Feds Crack Down on Bank Gift Cards, Retail May Be Next

By Evan Schuman  |  Posted 08-17-2006
Federal regulators the week of Aug. 14 clamped down on bank-issued gift cards, forcing the banks to much more prominently disclose expiration dates and any inactivity fees. Industry observers expect federal authorities to soon extend such rules to retailer-issued gift cards.

"The gift card market is growing rapidly, and the terms and conditions of various cards can vary widely," said Comptroller of the Currency John C. Dugan. "It's very important that national banks engaged in this business adopt robust disclosure policies so that consumers understand what they are getting when they buy or receive a gift card."

The government guidance said makers of bank gift cards "must put the expiration date on the front of the card, disclose the amount of any monthly maintenance or inactivity fees, and provide a phone number or Web address."

Issuers of the cards must also take steps to make sure that the users of those cards know that information, because the purchasers of the cards are often not the ultimate users.

"Issuers should not advertise a gift card as having 'no expiration date' if monthly service or maintenance fees, dormancy fees or similar charges can consume the card balance," a government statement said. "Similarly, if fees may consume the card balance before the stated expiration date, disclosures related to that expiration date should explain that possibility. Issuers should also avoid describing gift cards as if they are gift certificates or other payment instruments more familiar to consumers."

The issue is less that consumers are being misled and more that retailers are trying to navigate a series of complicated state and federal tax rules for handling such payment forms.

"Merchants apply expiration dates and inactivity fees to gift cards as a direct result of state escheatment laws, which require gift card issuers to return the unused portion of a gift card to the state as tax after a certain period of time," said Bruce Cundiff, a senior analyst for Javelin Strategy & Research, in Pleasanton, Calif., and a former Jupiter Research analyst. "If merchants (and banks, for that matter) were able to recognize gift card revenue at the time of the sale, rather than at the time of redemption, there would be little motivation to apply expiration dates or inactivity fees. The government, for its part, sees a lucrative source of revenue and wants to protect it. It's rather hypocritical to position the action taken as 'helping consumers.'"

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