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Prepaid > Postpaid

Over the years, more and more of the services I use daily are prepaid. What is prepaid? defines prepaid as,

to pay or arrange to pay beforehand or before due:

Basically, you pay for a service in advance on the full faith and belief the provider of the service will deliver what you wanted. In my experience, most of the world relies on prepaid. "Cash up front" is a common phrase in the various countries in which I lived.

Prepaid Cards

Prepaid cards, gift cards, reloadable cards, etc are a $1.8 trillion market globally. You deposit some money into a card account. This money is backed by the currency and the value of it is easy to know. Put $100 on the card, the account is worth $100.  You can't leverage yourself. You can't over spend. You can still get all the convenience of credit and debit cards without carrying around the equivalent in cash. Paypal, Netspend, American Express and others can hold high values on their prepaid cards, up to $15,000 per card. No need to worry about "credit scores" and other ways to be judged by algorithms. 

I remember joining a friend as he went to buy a car in Hong Kong. There was no credit check, no loans, none of that was really available. It was all "cash up front". He handed over two cards with the negotiated value of the car. The seller confirmed the amounts on the cards and we drove away with a car.  The seller was a dealer of certified used cars. My friend couldn't understand why you would buy a car on credit and loans if you can't actually afford the car. 

Prepaid Phones

You pay at the start of the month for service that month. The assumption is that the mobile phone company will a) deliver the service for which you paid that month, b) still be in business that month, c) treat you the same or better because you gave them cash in advance. In fact, they should prefer this arrangement as you paid upfront for service, and they don't have to chase you down if your credit card is declined.

Only in America

Prepaid seems to be synonymous with "poor". As in, the user isn't wealthy enough to have "good credit" and can't get a credit card. Bullshit. My credit score is "Excellent". As explained to me, my use of prepaid cards will cause my score to drop. I guess this means I'm dropping inputs to the FICO credit score, so they can't figure out my credit worthiness. Basically, you aren't leveraged nor in debt enough, so we're not interested in your business, or something. 

Pew Charitable Trust publishes an interesting study on prepaid card demographics.  Basically, people can live without credit cards just fine, and they use prepaid cards like debit cards, but without being tied to their actual bank account. People use prepaid cards instead of banks. And younger adults are the fastest growing segment of prepaid cards, including those with annual incomes in the $100,000 - $200,000 bracket. 

Flip that around, "I want to give you $5,000 to hold on this card, and let me use it as I see fit." How is that different than a bank? Why wouldn't everyone want to take the $5k and sit on it while the payor spends it down over time?

Running into biases

The financial world seems to have the most issues with prepaid anything. In trying to use zelle or even text message authentication with prepaid phones, banks consider these unreliable. Ok seriously, phones are not two factor authentication! If you're trusting the mobile provider did any collection or verification of an identity, you're sadly mistaken.  "We'll text you a code that can be read by anyone with a $5 usb tv-stick and some software or can clone the SIM card globally to prove that it's really you trying to login to this bank account." Ugh. Get real two factor authentication already. Shall I fax in my request to login too?

Uber, Lyft, and most taxi apps won't take prepaid cards. In trying to find out why, it boils down to "corporate policy".  Thanks. Why was the policy created? If I have a long track records of paying for rides, why does the method of payment matter? Hilariously, Uber lets you "buy uber credits" so you can spend them on rides. This is prepaid Uber rides! I suspect one reason is that most companies bulk process card payments in a batch cycle, like daily or a few times a week. If they do this and your prepaid card is empty, they're out the money. Visa, MC, AMEX, and the payment systems operate in real time, so can you.

I once worked with a global payment provider who wanted "darknet search results" in 2 ms or less. This was to feed their risk algorithms to detect fraud at the point of purchase. They didn't care if the card be presented was prepaid or not. It was the same effort to them "If amount_to_be_charged <= remaining_card_value then accept else deny" was the basic algorithm. In more code speak,

amount_to_be_charged <= remaining_card_value ? allow : deny

No one cares if the card is prepaid or not. 

Governments Use Prepaid

If you're on government benefits, you have a prepaid card. You're not asked to "trust the government to have enough credit to cover it all." It's fair to argue about how the banks managing the programs have mismanaged them. Maybe the reason there are so many fees and chances to nickel and dime you to death are exactly because the cards have cash value, not credit. 

Know Your Customer

I've sidestepped the whole KYC thing because identity and prepaid or postpaid is tangential. Sure, criminals have used prepaid cards to finance their activities. They can just as easily steal an identity and use postpaid cards too. In fact, the latter is more desirable because the potential amounts are higher. Why? Because the banking system thinks postpaid is better. The largest benefit of prepaid is no one does a credit check and no one stores your private information, social security number, maiden names, favorite food, etc in their insecure systems. 

Prepaid > postpaid.