Tis the Season: Gift Cards
According to the National Retail Federation, eight in ten shoppers plan to give gift cards during the 2011 holiday season. Gift cards are regulated by federal and state laws.
In the April 1, 2010 edition of the Federal Register (Volume 75, Number 62), the Federal Reserve Board generally defines a gift card as “A type of prepaid card that is designed to be purchased by one consumer and given to another consumer as a present or expression of appreciation or recognition. When provided in the form of a plastic card, a user of a gift card is able to access and spend the value associated with the device by swiping the card at a POS terminal, much as a person would use a debit card. Among the benefits of a gift card are the ease of purchase for the gift-giver and the recipient’s ability to choose the item or items ultimately purchased using the card. There are two distinct types of gift cards: Closed-loop cards and open-loop cards. Closed-loop gift cards constitute the majority of the gift card market, both in terms of the number of cards issued and the dollar value of the amounts loaded onto or spent with gift cards. These cards generally are accepted or honored at a single merchant or a group of affiliated merchants (such as a chain of book stores or clothing retailers) as payment for goods or services. They have limited functionality and generally can only be used to make purchases at the merchant or group of merchants.”
Title IV, Section 915 of The Credit Card Accountability Responsibility and Disclosure (CARD) Act of 2009, Public Law 111-24 amended the federal Electronic Funds Transfer Act to add language to that Act about gift cards. It addresses general-use prepaid cards, gift certificates, and store gift cards.
Title IV, Section 915 of the 2009 CARD Act defines a ‘‘general use prepaid card” as a card or other payment code or device issued by any person that is redeemable at multiple, unaffiliated merchants or service providers, or automated teller machines; issued in a requested amount, whether or not that amount may, at the option of the issuer, increased in value or reloaded if requested by the holder; purchased or loaded on a prepaid basis; and honored, upon presentation, by merchants for goods or services, or at automated teller machines.
It defines “gift certificate” as an electronic promise that is redeemable at a single merchant or an affiliated group of merchants that share the same name, mark, or logo; issued in a specified amount that may not be increased or reloaded; purchased on a prepaid basis in exchange for payment; and honored upon presentation by such single merchant or affiliated group of merchants for goods or services.
A “store gift card” is an electronic promise, plastic card, or other payment code or device that is redeemable at a single merchant or an affiliated group of merchants that share the same name, mark, or logo; issued in a specified amount, whether or not that amount may be increased in value or reloaded at the request of the holder; purchased on a prepaid basis in exchange for payment; and honored upon presentation by such single merchant or affiliated group of merchants for goods or services.
The 2009 CARD Act directed the Federal Reserve Board to develop rules to implement the new section (Title IV, Section 915) about gift cards.
The Federal Reserve Board subsequently issued these Final rules of the Board of Governors of the Federal Reserve System, effective August 22, 2010. According to the Board, “These rules protect consumers from certain unexpected costs and require that gift card terms and conditions be clearly stated. The final rules prohibit dormancy, inactivity, and service fees on gift cards unless: the consumer has not used the certificate or card for at least one year; no more than one such fee is charged per month; and the consumer is given clear and conspicuous disclosures about the fees. Expiration dates for funds underlying gift cards must be at least five years after the date of issuance, or five years after the date when funds were last loaded. The Board's rules generally cover retail gift cards, which can be used to buy goods or services at a single merchant or affiliated group of merchants, and network-branded gift cards, which are redeemable at any merchant that accepts the card brand.”
The Board noted in the April 1, 2010 Federal Register, “More than 40 states have enacted laws applicable to gift cards in some fashion. Most commonly, state gift card laws may restrict the circumstances under which dormancy, inactivity, or service fees may be charged and/or restrict the circumstances under which the card or funds underlying the card may expire. Other state laws simply require the disclosure of fees or expiration dates. Many states have applied abandoned property or escheat laws to funds remaining on gift cards, and some states require that consumers have the option of receiving cash back when the underlying balance falls below a certain amount. However, while all state gift card laws address closed-loop gift cards in some manner, many state gift card laws do not apply to open-loop bank-issued cards.” The Board pointed out that “Section 402 of the Credit Card Act amends EFTA Section 920 to provide that the EFTA does not preempt any state laws that address dormancy, inactivity, or service fees or expiration dates for gift certificates, store gift cards, or general-use prepaid cards if such state laws provide greater consumer protection than the new gift card provisions.” However, this interpretation seems to be undergoing further clarification by the Board (e.g., Supplement I to Part 205--Official Staff Interpretations).
Consumers Union publishes this summary of state gift card laws.
A 2007 SSL draft, Service Charges and Fees on Gift Certificates, is based on North Dakota Chapter 446 of 2005. This Act directs that a person may not charge additional monthly or annual service or maintenance fees on a gift certificate. Under the Act, a person may not limit the time for redemption of a gift certificate to a date before six years after the date of purchase of the gift certificate, place an expiration date on a gift certificate before six years after the date of purchase of the gift certificate, or include on a gift certificate any statement suggesting that an expiration or redemption date may apply to a gift certificate.