Archive for the ‘Fees & Breakage’ Category

Reader Phyllis asks:

My brother gave me a mastercard debit card for 50.00. His wife paid the 4.95 activation fee upfront. However, when i went to use it at a restaurant, they said only 40.00 could be gotten through. I have tried numerous times to redeem the remaining 10.00 to no avail. What can be done about this fraud.

I’ve read a number of times that restaurant POS systems tend to add an additional 20% or more when running credit card authorizations to account for an additional charge in the form of a tip.  This may be something that is automatic and beyond the control of the person running the card.  In your case it seems that the system added an additional 25% for the authorization and would only allow $40 of charge as the additional $10 was included in the authorization.

With a normal credit card you might never know, because when the transaction settles a few days later and the original authorization expires or is removed, you only see the charge for the exact amount you actually paid (including the tip).

This is a problem that has plagued open-loop (which includes MasterCard, Visa, American Express, and Discover) gift cards from the very start.  In addition to restaurants, gas stations tend to authorize specific amounts (often $50 or $75) which causes problems with gift cards as it makes it impossible to put $10 of gas in your car using a card with $10 left on it.

While your missing $10 might be locked up for up to two weeks before the original authorization expires (and this is not a fault of the merchant, it is most likely the card issuer that wants make sure you don’t charge more than you should – but they go too far) you will eventually be able to spend that $10 if you can find a business that will let you charge that much as a separate transaction if your purchase something for more.  This is called a split tender when you use two different payment methods to pay one total charge (like a $10 gift card + cash).  Most if not all closed-loop (i.e. store-specific) gift cards will allow this, but surprisingly few merchants are familiar with how to do this (or willing to) with an open-loop gift cards, despite gift card issuers claims to the contrary.

In 2008 we started a service that allowed people to get the last few buck off their open-loop gift cards, but the powers that be were not happy with it and we had to shut it down.  There are no similar services that we are aware of, so you have to find a merchant that will allow you to do a split tender, or purchase something for exactly $10 to get the full amount off.

We’ve reported on this a number of times before, and it is time to say it again:  Non-gift prepaid debit cards are not covered by the fee limitations imposed on gift cards by the Credit Card Act of 2009, and issuers are free to load up as many fees as they wish, and many do.

As the Wall Street Journal reports (Drawing Benefits Via a Debit Card?  There’s a Fee for That, 5/14/11) banks seem to be prepared to use prepaid debit card fees to make up for lost fee revenue from normal debit card interchange fees.

The combined regulatory changes for credit and debit cards are expected to cost financial firms about $26.2 billion a year in revenue, according to R.K. Hammer, a credit-card consulting firm in Thousand Oaks, Calif.

Richard Davis, U.S. Bancorp’s chairman, president and chief executive, said last month that prepaid debit cards and other products will help the company recover roughly half of the revenue likely to be lost from swipe-fee rules being written by regulators.

Keep in mind that fees on most of these cards are already high:

PNC Financial Services Group Inc. subtracts 50 cents from the unemployment benefits of Indiana residents every time they check their balance at one of the Pittsburgh bank’s automated teller machines. Recipients also get just one free cash withdrawal per week; other cash withdrawals cost $1.25.

Wow! It gets worse.  Prepaid debit cards are allowed to charge you for overdrawing your balance, which is reminiscent of the debit card overdraft gold rush which just got outlawed by federal laws.  Who in the world would expect a prepaid debit card to allow charges beyond the available balance.  Even more so than normal debit cards, consumers expect exactly the opposite, which makes these fees a real blind-side.

Given a choice between prepaid gift cards that have highly regulated (and reasonable) fees, and prepaid debit cards that are already saddled with a myriad of fees and more to come, the prepaid debit card industry would surely find a cold reception from consumers.

But states and the federal government seem to be charging full speed ahead on issuing benefits, tax refunds, and other government to consumer money transfers via prepaid debit cards and they don’t appear to have made much effort to negotiate reasonable fees.  Furthermore, some states officials were involved in lobbying for the prepaid debit card exemption from the new rules on swipe fees:

Last year, 10 state treasurers successfully prodded lawmakers to shield prepaid debit cards from part of the Dodd-Frank financial-overhaul law that limits so-called “swipe fees” charged to retailers.

The bottom line is that these cards are no bargain for consumers.  If you are unfortunate enough to get one, do your best to get all the money off of them immediately before the fees put a substantial dent in the balance.

Prepaid card issues have been pushing non-gift prepaid card since the Federal Reserve finalized gift card rules for the Credit Card Act of 2009 and this recent news blurb (Wall Street Journal Overheard, 3/8/11) perfectly demonstrates the fee traps that exist more than ever in non-gift prepaid cards.  As a reminder, the Credit Card Act of 2009 gift card rules exempt non-gift prepaid cards from the rules on disclosure and fee limits.

Price is everything for Wal-Mart Stores’ customers. So users of its popular prepaid debit card, managed by Green Dot, may be surprised to hear they still run up $3-a-month fees for up to two months even when their balance hits zero.

Many simply never use the card again. But those who do may find these fees and a regular $3 reloading fee deducted. For somebody depositing $100, that adds up to a painful 9% hit.

While monthly maintenance fees are disclosed by Green Dot, the cardholder agreement doesn’t specify that such fees can push account balances into the red. The only place to learn that level of detail is in Green Dot’s SEC filings, notes analyst Thomas McCrohan of Janney Capital Markets. Everybody knows the importance of reading the small print before signing up for a new financial product. But trawling through the 10-Q?

That’s a new low for both puntive fees and lack of disclosure for a prepaid card.

The Wall Street Journal points out in an article today (Banks Pin Revenue Hopes on Prepaid Cards) why prepaid (non-gift) cards are a bad idea for consumers.

Prepaid cards carry the same interchange rates as debit cards, typically 0.75% to 1.25% of each transaction. So if banks lose some of the debit-card fees, they hope to regain them through increased prepaid-card use.

Because these cards are not covered by either the new gift card laws put out by the Federal Reserve, or the new laws regarding debit card fees, banks are free to charge what fees they want and apparently plan to make up lost revenue through these cards, which is sure to be a bad deal for consumers.

One of the biggest problems with open-loop gift and prepaid cards is the ability to use them all up, or, in some cases, use them at all, as gift and prepaid open-loop cards can be very difficult to use online.  So, if course it catches our attention when there is mention of making  these cards easier to cash out.  Take for instance this recent press-release by MasterCard:

MasterCard Inc. is partnering up with Cardtronics Inc. in order to make free ATM access a possibility for prepaid card members across the country.

Quick Overview of Prepaid Cards

MasterCard prepaid cards are similar to gift cards and can be used as gift cards in that you purchase the card and then can contribute additional money to the card. Money can be added in-store at the time of purchase, online or via direct deposit from your paycheck. You can reload the card continually.

This card is basically an alternative to cash, without all the complications of maintaining an account or credit card. MasterCard offers different cards, including prepaid gift cards, travel cards and cards for everyday purchases.

MasterCard Differentiates From Other Prepaid Card Issuers

MasterCard has focused on growing its prepaid market and the latest addition to the strategy is expected to reel in more prepaid companies. Neil Dugan, MasterCard’s VP and head of U.S. markets prepaid product management told US Banker, “It’s a great opportunity for prepaid companies that are looking to differentiate, are looking for ways to provide value for their cardholders, looking to continue progress in the evolution of their products and the way they are going to market.”

MasterCard Partners with Allpoint Network

This decision also involved Cardtronics Inc.’s Allpoint Network, America’s largest surcharge-free ATM network with more than 37,000 ATMs across the nation. Although prepaid cards are a small portion of Allpoint Network’s business, the company is eager to increase that portion. “We’re trying to leverage our infrastructure as a financial kiosk leader to sell more products and services to this growing segment,” Allpoint president Ben Psillas told US Banker. Usually, Allpoint collects revenue from a monthly fee that banks and other customers pay based of of the number of cards that have access to the Allpoint ATMs. Card issuers who use the Allpoint Network through MasterCard will get a special deal on the price they pay. The terms of the deal were not specified.

It is important to make cash as accessible as possible for prepaid card users who are looking to replace actual cash with the cards. Making ATM usage free and accessible is a smart move on MasterCard’s part and could help build its customer base.

Sounds good right?  Well, sort of.  They don’t actually come out and say that you can get cash for your open-loop prepaid or gift card at an ATM, but they seem to vaguely imply this.  Interestingly enough, MasterCards FAQ makes in interesting statement about using prepaid and gift cards at an ATM:

Q: Can I use my Prepaid, Gift, and Credit cards at an ATM?
A: Yes. You may withdraw cash against the balance on most MasterCard prepaid and gift cards at any ATM. However, not all prepaid and gift card issuers allow ATM or foreign transactions. Be sure to check with your card issuer to ensure these types of transactions are permitted. Most Credit MasterCard® cards also allow you to obtain cash advances at an ATM. You will need a Personal Identification Number (PIN) to withdraw cash. To contact your card issuer, you will find their contact information on the back of your MasterCard card and/or on your billing statement. Or you can visit the issuer’s Web site to manage your account online.

The real truth lies in the fine print, which is that it is up to the individual issuing banks to decide whether or not you can simply cash out your gift card at an ATM.  As far as I know, most issuing banks DO NOT allow this or I suspect will make it hard to obtain a PIN.

Still, the fact that many more ATM’s will be available for these transactions if they are allowed is a step in the right direction.

With mail-in rebates, the odds are against you from the start.  My own experience is that I only get an actual response to a mail-in rebate about half the time, even if I have done everything right.  Then rebates started to appear as Visa/MasterCard cards, with none of the protections of most state laws or the new federal gift card laws.

It seems like they are becoming an even worse deal as rebate companies seem to be experimenting with shorter expiration dates.  Take this recent experience by a journalist:

Imagine my anger and humiliation when I pulled the card out in August, only to note two key dates: “Valid From 03/10” and “Good Thru 07/10.”

When he contacted the company that manages the rebate card program, he discovered:

A fact sheet on the site promoting rebate cards says this: “Checks expire within 3 or 4 months. While there are some exceptions, most rebate cards do not expire for at least 12 months.”

Clearly because of his experience, some rebate cards, and ALL rebate checks expire in substantially less than 12 months.  I think most people simply don’t pay attention to expiration dates and these companies must realize that shortening expiration dates is a good way to reduce redemption; it is better to deal with a few angry customers to save quite a bit of money.

We’ve previously posted some tips on getting the most value out of rebate cards, like:

  • Trick number one:  Take the card into your bank and attempt to have it turned into cash.  Apparently this is allowed on some cards.
  • Trick number two:  Use the card to buy another open-loop gift card, one that DOES have the gift card safeguards.

This particular customer decided to force the issue with the rebate company and demand a new card for his remaining balance:

I employed a strategy espoused by Richard Birke, director of Willamette University’s Center for Dispute Resolution. Everything is negotiable, he says. Plus, it never hurts to ask.

When I called the rebate card’s 800 number, I asked the rep to speak to a supervisor. None was there, she said, but she’d forward my request to one for review. Check back in 10 days on the status, she said.

Three calls and two weeks later, a rep named John told me my $85.80 had been reloaded on another card. I’d receive it in four weeks.

Even though vendors have until January to comply with the new packaging requirements for open-loop gift cards, they are required to follow some of the new rules, like no expiration before 5 years and no fees until after 12 month starting August 22nd.  And like clockwork, the announcements for new and friendlier open-loop gift cards are starting to roll out, like this one from Wells Fargo/Wachovia.

Wells Fargo and Wachovia gift cards now will be valid for 7 years, 2 more than required by law.  They also carry a relatively low $3.95 purchasing fee and can be bought in denominations of up to $500 for Wells Fargo cards and $600 for Wachovia cards.  Like Amex, they have completely done away with the monthly fees, and if the expiration date on the card rolls by before 7 years, you can get a replacement for free.

I expect some open-loop vendors to try and scam consumers with expiration dates printed on cards.  As long as they comply with the law and offer to give you a replacement for free if five years from purchase hasn’t passed, they aren’t technically breaking the law, but surely some of the shadier vendors will discover that some percentage of people won’t realize this despite the law.

I expect most vendors to do away with monthly fees of any type for open-loop cards as this seems to be the trend and customers will learn to avoid the ones that do charge monthly fees like the plague.  This is good news for customers.

To replace a lost or stolen card now costs only $7.50, down from the $15 it used to cost.

Neither card can be used outside the US.

One thing to remember is that open-loop gift cards purchased from banks will require you to provide your personal information.

A recent LA Times consumer advocate column states that a customer was upset when he found out that Target charged him a $4 activation fee.  When I tried to verify this by going through the purchasing process with Target online, I was not charged an activation fee, but only a $1.95 shipping and handling fee, a cost that seems reasonable.

Is Target charging an activation fee for its gift cards purchased in-store?  Why?

I just came across this story on about the Walmart money card, which, by all appearances is a normal Visa prepaid gift/debit card.

The biggest problem with the card is its onerous activation scheme, which seems almost designed to prevent people from successfully activating the card, thus allowing Walmart to keep the money.

  1. You need to call to activate it, unlike other prepaids that are activated when purchased at the store.
  2. When you call to activate, you need the 14 digit activation code from the purchase receipt.  I can imagine that most of the time, people giving a gift card do NOT include the receipt.
  3. Activation requires that you give them all kinds of personal information, including your social security number.

Collection of personal information to identify the individual purchasing or using a card is something banks are required to do, so I can’t help but wonder if Walmart’s banking partnerships and in-store financial services are responsible for these activation requirements.

While I do like the idea of a post-purchase activation scheme, which could help reduce the rampant mail theft that occurs with gift cards sent through the US Postal Service mail, Walmart seems to have gone about it the wrong way.

Even without the activation requirements, these cards are a poor choice as they seem to be saddled with about every fee known to man.

The American Express gift card is probably a better choice.

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.

It is always interesting to compare the perspective of industry trade groups with those of consumers, consumer advocates, and legislators.  Take for instance this article, which talks about the new gift card rules and their effect on the prepaid card industry.  The article quotes the Network Branded Prepaid Card Association.

By the NBPCA‘s estimate, more than 90 percent of prepaid gift cards are drained of funds within a month after they are purchased.

Really?  How then can breakage exist at a level of 10% of the face value of these cards?  This also goes against a common sense experience of prepaid gift cards, which is that it is VERY VERY HARD to completely use them up, due to the fact that so few merchants understand how to do a split tender transaction or have the ability to determine the remaining balance on a card.

A bit of a black eye for Amex and Travelocity on this one.  A class action lawsuit accuses them of colluding to charge more for trips when American Express gift cards are used to pay for them than they would otherwise.

Named plaintiff Morris Wilner said he received a $200 American Express prepaid gift car for signing up with Verizon for telecommunications services. He said he discovered the pricing scheme when he tried to use the card to pay for a trip.
Wilner said he visited American Express’s Web site, and was directed to Travelocity’s Awards site, where, using the gift card, he paid $35 more for airline tickets than he would have had he paid through other means.

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’ve made no attempt to hide my prejudice in favor of American Express gift cards lately as they have shown some extraordinary customer service and were the first to do away with monthly fees, but this agreement with National Gift Card to market a corporate volume rewards card seems like s step in the wrong direction.  It is no secret that gift card issuers, expecially open-loop ones, are scrambling to find other ways to ring up fees now that the new gift card rules are coming in August.  The most common tactic seems to be to offer cards that aren’t classified as gift cards and so are not beholden to the gift card rules under the Credit Card Reform Act of 2009.  This move by Amex appears to be just such a tactic.

While the rewards cards are offered at a discount to face value, and carry no monthly fees, they expire after 12 months and lose ALL of their value.  Seems rather drastic.  I would avoid these cards.

Mail-in rebates are what gift cards wish they were.  Let me explain.

Anyone who has tried to get a mail in rebate knows that the odds are against you.  In fact, only somewhere between 20% and 40% of mail-in rebates are ever redeemed.  Now, given that many people don’t bother with the mail-in rebate, that number is artificially low.  But, as I can attest myself, it is extremely difficult to get your mail in rebate back, for a number of reasons, including the fact that it may just never show up after you’ve mailed it in, or you send the wrong part of the packaging to claim it, or the paperwork is filled out wrong in the smallest of ways … you get the idea.

Well, companies that offer rebated decided that they liked some of the provisions of gift cards so much they started offering rebate cards instead of checks.  Now, in addition to it being really hard to get your rebate, once you get it, there are even more ways that you won’t be able to spend it.  Rebate cards are essentially the same as gift cards except, since the government considers it free money, rebate cards DO NOT fall under the gift cards rules – pretty much any of them.

So, if you do get a rebate card, here are some tips to getting the most out of it.  Probably the best tip is SPEND IT IMMEDIATELY!  Here is an excellent blog called RebateRemedy dedicated to getting the most out of rebates.

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.

The process of adapting to limits on fees has begun, such as the Valley View Mall’s gift cards, which no longer have expiration related fees, but now cost more when you purchase them.

Another interesting fact about this particular mall’s gift cards is that while the previous ones were American Express branded, they could only be used at mall stores.  The new ones can be used anywhere an Amex card can be used.

Holy cow!  This article claims that 33% of Australian gift card go unredeemed.  While that figure is for the number of gift cards sold, apparently it represents the value that goes unredeemed as well.

What is curious though is that the article (entitled Profiting from Expired Gift Cards) is for merchants and touts the benefits of selling gift cards as a way to make more money.

Came across an interesting restriction while reading the terms & conditions for the US Bank Visa gift card:  “Resale of Gift Cards is strictly prohibited.”

Wow, that’s quite a restriction.  But the US Bank gift card is unattractive for their many fees, most of which will presumably change after the gift card rules from the Federal Reserve as per the Credit Card Reform Act of 2009 take effect in August.  Their fees include $.50 for using the automated 800 number, $1.00 for talking to a live representative, a $2.50/mo inactivity fee after 12 months, $15 balance transfer or replacement fee, and a 3% foreign transaction fee.  The worst though is that the terms & conditions include a hefty disclaimer that provides plenty of hoops you must jump through to get your money back if your card is stolen or otherwise used fraudulently.

I’m going to do a comparison to these current terms & conditions after August.

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.