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Prepaid debit cards, e-money and the hotel and travel industry

Prepaid Debit Cards – What are they?

Prepaid debit cards are plastic cards, which can be used to make payment for goods or services and/or withdraw money.  Before use, the user needs to load the card with a sum of money.   There are various markets for prepaid debit cards.  For example, they can be used as a replacement for a credit or debit card as a means of payment at merchants linked to a payment scheme or to withdraw cash at ATMs.  This article considers legal issues for hotels and the travel industry using prepaid debit cards denominated in cash.

Uses of Prepaid Debit Cards

Loyalty cards and programmes, which operate on a points system redeemable at a limited number of outlets and not denominated in cash, have long been present in the hotel market. They do not need the additional commercial structure offered by certain prepaid debit cards. 

The prepaid debit card is of use, however, if a hotel wishes to offer a hotel branded card that can be used at any merchant in and outside the hotel industry and/or which uses payment schemes such as MasterCard® or VISA®.  Customers could purchase a card for themselves or as a gift for friends and family.  If the hotel was not concerned about limiting usage to certain hotels, the card could have open loop functionality and so be used at the hotel as well as any other merchant outlet.  Alternatively, the hotel chain could set up a semi-closed or closed loop prepaid debit card, which could only be used at a specific hotel chain or hotel outlet.

Hotels could also incorporate an open loop or closed loop card into a loyalty programme, where the customer redeems his points for such a card.  That does, however, effectively allow redemption into cash form. 

Hotel chains could also operate a prepaid debit card scheme as a corporate incentive scheme for their employees, where employees earn cash, which they can spend at any merchant that is a member of a payment scheme.

Finally in the travel industry, prepaid debit cards can be used be used as a replacement for travellers’ cheques.  Customers buy prepaid debit cards denominated in sterling or in the currency of destination, and then use them to withdraw cash at ATMs or pay for goods or services.

Structuring Prepaid Debit Card Programmes

Such prepaid debit card programmes do, however, require additional legal consideration. Issuing certain prepaid debit cards in the UK will involve what is called the issue of e-money, and compliance with e-money handbook and rules (ELM Rules).  To achieve regulatory compliance a hotel will probably need to enter into a services contract directly or indirectly with a bank or building society (or possibly an electronic money issuer (ELMI)) authorised to issue e-money.  The bank will issue the e-money and the prepaid debit card, which will be branded with the hotel’s logos like a co-branded hotel credit card.  The bank or ELMI as issuer of the card (not the hotel) will typically have the contractual relationship with the customer.

If the scheme is structured so as not to involve the issue of e-money, for example in certain closed loop programmes, the hotel will still need to enter into a services contract with a member of the payment scheme, commonly a bank, if it wishes to use a payment scheme to administer payment.

ELM Rules

Electronic money is monetary value as represented by a claim on the issuer, which is stored on an electronic device, issued on receipt of funds, and accepted as a means of payment by persons other than the issuer.  There are exemptions for small money issuers where there is a purse limit of £150 and a waiver arrangement is in place.

Float Requirement

Under ELM Rules, an ELMI may need to ensure it has pre-funding and a buffer in place to accommodate potential loads onto cards before they receive this money, and may require the hotel to provide the pre-funding and buffer.  While the rule does not apply to banks and other building societies, they may prefer to have arrangements to ensure that for programmes they operate with hotels, they hold sufficient cash at all times to meet the balances on prepaid debit cards.

Purse limits and risk of loss

A cardholder is at risk if the issuer becomes insolvent and e-money is not covered by any regulatory compensation scheme.  Similarly a cardholder is at risk if he or she loses the card.  For those cards that have a maximum load capacity of £1,000, issuers need to warn customers in writing, obtain an acknowledgement, and need to maintain the identity of the cardholder.

Redemption requirements

Customers of e-money have a right not to spend the money on the card and request a refund in cash, known as a redemption of the outstanding balance.   This means that processes need to be in place to arrange redemption in the currency in which the e-money is denominated.

Contractual Issues

Agreements between a hotel and the prepaid debit card issuer and processor need to cover allocation of responsibilities, service level agreements, approval processes and change management procedures.

As the issuer of the card will have the contractual relationship with the customer, and responsibility for regulatory compliance, the hotel will need to ensure the contract has appropriate provisions concerning customer data sharing, contractual restrictions on use and licensing of customer data, obviously subject to data protection compliance.  Any contract will also need to clearly define responsibility for collection, payment and return of funds, and the times and dates by which they need to be achieved. 

Where a card is part of an open-loop arrangement, no specific arrangements will need to be put in place with outlets requiring them to accept the card, as the card will bear the relevant payment scheme logo.  Any hotel setting up a semi-closed or closed loop arrangement may need to ensure it has contractual arrangements in place with the other outlets requiring them to accept the card.