Archive for the ‘Legal & Regulatory’ Category

California is considering raising the amount of money consumers can demand in cash from a gift card from the current level of $10 to “under $20.”

New Jersey is the latest state to go after gift card funds under the authority of unclaimed property laws, with a twist; they want to actually take possession of the money spent on gift cards when the cards are first purchased, so that the State, and not the issuing company can benefit from the interest and other benefits of holding that money until it is spent, as well as end up with the value on gift cards that is never spent (i.e. the unused property law aspect).

However, the numbers reported don’t make a lot of sense:

Eristoff said the state currently collects money on unused money orders and travelers’ checks. He said the administration expects to collect $85 million in 2010-11 and make $135 million that can go to help finance the government.

Obviously they can’t make more money than they collect, although numbers like that are quite consistent with how States and the Federal government seem to do their books these days.

A bill was introduced into the PEI legislature recently is similar to the new US Federal gift card laws under the credit card reform act of 2009, namely it limits expiration dates and severely limits fees.

A couple of items in this article are troubling: the claim that gift card laws are seldom enforced and the admission by the State of Louisianna (and probably by most States with gift card law) that complaints about gift cards are rare.

Why is this?

Just like with the proliferation of nickel and dime fees on everything from airlines to bank accounts, companies know that people rarely make a huge stink about a small amount of money list even though they despise it. And customers are easy to forget their frustration which keeps them feeding at the same tainted trough. Gift cards are no different. Companies that sell gift cards know damn well that most customers won’t bother to complain if they have a problem with their gift card. This is part of what helps them make money in a profit-by-small-fee fashion, which has become the norm for most businesses in this country.

A real shame.

The Federal Reserve has apparently finalized its new rules for gift cards, which are scheduled to take effect August 22nd, 2010. At least one Senator wants them enacted earlier.

At least one part of the rules is a little disappointing; inactivity fees are allowed after one year of no use, but only one fee can be charged, not multiple fees. Other than that, the rules specify that gift cards must be valid for at least 5 years and has stricter rules about how information about fees must be displayed to the consumer prior to purchase.

What missing from the rules? Unfortunately there is no cap on fees, no specification that cards must be replaced free of charge if they are lost or stolen, no protection if the issuer files for bankruptcy, and finally, the rules don’t apply to loyalty cards, promotional cards, or to reloadable cards not sold as gift cards.

Look for plenty of cards that try to slip through these cracks. For instance, if, say, a Visa gift card had an expiration date on it for less than 5 years, you are entitled to a new one after the expiration date on the card (because you can’t use it anymore), but how many people will actually ask for a new card?

Also, keep in mind that State laws that are stronger than the Federal gift card laws still apply. For instance, in California, you should still be able to get cash back for gift cards if the balance is less than $5, even though this isn’t specified under Federal law. The best summary of State gift card laws can be found here.

Heavy lobbying by shopping mall owners in 2007 convinced the government of Manitoba to exempt mall issued gift cards from the law they passed that prohibits expiration dates and fees on gift cards. Legislators of course are loath to advertise this fact and people are getting bitten by the disparity, expecting their mall gift cards to have no fees or expiration dates. This is strikinly similar to the complete ignorance of open-loop cards by any gift card legislation issued by US states prior to the recent gift card statutes in the Credit Card Reform Act of 2009. Who knows if it was lobbying by the card issuers that gained them their exemption or just dumb luck, but they definitely didn’t dodge the bullet at the Federal level.

In Canada’s Nova Scotia province new laws came into effect on Feb 1, 2010 that prevent gift cards from having expiration dates or inactivity fees of any kind. As a result of this, one chain of malls is crying foul and has suspended sales of their mall-endorsed Mastercard gift cards. They stated a campaign to get the laws changed. One interesting note is that the website set up for the campaign claims that 96% of all gift cards are redeemed before the 15 month window after which fees were previously charged. If true, and not just political retoric, this would seem to indicate that perhaps people are more diligent in Canada about using up their gift cards.

As always there will be loopholes to the protections offered by the Credit Card Act of 2009 that card issuers will try to exploit. One such loophole, chronicled here, is that reloadable cards that are not marketed as gift cards are exempt from the provisions of the regulations under that act, which makes no sense considering those are more like credit cards which are the main focus of that legislation anyways. With this loophole, look for prepaid open-loop (Visa) gift cards to be instead convereted into reloadable cards that don’t say gift on them.

As we’ve stated a number of times, there are many companies that either aren’t aware of the laws around gift cards, don’t train their staff properly, or just don’t care to obey them. So when company refuses to give you cash back for your gift card valued under $10 (in California), it may not be worth the couple of bucks to you to file a complaint with the proper authorities, but it will help the next guy who tries to get their money.

Do the right thing.

Looks like there is a proposed bill SB885 in California which aims to raise the amount you can get cash back for on a gift card (close-loop only) from $10 to $20 and to do away with dormancy fees.

According to this Sacramento Bee article, the author had a lot of trouble getting cash back for gift cards that were valued under $10, which is clearly spelled out under a California gift card law that has been in force for over two years now. This is similar to the problems with trying to use a low value Visa or MasterCard gift card at a point of sale via a split tender transaction, where you pay with two forms of payment, your low value gift card and something else. Open-loop card issuers claim that this is possible but in reality very few retail locations either allow this or have trained their clerks to be able to do this. Are you really going to take a retailer to task for not giving you back $5 when they should by law? I wish more people would, then perhaps retailers would properly educate their staff

According to this story, getting a general purpose (Visa/MasterCard) gift card from a bank is a royal pain in the butt. I understand that banks have financial reporting regulations but do they really need to make you jump through all the paperwork hoops for a $50 gift card when you can buy one at CVS or Safeway with zero documentation? My guess is that the share of gift cards sold directly from banks is a VERY small part of the market because of this.

Does this lawsuit spell the end of the gift card party as retailers and card issuers know it? At issue is the remainder minutes on AT&T prepaid calling cards (breakage); there is often not enough left (pennies?) on a calling card to make an actual call, so the money is effectively lost. The lawsuit aims to repatriate that money into the State unclaimed property coffers, which, as anyone with a brain knows generally goes eventually into the State’s general fund, because unclaimed property of this type is VERY hard to return to the consumer.

What is interesting is that the State is going after a smaller breakage of this type. This could either happen because States are truly concerned about the consumer (not betting on it) or they are increasingly looking for additional cash to grab (most likely). In either case, combined with new State and Federal gift card laws, this could be the end of the party for gift card issuers.

Here is an excellent summary of state gift card laws by the National Conference of State Legislators.

Right on the heels of Colorado’s announcement about pursuing gift card legislation next year, Wisconsin, which has no current gift card consumer protection laws, is discussing a gift card law outlawing service fees and expiration dates.

While the details of Colorado’s proposed gift card legislation (press release) have not been fully released, it sounds like is like a gift card law on steroids. It bans expiration dates and fees, including activation fees, monthly fees of any kind, fees for checking balances, etc. It also allows consumers to get cash back for balances less than $5.

What is unclear is whether it will apply to open-loop (Visa-type) gift cards and whether it will conflict in some ways with the Federal Reserves gift card rules.

This article in the Chicago Tribune’s Consumer Help column tells us a couple of things anyone should know: First, contacting either a newspapers or TV stations consumer help guru is possibly the best way to get stubborn banks or other companies to change their minds and give you what they want. Almost every story I have read in one of these columns has resulted in the company reversing its previous position. Second, ridiculous policies still exist for gift cards, like in the reference article where a Visa gift card expires and loses ALL of its value in less than one year. Despite the best efforts of legislators, this behavior will continue, as trickery is the way many companies and most banks make their money these days. With gift cards, you must ALWAYS be on your toes, even after the new gift card laws take effect next year.

The Fed announced its new proposed rules for Gift Cards from the responsibility given to it by the Credit Card Accountability Act of 2009. The major change from rules on gift cards previously discussed is that rather than allowing monthly fees after 12 months, they will require that no fees be charged until 12 months of inactivity have passed. That won’t matter for people who receive a card and put it in a drawer.

The other interesting proposal is regarding the expiration of a gift card and the expiration date printed on the card, as it is with almost all open-loop (Visa-type) gift cards. In some states, these cards often have expiration dates that is before they are legally allowed to expire. The new rules include two proposals, one that would require the expiration date on the card to be at least 5 years out from the purchase of the card, and the other to allow for a shorter expiration date to be printed on the card but to allow consumers to receive a new card at no cost. It seems that it is up to Congress to suggest which proposal should be adopted

As States started to realize that unclaimed gift cards were enriching companies bottom lines, many if not most of them passed laws that allowed them to drag that money into their own coffers via unclaimed property laws. Colorado has tried to legitimizes their efforts by allowing people to get that money back by looking up their gift card on the State’s unclaimed property website. (article)

Of the $13 million Colorado recently pulled in in unclaimed gift card dollars, our expectation is that people will claim less than 0.1%. The great legislators and administrators of Colorado must undoubtedly realize this.

In some ways Gift Cards have not been very well thought out. In particular, they are hard to distinguish from real credit cards, and this can cause problems for merchants. Well, it also causes problems with the governments efforts to fight against money laundering (link and link) because 1) it is not illegal under the current US law to transport more than $10,000 in value on a stored value card across the US border, as it is with other valuables such as cash, precious metals, or gems, and 2) even if it were illegal, border patrol agents have no way to tell how much is on a card.

According to a recent article from the Wall Street Journal, prepaid card issues are claiming that new regulations will drive away legitimate business and drive up fees for users. For an industry that is practically minting money in fees, I find this very hard to believe. However, if this does happen, it would likely drive people away from open-loop gift and prepaid cards, which would be a good thing as they are the most costly of all gift and prepaid cards.