When I switched my prepaid wireless phone service, I was offered a free phone after rebate by prepaid debit card. That got me curious. What’s wrong with plain ol’ check? Isn’t printing a paper check easier and cheaper than producing a prepaid debit card? There must be something in it for the company to issue a prepaid debit card instead of a check. What’s good for the company issuing the card is likely bad for the consumers receiving the card. What’s the catch?
I started my research with Googling vendors that offer prepaid debit card services to companies who issue rebates. Their pitches reveal what’s behind this new phenomenon. From what I gathered, here are the benefits to the companies and potential pitfalls for consumers.
1. Consumer Spending Tracking. The company which issued the prepaid debit card gets to see what the consumer purchased with the card. I’m not sure whether they track it on an aggregate or individual level, but because they know which card is issued to which consumer, they *can* track it by individual if they want to. Data on consumer spending pattern can be used for marketing purposes.
2. Brand Marketing. A prepaid debit card is customized with the company’s logo. You see it whenever you open your wallet. While a check can also be printed with the company’s logo, the prepaid debit card stays with the consumer longer than a check. A check gets deposited within a few days. A prepaid debit card stays in the consumer’s wallet until it’s spent. A small benefit to the company’s marketing, but not the holy grail.
3. Breakage by Expiration Date. The fact that a prepaid debit card stays with the consumer longer than a paper check leads to breakage. When you receive a check, you usually deposit it right away. When you receive a prepaid debit card, you have to wait until you buy something. If you forget to use it before the expiration date, the card is dead and you lose the rebate. Although companies typically print “void after X days” on rebate checks, as Stingy Student discovered, it’s not necessarily enforceable. Even if you deposit the check after that date, most of the time it will go through just fine. The electronic card network enforces the expiration date much more easily.
4. Breakage by Residual Amount. Many retailers cannot process a purchase on two different payment methods. If you have a $40 debit card and you try to buy $51.67 worth of stuff, your purchase will not go through. The cashier can’t just charge you $40 on the debit card and the remaining $11.67 by cash or another card. If you try to buy less than what you have on the prepaid debit card, you will have a residual amount on the card that becomes more difficult to spend. What do you do with $1.57 on a prepaid debit card? Many people just throw it away. The company then pockets that $1.57.
5. Merchant Fee. Although the prepaid debit card is a debit card, it doesn’t come with a PIN. You must select credit when you use it. The retailer pays a fee when they process a credit card transaction. That fee flows to the company which issued the card. 2% on a $40 prepaid debit card is 80 cents. Although it doesn’t sound like much, when a company issues a large number of rebates, the small amounts add up to some serious money. When you use the prepaid debit card, you don’t earn a reward from the credit card you would otherwise use. That’s an opportunity cost. You lose 1-1.5% on the rebate amount or as much as 5-6% if you use the prepaid debit card at a grocery store or gas station.
So what should you do when you receive a rebate debit card?
1. Find a place that accepts more than one method of payment for a purchase or a business that accepts partial payments for their bills. Gas stations usually allow you to purchase exact $X worth of gas, but if you have a credit card that gives you 5% rebate on gas purchase, you will lose 5% in opportunity cost. Utility companies usually accepts partial payments. So call them up or go online and make a one-time payment. You still lose 1-1.5% because you don’t get to use your reward credit card, but that’s the best you can do.
2. Use up the prepaid debit card as soon as you receive it. Before you receive the prepaid debit card, do your research and locate a place where you can use the entire amount in one shot. As soon as you receive the card, use it up. The longer you wait, the more likely you will lose the rebate to breakage.
The companies which issue rebates are known to place various hurdles around rebates. See this great post by Golbguru. Now they have a new tool for more breakage. Don’t get caught by it.