Archive for the ‘Legal & Regulatory’ Category

Like it or not, when a company issues a gift card they have to realize that they could potentially be around for a long time, especially now that the federal gift card laws require they don’t expire for at least 5 years.

That is the lesson Apple learned when it advertised 99 cent songs on some of its gift cards or their packaging and later increased the prices on some songs.

If you happened to be one of the customers that bought or received a 99 cent gift card, a class action settlement has been reached valued at $3.25 per customer.

Have you ever wondered what gift cards would be like in this country if we had no gift card laws or consumer watchdogs?  Look no further than China as this recent report illustrates.

Prepaid gift cards make up almost 10% of Chinas $1.56 trillion consumer economy, at around $153 billion dollars. For comparison, that is about 1 1/2 times the amount spent on gift cards in the US while the US consumer economy is 6.5 times larger.  In the US, about 1% of consumer spending is on gift cards.

Gift cards are largely unregulated, meaning, breakage (the amount of the card face value not spent before the cards expire) could well be many times larger than in the US, where breakage is believed to be around 10%.  As far as I can tell, there are no laws limiting card expiration.

There is no concept of unclaimed property laws in China, which means any gift card balance not spent goes directly to the issuing company.  In the US, states have become very aggressive at claiming gift card breakage as unclaimed property which means companies profit less and less from unspent balances.

Gift cards in China pay no interest, despite a very high level of inflation; companies get to put the gift card money to work as consumers aren’t using the cards while the card face value becomes lower and lower.  You can be sure that if we had 7-10% inflation in the US, laws would be passed requiring gift card to pay interest.

Gift cards take a bite out of Chinese consumers

  • Source: Global Times
  • [20:57 April 28 2011]

Observers often try to understand the mysterious patterns of Chinese consumption, such as the general sense of thrift when saving money, obsession with luxury goods and the sometimes irrational enthusiasm for health products.

The wide use of prepaid gift cards perhaps offer us some hints about Chinese patterns of consumption. Somehow the tiny little gift card has become a symbolic economic idiosyncrasy.

China isn’t an enthusiastically consumerist country. Its total GDP is twice that of the UK, but according to World Bank statistics, in 2010 its total household consumption ($1.56 trillion) was even lower than the UK’s ($1.72 trillion).

hinese spend modestly on most things – save gift cards.

According to consultants’ estimates, Chinese consumers spend nearly 1 trillion yuan ($153 billion) on prepaid gift cards each year, while the British only spend $5 billion. It is also estimated that in China’s malls, payments made through gift cards account for 15 percent of merchants’ total average revenue.

Gift cards’ intriguing popularity has explanations, many of which are cultural. Gift-giving is certainly a Chinese custom. Sometimes such gift is in the form of hongbao (red envelopes containing cash), which seem to be indelicate. But many are worried as to whether gift cards worth hundreds of yuan are a medium for expressing gratitude or a vehicle for small bribes.

Recently, the use of gift cards as bribes even drew attention from the highest ranks of the Chinese government.
On March 25, Premier Wen Jiabao, during a speech on fighting corruption, warned that the gift card had created an easy means of corruption and called on the government to address the issue.

But it’s unlikely that a market of 1 trillion yuan is all made up of bribes. There is also economic rationale behind this boom.

Some people believe that company’s giving out gift cards rather than direct payments to employees facilitates tax evasion.

This partly explains the enormous amounts spent on gift cards by large firms.

As to the supply side, at a time of inflation and mounting interest rates, a gift card that pays consumers no interest are actually giving retailers whopping extra income.

Retailers can sell gift cards to consumers and then lend the deposited money out, while the consumers are shouldering the burden of inflation.

This is barely perceptible to each individual. But the lucrative margin pushes merchants to issue massive amounts of gift cards.

It seems almost unbelievable that so many people would unwittingly throw money away like this. But this is very common in China, as many consumers often have multiple gift cards and it is not easy to find the time to shop before the expiry date.

Most people aren’t aware of the risks around cards. But consumers and taxpayers ultimately pay the price for tax evasion and the loss of interest.

The emergence of China’s gift card culture thus has solid commercial rationale. Its consequences, apart from the potential consumer’s welfare loss and adoption as bribery, are not all bad, tough.

After all, gift cards spur spending. Chinese usually instinctively save cash, but do spend most of their gift cards.

Anything that gets money out of savings accounts and into the wider economy is good for the country, from a Keynesian perspective even if it costs consumers a tiny amount each time.

Contacting the consumer advocate at your local newspaper or TV station can be a great way to get a company that is shirking its legal, moral, or ethical obligations to pay attention and do the right thing.  So I pay attention to those consumer advocates with great interest to see what publicly shamed company is doing an about face this week.

And this week it appears that gift card issues have gained the ire of the San Jose Mercury News’ Action Line advocate Dennis Rockstroh and he reports being contacted by hundreds of people reporting that many retailers still refuse to give them cash for gift card balances under ten dollars, more than two years after the law compelling retailers to refund such balances too affect.

The reason this continues to happen is that most people don’t put up a fight, thinking it isn’t enough money to be worth it.  But it is, because it keeps happening over and over to tens or hundreds of thousands of people, adding up to millions of dollars.

If this happens to you, I urge you to report the retailer to the California Department of Consumer Affairs, the Better Business Bureau, your local consumer advocate, and anyone else you can think of.

Here is an interesting ruling that finds that state gift card laws do not apply to airline gift certificates.  Specifically, the court found that California’s law against gift cards with expiration did not apply to an airline gift certificate that had a one year expiration date.

Div. Four agreed with Los Angeles Superior Court Judge Anthony Mohr that the Airline Deregulation Act, which bars states from regulating “a price, route or service of an air carrier,” takes precedence over Civil Code Sec. 1749.5.

Airlines seem to have an interesting exemption here.

The class distinction between gift certificates and gift cards goes further.  Under the new federal laws, gift certificates issued in only paper are exempt, but actual gift cards would be covered under the federal laws.   In plain language, the new federal laws don’t apply to paper gift certificates at all.

From the airlines perspective, they clearly treat gift certificates as second class citizens as well.  In the past, my experience on several airlines has been that these certificates can only be used at the ticket counter at the airline, and typically can not be used more than one at a time, making them incredibly tedious to use up.  So when an airline offers to give you four $25 gift certificates for your troubles, ask for a gift card instead.

Just a reminder, the new gift card rules authorized by the Credit Card Reform Act of 2009 and finalized by the Federal Reserve earlier this year take effect today, August 22nd.  An important exception though is that open-loop (Visa, MasterCard) gift cards requirement to have more informative packaging has been delayed until 2011, to give vendors more time to purge current inventory.

Here is a summary of the new Federal rules:

The final rule amends Regulation E to implement the gift card provisions of the Credit Card Accountability Responsibility and Disclosure Act of 2009 (Credit CARD Act). The final rule sets forth new protections for consumers that purchase or use gift cards. These protections apply to all gift cards sold on or after August 22, 2010.

Products covered:  The final rule applies to gift certificates, store gift cards, and general-use prepaid cards, as those terms are defined in the Credit CARD Act.

  • Covered products include retail gift cards, which can be used to buy goods or services at a single merchant or affiliated group of merchants, and network-branded gift cards, which are redeemable at any merchant that accepts the card brand.
  • Consistent with the statute, the final rule does not apply to other types of prepaid cards, including reloadable prepaid cards that are not marketed or labeled as a gift card or gift certificate, and prepaid cards received through a loyalty, award or promotional program.

Restrictions on dormancy, inactivity, or service fees:  The final rule restricts dormancy, inactivity, or service fees with respect to a gift certificate, store gift card, or general-use prepaid card.

  • Dormancy, inactivity, and service fees may only be assessed for a certificate or card if: (1) there has been at least one year of inactivity on the certificate or card; (2) no more than one such fee is charged per month; and (3) the consumer is given clear and conspicuous disclosures about the fees.
  • Fees subject to the restrictions would include monthly maintenance or service fees, balance inquiry fees, and transaction-based fees, such as reload fees, ATM fees, and point-of-sale fees.

Restrictions on expiration dates:  The final rule prohibits the sale or issuance of a gift certificate, store gift card, or general-use prepaid card that has an expiration date of less than five years after the date a certificate or card is issued or the date funds are last loaded.

  • The expiration date restrictions apply to a consumer’s funds, and not to the certificate or card itself. The final rule also includes provisions intended to give consumers a reasonable opportunity to purchase a certificate or card with at least five years before the certificate or card expiration date.
  • The final rule prohibits any fees for replacing an expired certificate or card, or for refunding the remaining balance, if the underlying funds remain valid.

A good summary of state laws for gift cards from Consumer’s Union can be found here.

About a month ago, I did a post on Plastic Jungle’s announcement that they were working with First Data, who runs a number of retailers gift card back end networks, to be able to start processing secondary gift card sales electronically rather than by mail, thus making the process more efficient and easier for customers.  I also theorized that retailers were willing to get involved in this because they realized that the days of free money via gift card breakage (what customers don’t spend) were over because states are now aggressively going after the money via escheat (unclaimed property) laws.  Retailers probably realize they have much more to gain by helping consumers spend the gift cards, because people often spend more than the face value of the gift card when they do visit the store, aka, the bump in sales.

Now, another gift card company, Wolfe, LLC, owners of the and sites, is also launching an electronic gift card secondary market they are calling  They are also working with First Data and their FAQ pretty much solidifies my theories around why retailers are willing to let secondary gift card markeplaces handle their cards electronically, as they are pitching both lower escheatment and increased sales as retailer benefits:

Increase Sales / Reduce Escheatment: We enable motivated buyers to purchase your gift card and quickly spend those funds – putting cash in your register and off the balance sheet.

Since Wolfe, LLC’s business is familiar with  the production of physical gift cards, while the site doesn’t say so explicitly, I suspect they might also be interested in issuing physical gift cards as well as electronic ones; not everyone will be comfortable with an electronic only gift card.

However, as we move closer to the reality of electronic processing in the secondary gift card market, I can’t help but wonder if things might take a different turn. Read more…

I feel for the government, I really do.  It is well known that terrorists, drug gangs, and other criminals are using prepaid debit cards (including gift cards) to launder money and circumvent financial reporting rules.  But do we really need draconian rules in place that will make buying a prepaid card of any type a huge hassle and infringe in the legitimate privacy of individuals?

Right now there is a huge disparity between banks and non-bank entities when it comes to purchasing prepaid cards.  You can buy a $500 gift card from your local mall or Safeway without any reporting, but a bank will likely require you to have an account there to purchase even a $25 prepaid card, so they can identify who you are.

The Treasury Department recently proposed new rules for prepaid cards, which were mandated by the Credit Card Act of 2009.  Specifically, they are proposing that non-bank entities selling prepaid cards:

  • File suspicious activity reports (SARs) with the government on suspicious activity of more than $2,000.
  • Collect customer information anytime a card is reloaded at someplace other than a bank.
  • Maintain transaction information.

For the next 30 days (as of June 28) the public can comment on the proposed rules.

Most troubling is the provision that requires reporting  anytime a card is reloaded.  I know a few people that use these reloadable cards because they have a strong sense of a right to privacy and don’t want their personal spending habits picked through by either hackers or warrantless government requests.

My biggest concern though is that this represents a slippery slope towards total reporting on every prepaid card purchase, essentially treating everyone like criminals.  As an example, while Federal law requires only reporting of cash transactions over $10,000 by banks, one of my banks recently gave me the FBI treatment when inquiring whether a cash withdrawl of less than $10,000 was an attempt to get around the financial reporting requirements.  Get that, the bank was not required to report the transaction but was giving me the once over anyways to cover its butt.  We could see a similar effect with the new prepaid card reporting rules, where some retailers figure they will cover their butts by requiring personal information on ANY prepaid/gift card purchase.  This also means that if you are a business buying 30 $50 gift cards for your employees, you will be suspected of criminal intent automatically.

On the bright side, if personal information was required for EVERY purchase of a prepaid card of any kind, it would be a lot harder for companies to claim unspent funds as breakage and for states to co-opt breakage funds as unclaimed property which would never likely be returned to their rightful owners

Also on the bright side, if personal information was required for EVERY purchase, perhaps people will be less inclined to purchase gift cards and I will receive less of them and more real, thoughtful gifts.  Along similar lines, I haven’t bought Sudafed since they started asking for my ID to buy it.

New Hampshire is a great state.  They have no state income tax and no state sales tax. Their motto is Live Free or Die.

And in New Hampshire, gift cards and gift certificates with an original face value of $100 or less are not allowed to expire.  Ever.

The National Conference of State Legislatures has put together this great summary of state gift card laws, which also includes each state’s Escheat provisions (state’s rules on claiming unspent gift card funds as unclaimed property that must be turned over to the state), something which the slightly simpler to read Consumers Union gift card law summary does not include.

Hawaii’s governor is threatening to veto a bill that purports to sync up Hawaii’s gift card laws with the new Federal standards, but also changes the rules to allow card issuers to add new fees that are currently not allowed.

Under the proposed law, retailers would be allowed to add an up-front fee that buyers pay when purchasing gift cards, up to 10 percent of the face value of the gift card, up to $5.  The law is being proposed under the guise of syncing up Hawaii’s rules with Federal gift card rules applicable under the Credit Card Act of 2009.  Newsflash Hawaii legislators, the stricter parts of those laws apply to your state whether or not you change your state laws.

This is a real shame, as Hawaii has one of the most consumer friendly gift card laws.  We can only hope the Governor vetoes the bill.  Under current law, gift cards (actually any electronic card with a banked value, so applies to prepaid debit cards as well) are not allowed to have any fees at all.

A bill passed by the House (summary here) of Representatives this week would delay the onset of the disclosure requirements of the gift card provisions from until January 31, 2011.  The disclosure requirements are considered among the most onerous of the new gift card regulations because they all but insure that gift card issuers will have to remove the current inventory from store shelves, destroy them, and issue new gift cards with the proper disclosures on the outside of the packaging.

This is a bit of a setback for consumers, as it is possible in that time that cards that have expiration dates that don’t meet the requirements of the gift card laws will likely still be sold.  While issuers will have to honor request for replacement of those cards with new ones that have later expiration dates upon request, there are sure to be plenty of cases where consumers aren’t aware of this or store personnel are not properly trained, and deny requests.

The bill still must be passed by the Senate to become law.

Update 7/14/10:  The bill was passed by the Senate yesterday.  The rules for new open-loop gift cards discussed above will not have to take effect until January 31, 2011, for cards produced before April 1, 2010.  The industry is thrilled.

We recently reported on Plastic Jungle’s integration with First Data’s electronic gift card network, allowing them to handle some gift cards electronically, saving customers the trouble of completing transactions by mail.

Here is what First Data has to say about working with Plastic Jungle:

But now there are sites that can provide a trusted environment for consumers to sell cards they don’t want and buy cards they do want at a discount. Merchants benefit as well, because when consumers purchase gift cards they want and will use, there is an increase in store foot traffic and a reduction in outstanding liability and escheatment concerns.

For those not familiar, escheatment is the process of turning unclaimed or abandoned property to a state authority.

What they are telling us here is subtle, but important and could signal a significant change in the retailing industry’s perspective on gift cards.

For many years, gift cards have been win/win for retailers, meaning they win twice.  When a customer comes in to spend a gift card, they often spend more than the face value of gift cards.  Retailers also had the added benefit of breakage, where as much as 10% of face value of gift cards went unspent and retailers got to keep this money as profit.

However, in recent years more and more states got hip to breakage and started demanding the retailers turn over breakage to their unclaimed property coffers, presumably under the guise of making this property easier to reunite with its lost owners.  But it was no great secret that the majority of this unclaimed gift card money would go straight to states’ general fund as it is notoriously hard to reunite with its rightful owner, meaning the customer that either forgot about, lost, or had a really hard time spending the full amount of their gift card.  This has turned retailers win/win for gift cards into a win/lose.

Well, that little statement buried in First Data’s press release signals an attempt by retailers to turn their win/lose back into a solid win.  You see, by acknowledging that they no longer benefit from breakage, and trying to make it easier for customers to redeem the full value of their gift cards, or allowing someone else to benefit from an unwanted gift card, they benefit more than the unused gift card $$$ going to the state, as they get to claim that gift card money as sales and stand to benefit from the additional sales that gift card redemption typically brings.

This is a good thing for consumers.

Holy cow!  According to this article by the Australian Herald Sun 30% of the $1.2 billion Australians spend on gift cards this year will go unspent.

The main reason seems to be that Australian law doesn’t restrict expiration at all and my gift cards expire after only 12 months.  Another difference between Australia and the US is that the government allows retailers to keep all the breakage as profits rather than turning them over to the state as unclaimed property.

Apparently MasterCard and Visa are clamping down on the use of prepaid (reloadable?) debit cards for use at online gambling websites to comply with the Unlawful Internet Gambling Enforcement Act (UIGEA).  It isn’t clear whether this applies to just some of the vendors of prepaid cards (Vanilla Visa, NetSpend) or all of them.  It also isn’t clear if it applies to non-reloadable prepaid and MasterCard and Visa branded gift cards.

A troubling trend that has developed over the last few years has been States extending their unclaimed property laws to apply to gift cards, which means stealing away the free money that retailers thought they were entitled to when consumers didn’t use up their gift cards.  Many states now do this.  I have always assumed that states make little to no effort to find the rightful owners of the gift card money.

But it is actually worse than that.

According to a recent study done by, some states are actually requiring information in addition to the gift card number for consumers to claim their funds, information such as the name of the person who purchased the card and the credit card number used to purchase it.

Which begs the question, if the state has this information, why doesn’t it try to return the money.  For that matter, if the retailer had this information, why didn’t it try to contact the customer?

For some reason, iTunes customers in Canada can’t use gift cards to purchase apps from the app store.  Seems that this might be in violation of Canadian law as such terms must be disclosed on the packaging so that consumers know the full story before purchase.  This little tidbit of information is only available on the iTunes website.

Update 5/26/10:  Faced with the option, by Canadian law, of either allowing iTunes gift cards to purchase anything, or update their gift card packaging to indicate the gift card’s limitations, Apple has chosen to allow iTunes gift cards to purchase apps from the app store.  Perhaps this is only a temporary remedy until they can update their gift card packaging for Canada, or perhaps the change is permanent.  Still no explanation why these gift cards couldn’t purchase apps in the first place.

Judd over at ScripSmart has tackled one of the things I’ve had on my list for a long time but never got around to – compiling information on all lots of individual gift cards.  Additional information included in his very useful site is information about gift card state laws, a comparison of state vs Federal gift card laws, and even the ability to track your gift cards and set personal alerts, if I understand how the site works correctly.

Definitely worth bookmarking.

Not like we didn’t see more of this coming given the huge state budget deficits that exist for most states right now.

While so far the legislation is only a proposal, it is one of the more ominous such unclaimed property policies we have seen.  Under the proposed legislation, gift cards would be considered dormant and be grabbed by the state after only one year.  While, in theory at least, if you tried to get the value back the state is supposed to give it back to you, I can think of quite a few ways the state could make this very difficult to discourage people actually getting their gift card value back.

It does like this:

1. Consumer lets card sit in a drawer for a year
2. State grab gift card
3. Consumer tries to use gift card, but it fails
4. Consumer can’t figure out what is going on and issuing company is no help
5. State doesn’t actually make any effort to find the rightful owner of the gift card

And the money is lost.

Isn’t the government supposed to be helping its constituents?

Colorado Senate bill 10-155, awaiting signature by the governor, would do away with all gift card fees of any kind.  Alas, it does not apply to what they call “general purpose” cards, or open-loop gift cards.

If signed, the law would take effect Aug 11.

I’m not sure the history of the laws around gift card fees in Hawaii, but, in a move that seems contrary to the trends in legislation both at the State and Federal levels, Hawaii’s legislature voted to approve the charging of fees, up to 10% of the gift cards face value with a maximum of $5, when a gift card is issued.

Most closed-loop store gift cards (Target, Wal-Mart) do not charge fees when gift cards are issued.  Most open-loop (Visa, MasterCard) gift cards DO charge fees when the cards are issued.  Perhaps prior to this law these fees were somehow not allowed in Hawaii.  As to why the legislature would vote to weaken a consumer friendly law, I am baffled and the comments on the story are very against the move.