Archive for the ‘Fees & Breakage’ Category

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.

Prepaid cards are essentially open-loop gift cards without the word “gift” on them and are often marketed as a viable alternative to a bank account. Wal-Mart recently announced that it will be paying employees through prepaid debit cards instead of direct deposit.

Consumers Union decided to weigh in on the topic and has published an in-depth review of prepaid cards; it isn’t pretty. But of course, if you’ve read any of the other information published here about open-loop gift cards, you already guessed that. The bottom line is prepaid cards are chock full of fees, do nothing to help someone build credit, and have inadequate protection against loss.

To get a better idea the value lifespan of an All-Access Visa gift card, one of the most highly reviled and complained about gift cards due to their very short no-fee period and their very high ($4.95 monthly fee), it is helpful to graph the value left on the card over time.

A $25 gift card will be worthless after 12 months, a $50 gift card after 17 months, and a $100 gift card after 27 months.

If All-Access showed a graph like this on their gift card packaging, people wouldn’t be so excited to buy their cards.

Perhaps the above images should be incorporated into the All-Access logo. :)

I came across this handy summary of prepaid debit and gift cards. The author makes a very valid point; even when you’ve managed to spend the last dime on your prepaid card, you may not want to get rid of it. In the case where you return something that was purchased using your prepaid card, it will likely go back on the card. If you don’t have the card, your money is lost.

I’ve seen plenty of estimates of how much of total gift card sales gets left on the table by consumers each year ($8-10 billion), but I’ve never seen someone give a number for the TOTAL in gift card value that sits unused. An article in Business Week (here) says that there is about $40 billion in unused gift cards sitting out there.

How does Ticketmaster get around honoring an expired gift card even though California has a law that says gift cards can never expire? They call it a “discount card,” despite the fact that the card says “Gift Card” right on it. (story)

We can undoubtedly expect more of these shenanigans as more gift card laws get passed.

US Bank recently announced that it is the number one issuer of Visa branded gift cards. An analysis of their gift card fees shows that they are even worse than everyone’s least favorite gift card, the All-Access gift card. The US Bank Visa gift card starts charging a $2.50 monthly fee ONLY six months after issuance, charges $0.50 for every call (after the first two) to the AUTOMATED balance check number, strictly prohibits resale of US Bank gift cards (huh?), and charges $15 to replace a lost or stolen gift card.

Is it just me, or are gift card companies getting even more brazen with their high fees? Perhaps they feel that because they have escaped regulation thus far, anything goes.

Sounds good, doesn’t it? GiftCards.com recently announced, as a gesture to help people for whom every buck counts, a gift card that has no montly fee. Their normal gift cards come with plenty of fees, including a per-transaction fee, ATM fee, international use fee, and even a fee to change your PIN number. The new montly feeless NMF Visa gift card, while it has no montly fee (until the expiration date passes), seems to make up for it in other ways, including a higher per-transaciton fee, a $15 expiration fee (that is assessed when your card expires), and a higher issuance fee. It also isn’t clear from the language in the press release and the cards terms & conditions, but it appears that the NMF card expires after only one year, unlike their normal cards that expire after 2 years.

Not such a good deal after all.

One of these days I’m going to survey every open-loop gift card I can find to figure out which one of them is the best, or most likely in the realm of gift cards, the least worst.

Tennessee is considering a bill that would allow consumers cash back for gift cards worth $10 or less. (story) Sadly, no talk of including open-loop cards.

You can now be the proud owner of a Capcom Street Fighter sponsored Visa debit card that sets a new low in the fees it charges, including:

* $9.95 activation fee
* $4.95 monthly fee
* $0.25 per debit use
* $1.50 per ATM withdrawal (not including whatever fee the ATM charges)
* $10 to close the card (and you can’t just stop using it, because besides the $4.95 monthly fee, there’s a $5 dormancy fee

It appears that the monthly maintenance fee kicks in immediately, which would be a first, as far as I know. (article and card)

This has to be the most blatant example of the government not “getting” gift cards and the ridiculous fees they charge. The governments in 30 states are essentially using reloadable gift cards issued by banks such as BofA, Chase, and US Bancorp to pay people their unemployment benefits. The problem is, the cards include all sorts of fees, such as overdraft fees (on a debit card?), and fees to withdraw funds. Don’t state governments have enough clout to issue cards for the UNEMPLOYED that don’t carry fees? (article)

More states are jumping on the bandwagon. Indiana has a bill (1529) before the State House that would ban fees and expiration dates. Like all other states, they specifically exclude open-loop gift cards. (article) For once I’d like to see a legislator state WHY they are excluding open-loop cards.

Westfield malls is HUGE, with 55 malls in the US and more outside of the US. They sell a lot of gift cards. Their gift cards happen to be American Express branded cards and can be used anywhere Amex cards can be used. As Amex/open-loop cards, they come with all the downsides that everyone complains about, such as high dormancy fees and difficulty using up the small remaining balance.

But since it is a Westfield branded card, you would think you wouldn’t have a problem using it up fully at a store in a Westfield mall. Not so according to this story, about a woman who is making a stink about Westfield retailers not accepting cards with less than ten bucks on them. Worse, the retailers tell her the cards had nothing on them, when they in fact did have money left on them.

Westfiled turned to the fine print and said all the terms and conditions were in there, such as the fact that Westfield retailers could choose to accept or not accept the Westfield gift card. Here is the funny part, when she asked them where she could use the card, they named three retailers out of the perhaps hundred in the mall. Three.

It is also interesting to note that according to American Express merchant guidelines and agreements, retailers can not specify a minimum amount for credit or debit card charges.

The jury is in, open-loop (Visa, MasterCard, Amex) gift cards are simply a raw deal. Stay away from them.

For a while I thought I was the only one talking about the fact that multi-store, aka open-loop or bank issued gift cards are exempt from most laws that limit expiration and fees on gift cards. Finally at least some articles are beginning to mention them.

As this article points out, merchant agreements with credit card processors specifically prohibit merchants to have minimum purchase amount requirements for credit card use. This applies to gift cards as well. If they say you need to meet the minimum purchase amount, tell them it is against their merchant agreement. If they still refuse, report them to MasterCard, Visa, or American Express.

Of course, it’s not really the merchants fault. They have minimum purchase amounts because for small purchases their fees end up being a much larger percentage of the overall price and they may lose money on the purchase. However, if enough consumers complain about merchants, perhaps enough merchants will complain about the credit card fees, which are what really need to change.

Consumer reports says that 25% of gift cards go unused each year. A commonly accepted breakage value (the amount of gift card value that doesn’t get spent) is 10% of the total amount on gift cards sold each year. For these two numbers to make sense, the cards that go unused must be heavily weighted in the smaller values. Perhaps the psychology behind this is that people are less likely to forget about a gift card with more value on it.

I recently ran across an article in the Washington Post from February of 2006. The article talks about how difficult it is to use up small amounts left on Visa and MasterCard Gift Cards. A couple of quotes from the article caught my eye:

“Visa spokeswoman Rhonda Bentz said the company was unaware of the problem of split transactions until The Washington Post raised the issue. “Now we’ll be looking into it,” Bentz said.”

“MasterCard and American Express officials said they have been slowly rolling out new technology to make it easier for merchants and gift card users to know a card’s balance so it can be used with cash or another credit card to buy something for more than the card’s value.”

Very very few merchants allow you to check the balance of your gift card. Visa’s site lists about 15, while MasterCard’s site lists none, but says “some” can. Split transactions have not gotten any easier in the last two an a half years either.

If these companies are working on fixes to these problems, global warming appears to be melting glaciers faster.

Speaking of terminology, an article in today’s Wall Street Journal talks about “prepaid debit” cards. As debt among college students has risen to record levels in the last several years, colleges have gotten criticized for allowing credit card companies to aggressively promote credit cards to students on campus. In response, many colleges have limited credit card companies ability to hawk credit cards to students.

The result, according to the article is that banks are now pushing what they call prepaid debit cards. These are essentially the same as the open-loop (Visa, MasterCard, etc.) gift cards, but they are of the re-loadable variety. Essentially the same product but with a different name.

Oh, by the way, these cards are really loaded with fees.

I’ve seen stories about debit card holds at gas stations since the Spring. The problem is that at a gas station, where the pump authorizes payment before it knows how much gas you will pump, it typically does an authorization for $50 or $75 first and then when you are done, releases the hold and runs the correct amount. These holds can stay on for quite a long time. With debit cards, this can tie up your funds, which is a problem if you don’t have a lot of funds.

With gift cards, the side-effect of holds can make your cards very hard to use. My experience has been that holds on gift cards can last up to 30 days for authorizations that are correctly canceled. When merchants process credit cards online, it isn’t possible to tell if any information is incorrect (CVV or expiration date) without doing an authorization, which puts a hold on the funds for up to 30 days, even if it is cancelled. Just how long is up to the cards issuing bank. Basically, you can lock up your gift card funds easily if you try to use it online and type in some of the info wrong.

Well, in the latest issue of Consumer Reports, there is an article about Consumers Union and other groups putting pressure on Visa and Mastercard to fix the debit hold problem, at gas stations in particular. Looks like Visa is moving to a real-time clearing process for gas stations.

I am curious to see the effect this will have on gift cards. One side-effect of the debit hold process at gas stations, as I found out by accident once, is that you can go to a gas station with a $50 gift card, it will do a pre-authorization for $50, and then you can charge more than $50 of gas on the card. This works at some, but not all gas stations. I wonder how often this happens. Like most cases of fraud, the merchant, not Visa, probably eats the loss in this case.