The Federal Reserve's New Rules on Gift Cards

The Federal Reserve's new gift card rules, promulgated in connection with the 2009 CARD Act, establish restrictions on fees and expiration dates for these cards to lower the cost of the product to consumers. Professor Jennifer Martin looks at the proposed gift card rules and the requirements for retailers providing these cards.

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While many consumers look forward to receiving stored value or prepaid cards (commonly called "gift cards"), some of the gift card attributes regarding fees and expiration dates are less appealing. Debit card transactions result in the removal of funds from the consumer's bank account shortly after a transaction, and credit card transactions only result in the removal of funds when the consumer pays the bill; consumers, however, part with their money at the time they receive the gift card, even before receiving any actual merchandise. This does not suggest that other cards are somehow superior products, as complaints abound concerning debit and credit card fees and recent bank practices. Nevertheless, consumers don't always appreciate card differences, believing cards are mostly the same (especially those bearing a Mastercard or Visa logo). Certainly, the pay up-front nature of gift cards causes problems, particularly if the card is lost or stolen, or the issuing company goes into bankruptcy. Moreover, consumers have difficulty obtaining fee information about these cards, or, alternatively, they find the value of the card evaporated due to monthly fees. Additionally, consumers who wait to use a gift card may find it has expired.

Gift Card Provisions Under the Card Act

The Obama Administration has tackled broad scale stabilization of financial institutions and consumer affairs, encouraged home loan modifications so that homeowners can stay in their homes, and even tried to spur car sales with the cash-for-clunkers program. As part of the broad attention given to financial matters, President Obama signed into law the Credit Card Accountability Responsibility and Disclosure Act of 2009 (the "CARD Act"), 111 P.L. 24, on May 22, 2009. The Act primarily addresses issues related to "credit card account[s] under an open-end consumer credit plan," but also contains less publicized provisions on gift cards. With respect to gift cards, the CARD Act amends the Electronic Funds Transfer Act (15 U.S.C. 1693 et seq.). The Federal Reserve issued proposed gift card rules on November 20, 2009 (Proposed Rules) 74 FR 60986. Generally, the Proposed Rules place restrictions on dormancy, inactivity or service fees, and prohibit expiration dates of less than five years. This commentary looks at the background of the Proposed Rules, their provisions, and some of the arguments on open issues regarding gift cards.

Three Types of Gift Cards

There are three common types of gift cards: closed system, open system, and mixed system. The closed system gift cards typically allow a consumer to purchase goods and services at just one merchant or related group of merchants. An example would be a gift card issued by and redeemable at specific merchants such at Best Buy, Bed Bath & Beyond, or Olive Garden. Consumers can use these cards for a relatively narrow set of goods or services offered by the designated merchant. Closed system cards are the most common form of gift card with the most money spent on them by consumers. An open system gift card operates like a cash substitute. That is, the card is accepted by a wide variety of merchants instead of cash. An example would be a prepaid debit card, which a consumer can use for groceries, gas, coffee, or a trip to the mall. Finally, mixed system gift cards have features of both open and closed systems. An example would be a gift card issued for the local mall that is accepted by multiple unaffiliated merchants at the mall. Although this system is not completely open due to the limits on use at the mall, it is not closed in that a consumer has more choice when they use these types of gift cards.

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