Putting Stored-Value Cards in Their Place

Abstract

This Essay explores the effects of stored-value cards on social welfare. We argue that stored-value cards, in general, are socially beneficial payment devices. Their burgeoning use benefits society in three main plains. First, by replacing paper-based instruments in market segments previously inaccessible to card-based payments, stored-value cards lower the private and public costs of payment transactions. Second, by extending the use of card-based payment systems towards lower- and middle-income households, stored-value cards foster inclusion of those households in the financial mainstream of our society. Third, by operating without an extension of credit, stored-value cards help to limit the uniquely American reutilization of credit transactions associated with the widespread use of credit-card borrowing.

We further identify several risks associated with the use of stored-value cards. First, as in many cases their issuers are not federal banks, stored value cards expose consumers to the possibility of losing funds in the case of issuer's insolvency. Second, as their mechanism is vulnerable to data breaches, they expose consumers to unauthorized uses of their funds — as opposed to other payment cards where consumers enjoy regulatory protection on this matter. Third, they raise the issue of the unused funds remaining on the card after most of it has been depleted.

We recommend policies that will foster the use of stored-value cards, while adopting several rules that will confine their associated risks. We therefore call for adequate supervision that will assure the availability of deposits insurance to most stored-value cards; an extension of the current unauthorized use rules to stored-value cards; and a mechanism that will allow cash out of small unused funds associated with those cards. We also emphasize the need to exempt from regulation small stored-value cards programs in order to foster their beneficial use in contexts where the risks of harm are slight.