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
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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
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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