Prepaid’s Day in the Sun

In the United States, prepaid money is the most rapidly growing payment instrument. It is a lifesaver to the unbanked and the underbanked. It is the payment vehicle used in an increasing number of creative arrangements. But it is also the platform of choice for many fraudsters, and it amounts to a house of cards for many incompetent entrepreneurs.

Prepaid money also describes non-speculative digital-money products, which is where the payment roadmap leads, and where the full power and possibilities of prepaid products will emerge. And for all that, it became a prime regulatory target during the Obama administration, with some uncertainties going forward owing to the anti-regulatory sentiments in Washington today.

The general-purpose reloadable card (GPR) is essentially a modern form of cash, some say Internet cash. It’s a way to pay online without exposing personal information, and with risk limited to the amount loaded. And as with tethered digital cash, prepaid money may be tethered to any set of terms and conditions. Albeit, those terms are spelled out in a lengthy contract nobody reads when signing on, while tethered digital money carries its terms on its back.

Furthermore, prepaid instruments that are reversible may be reconverted to cash. It is like digital money convertible to U.S. dollars, and it may be regarded as currency. That is why prepaid instruments attract both innovators and fraudsters. For example, there are cards that are periodically recharged by a remitting agency. If those cards are stolen, so is the monthly recharge. Illicit drug deals are paid for with a bunch of prepaid cards. While the Consumer Financial Protection Bureau is rightly worried about the risk to the consumer, fishy entrepreneurs leverage this innocent-sounding instrument for large-scale financial gain.

Historically, prepaid activity emerged as a response to the regulatory burden on debit cards, which at first glance look quite similar. But they’re not at all alike. Cash-redeemable prepaid instruments are nothing short of a new form of currency, which is open to all the creativity as well as criminal activity associated with currency.

Come to think about it, the dollar bill was established as a prepaid instrument. You had to pay a nugget of gold to be issued this bill. And the bill served as a claim on that nugget. These paper claim checks evolved to become the real money, up to the point that in 1971 President Richard Nixon disengaged them from the claimed gold. And, lo and behold, they fly on their own. Why? Because they have the inertia of trust which they gained at the time they were gold-redeemable.

It is hard to see prepaid instruments evolving into a currency on their own. But that is because of our lack of imagination, primarily, and because of the conceptual difficulty posed by digitized dollars. Prepaid instruments allow their issuers and their users to store and transmit money without using the standard financial framework. This is promising for creative ideas. It allows us to fit payment to new technologies like robotics and the Internet of Things. But, at the same time, it is a bonanza for the criminal element.

So while the government is busy assuring consumers that they will not be cheated out of their prepaid money, the real action is with the growing economic activity that happens with prepaid devices.

We need to recognize that prepaid is rising to become modern cash, or, say, Internet-cash, and treat it as a new form of currency. Prepaid instruments will be doled out in the form of digital money, which will be stored in and paid from mobile devices to start with, then stored and paid from appliances and other devices that could buy and sell on our behalf through the growing power of artificial intelligence. Digital money is the medium to handle untethered currency as well as tethered money, or money limited to a particular use over a window of time by a designated payor to a specified payee.

Prepaid digital money carries its value and its identity through its bit embodiment, so those attributes flow with it everywhere it goes. Today’s financial fraud amounts to breaking into accounts where the money resides, while the money itself is “naked.” It has no identity, only a sum. Prepaid digital money is identified, tethered, tracked, and abuse-resistant.

Regulators and innovators alike should pay serious attention to this unassuming payment modality called prepaid.