what. (These causes of credit card expense fraud can be mitigated in just four steps.)
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.
Company credit cards offer less protection (than personal cards):
Since company credit cards come with a high credit line and are linked back to a major company, the perks received with a simple consumer card are removed altogether. Disputing billing errors becomes a difficult task for large businesses, as compliance policies are usually in place to prevent this in the first place.
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 individual business's needs. The type of card must align with the company’s compliance policies and spending habits. Taking into account the process for returning receipts and for accounting the spend which has been made, regardless of how it’s been paid for, is important as well. If your company has few employees that have expenses every now and then, a prepaid card may be best suitable. But, if your business has multiple employees requiring expenses, credit cards should be heavily considered because of the perks and ability to cooperate with compliance policies.