So how does the system deal with someone entering at an ungated station to exit at another ungated station,
carrying a pre-paid card with a zero balance? If gripped it seems the RPI won't be able to tell whether or
not they touched in and whilst the overnight reconciliation would try to charge a maximum fare for an
unresolved journey but this would be declined due to the zero balance.

It probably doesn't. Keep in mind that the goal isn't necessarily to
have £0.00 in lost revenue, it's to get as much net revenue as
possible. The savings in not having to sell and manage zillions of
Oyster cards likely would pay for a fair amount of contactless
shenanigans.

In the worst case, they could just stop accepting prepaid cards other
than Oyster. The prefix of the card number identifies the type of
card.