Prepaid cards replace checks as rebate payment of choice

The next time you're due a rebate or refund, don't expect to receive a paper check. An increasing number of stores and manufacturers are opting to issue prepaid debit cards instead, and some consumers aren't happy about it.

Unlike checks, these cards cannot typically be exchanged for cash or deposited directly into the consumer's bank -- they have to be spent somewhere, which merchants love. That fondness led to about $4.24 billion being loaded on to rebate cards in 2008 -- a 53 percent increase over the previous year -- reports Mercator, an advisory firm that provides market research for the prepaid card industry. Experts say there's no slowdown in sight for this trend, whether consumers like it or not.

"Personally, I would have preferred a check, even though I can use the card like cash," Deb Krol of Phoenix says regarding the rebate card she recently received from Alltel for her BlackBerry rebate. "It's just safer in my bank account and not so easy to forget it's in my wallet."

Why businesses love prepaid rebate cardsMany businesses -- from office supply stores to wireless companies -- are switching to prepaid cards, and the reasons are multifold. One is the likelihood of boosted sales. According to rebate analyst Hal Stinchfield, CEO of Promotional Marketing Insights, a well-featured rebate card can result in "double-digit or sometimes triple-digit sales growth during the promotion period."

One example of how companies can help themselves is by issuing so-called "closed-loop" rebate cards, which can only be redeemed at the issuing retailer. That helps ensure that the holder of the rebate card will ultimately return to the store and spend the rebated money -- and, ideally, some additional money on top of that out of their own pocket -- with that retailer. (The more common variety is the "open-loop" rebate card, which is issued through a traditional credit card network such as  Visa, MasterCard, American Express and Discover. Emblazoned with the company’s logo to ensure the recipient knows its origin, the card may be swiped anywhere the network is accepted.)

Juli Spottiswood, president and CEO of Parago Inc., a company that provides corporate and consumer incentive solutions, says that rebate cards also provide businesses with other advantages over checks. They "have a payment vehicle that allows them to message new promotions, products or offers (i.e., more 'real estate' in the card materials that are sent out versus a check) and extend a more professional image to their customers."

Consumers not sold yetWhile companies are quickly embracing rebate cards, consumers are giving them mixed reviews. Some card recipients prefer them for their ease of use, but not everyone appreciates a wallet bursting with additional plastic.

One problem is that people are still getting used to the cards. Jeff Thompson of San Francisco says he accidentally threw the first couple he received away because didn't realize what they were. Not reading the accompanying letter, he assumed they were "fake start-up cards from a credit card company."

Keeping an eye on rebate card expiration dates can also be a challenge. Krol notes the importance of using them quickly. "I have to be really, really careful to remember to use it before it expires," she says. All in all, she says, she would have preferred to just get a check instead.

Still others are suspicious about the motives of companies issuing rebate cards. Brian Peters, a New Yorker who started the budget travel blog, says AT&T mailed him a rebate card for $7. "Why don't companies send checks? Because they give them out with the hopes that consumers don't use them," says Peters. "I think people would find a way to use the cards if it was a large amount, but small amounts, people ignore ... until the card expires and the company gets to keep the money that is rightfully yours."

Cautions from consumer advocatesConsumer advocates have also chimed in about some of the cards' drawbacks. Among the critics is Edgar Dworsky, former Massachusetts assistant attorney general and founder/editor of "Using the card's remaining balance can be very tricky and sometimes impossible; you have to find stores and store personnel who know how to process a 'split tender' transaction," in which you use what's left on the card to pay part of your bill and put the rest on another form of payment, says Dworsky. He also points out that by using these cards for purchases, consumers lose benefits that come with their regular credit cards, such as extra warranty protection, buyer protection laws, reward point accumulation and helpful year-end accounting processes.

Fees, such as those for account maintenance after a certain time period has lapsed, are another cause for concern. "Some cards have fees associated with them, and if the responsibility for the fees falls to the consumer, it definitely mitigates the value of the rebate," says Julie Parrish, CEO of CG Media, a large couponing Web site.

Outside of the fees, though, Parrish sees little difference in rebate cards and checks, explaining that both can be lost, have spending limitations and can be used virtually anywhere. And Mark Romanelli, vice president of sales for, stresses a major advantage of the cards for those due a rebate: their quick turnaround. "We issue the prepaid card within two business days once the consumers rebate is validated by our clients, whereas when sending a check, the reward may take weeks to go out, depending on the merchant's account-payable cycle," says Romanelli.

How to use them effectivelyAs with all financial products, it is up to consumers to use rebate cards advantageously. Parrish explains they can even save money. "Rolling them into new rebates is a good way to keep the rewards coming," says Parrish. "So, say a consumer buys X product with a $10 rebate. They get a prepaid card back to use again. Rather than spend that card on something frivolous, rolling it into supporting a new rebated item keeps their cash free to do other things with and ensures that there is always rebate money coming in."

Other tips for rebate card use:

  • Read the fine print. All cards come with a letter explaining the terms and fees.
  • Be especially aware of expiration dates. Though most expire in a year or even longer, some expire in as little as three months. 
  • Keep track of the balance. After using the card, ask the merchant how much is left and make a note of the remainder.
  • Be aggressive about split charges. If the purchase price exceeds the rebate card's value, insist on cutting the bill in two -- one for the amount on the card and another for the rest.

The final noteworthy distinction between paper and plastic rebates is the way they tend to affect shopping habits. Most consumers deposit checks into their bank accounts, and the money is absorbed into their pool of funds used for groceries, housing, gas and other essential bills. Rebate cards can mimic gift cards, making splurging on discretionary expenses tempting. Therefore, card recipients would be wise to remember that a rebate -- whatever form it takes -- is not a windfall but cash due for an item they've already bought.

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