EU law ends 'trapped balances' on prepaid cards

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The second Electronic Money Directive was implemented by the Financial Services Authority (FSA) at the start of the month.

EU e-money changes

The new rules will have three practical implications for prepaid card users.

1. Stopping trapped balances

Prior to the new rules, prepaid card issuers could assimilate unused cash if it fell under a certain amount.

But many cardholders didn't even know their cards even had expiry dates and small balances also frequently became trapped on cards as retailers refused to allow transactions below a minimum amount or as partial payment for goods.

Added together, these small amounts have been earning card issuers between £5 and £7 million a year.

The new regulations stipulate that prepaid card issuers must repay any unused money stored on the card if the cardholder asks for it within six years from the end of their contract.

It's hoped that, in particular, the new regulations will reign in the many companies that have decided to try their hand at the credit less card game.

The FSA is demanding that all issuing companies that aren't banks or building societies must hold any money paid onto cards in ready cash so that it can be paid back to the cardholder should the business collapse.

2. Better complaints handling

Card issuers must also respond reasonably to customers' gripes under the terms of the new directive.

Prepaid cardholders who feel their complaints haven't been dealt with correctly are now entitled to take their case to the mighty Financial Ombudsman Service.

However, e-money is still not protected by the Financial Services Compensation Scheme (FSCS) and it's worth noting that the regulations continue to allow small businesses to simply register if they wish to issue e-money, rather than having to go through a full authorisation process with associated FSA checks.

Less traditional financial providers such as Phones4u, Napster, O2, Orange and Club 18-30 already issue e-money that - since it's associated with big payments brands such as Visa - is widely accepted.

3. No interest

Finally, as a result of the EU legislation, electronic money issuers are expressly forbidden from giving their customers interest or other benefits related to the length of time money is held on their products.

No prepaid card that we've ever heard of does this anyway but this aspect of the legislation does close a door on what may have been an interesting aspect of the e-money market.

Long time coming

The e-money directive has been a long time coming.

The directive was adopted by the European Parliament on 16 September 2009, although at that point the Treasury did predict that it would take 20 months to integrate it with existing UK legislation.

In that short time, though, prepaid cards have become more popular as a budgeting tool.

Consumers who prefer to keep the temptation to spend at arms length can load the card with cash and use it to make purchases or withdraw cash. Like pay as you go phones, once the balance reaches zero, the card will cease to pay out.

Cards can usually be reloaded at cash points, via text messaging, online or by visiting participating retailers although many charge top up fees, usually about 3% of the value loaded, for the transactions.

Other charges - some of which have caused concern within Government - may include an opening fee, replacement fees when the card expires, transaction fees and inactivity charges.