ORLANDO — How is a gift card different from a prepaid card?
Consumers might see little difference between the two types of plastic cards, both of which store funds. But with regulations set to take effect this summer that significantly restrict fees on gift cards, prepaid companies are scrambling to make sure their products are considered general-purpose payment products instead.
The subtle distinction has prompted prepaid marketers to revamp their sales strategies and packaging, and some are even abandoning some of their products that might be mistaken for gift cards.
"It's causing a lot of confusion," Judith Rinearson, a partner with the Bryan Cave LLP law firm in New York, said this week at the Card Forum and Expo conference here. "Millions and millions of pieces of plastic are going to have to be destroyed."
That's because gift cards are subject to strict new rules the Federal Reserve finalized in March as part of provisions included in the Credit Card Accountability, Responsibility and Disclosure Act of 2009. The new rules are included in the Electronic Fund Transfer Act.
In addition to limiting interest rate increases, late fees and other practices by credit card issuers, the legislation also changed when and how gift card providers can charge fees and imposed new requirements for expiration dates.
The changes take effect Aug. 22 and apply to open-loop gift cards, closed-loop or store gift cards and gift certificates. They exclude general-purpose reloadable cards as well as loyalty, reward and rebate prepaid cards.
Fees are typically a crucial component of prepaid card marketers' business models, so they are paying close attention to the language of the law, especially sections related to the marketing and placement of their products at retailers.
For example, "if you have a list of uses on a card for teenagers and one of them says 'great gift for your teen,' that now becomes marketed as a gift card," said Rinearson, who also chairs the government relations working group at the National Branded Prepaid Card Association.
The Fed's rules address prepaid cards whose packaging implies they could be used as a gift card. General-purpose products placed next to gift cards at stores without signage differentiating between the two would also fall under the law's jurisdiction.
In its final rule, the Fed said a reloadable network-branded prepaid card would be considered a gift card if, for example, the issuer promoted it in advertisements as "the perfect gift" during the holiday season.
"The key consideration is whether a consumer acting reasonably under the circumstances could be led to believe that all certificates or cards referenced in the advertisement or the sign are gift cards or gift certificates," the rule states.
"Similarly, if you have a gift card mall that has gift cards on the top and then you have side by side a non-gift-card" product, that would be subject to the regulation, Rinearson said.
The distinction requires issuers to be aggressive about product packaging, Kathryn Kling, a payments attorney with Nelson Mullins Riley & Scarborough LLP in Washington, said in an interview Monday.
It "remains to be seen how this is all going to play out," Kling said, but issuers already have started taking steps to scrap existing inventory that might earn a general-purpose card the "gift card" moniker.
Some marketers have also been forced to eliminate cards that don't bear language reflecting new expiration date rules.
Green Dot Corp., a provider of network-branded prepaid products, has taken steps to ensure card display racks it provides retailers are clearly labeled to prevent confusion, Steve Streit, the chairman and chief executive, said in an interview Tuesday.
"Most of our products were already marketed in a segregated fashion," Streit said.
The Monrovia, Calif., company also provides a Visa branded gift card that is sold at Wal-Mart Stores Inc. and issued by General Electric Co.'s GE Money unit.
Many "hundreds of thousands" of those cards have had to be destroyed and replaced to make sure they meet expiration data and other requirements, Streit said.
He said the regulation has had less impact on Green Dot than on other prepaid card marketers. "We do know there are some companies out there that unfortunately have had to destroy many millions of packages," he said.
If the gift cards include an expiration date, it must be at least five years after the date they are issued or five years from the date that funds were last loaded on to them.
For example, gift card issuers must provide notice on a card that the funds may expire at a later date than card's expiration date.
"The disclosure must be made with equal prominence and in close proximity to the certificate or card expiration date," the rules state.
Some companies have lobbied the Fed for an extension of when the rules take effect to handle existing inventory, but so far such efforts have been unsuccessful, Rinearson said.
"It's going to be this trailing long tail of the woes of expired cards," said Shawn Barrieau, the chief executive of DimpleDough Inc.
The Independence, Ohio, company offers software that helps issuers customize the images on their cards.
"What we're finding is sort of a pickup in demand" for new card designs because of the regulations, Barrieau said.
NetSpend Corp. a marketer of network-branded prepaid cards, has "already begun working with our distributors and educating them on the regulations and the impact they will have on in-store marketing," Brad Russell, a spokesman for the Austin company, said by e-mail.
Packaging for NetSpend's general purpose card "is already compliant with these regulations, and there will be no impact on our inventory that is currently in the field," Russell said.
Prepaid companies whose products do fall under the gift card category face new restrictions for the fees they can charge.
The rules prohibit issuers from charging "dormancy" or inactivity fees unless a card has been inactive for at least one year. If a card meets that threshold, an issuer cannot charge more than one fee per month, whereas before an issuer could charge multiple fees per month.
Additionally, if the card is used again after being inactive for a year, fees can not be charged until it is inactive again.
"For example, if a dormancy fee is imposed on January 1, following a year of inactivity, and a consumer makes a balance inquiry on January 15, a balance inquiry fee may not be imposed at that time because a dormancy fee was already imposed earlier that month, and a balance inquiry fee is a type of service fee," the rules state.
The rules do not specify the amount card companies can charge, but restrict maintenance or service fees, balance inquiry fees, ATM fees, point of sale fees and transaction fees charged for reloading.
Nor do the rules prohibit initial activation fees or "cash-out" fees, and Rinearson said she expects marketers to raise activation fees as a result.
"That's one of my complaints," she said. "That means that everyone pays more for these cards" up front.
