All agree the new rules for prepaid gift cards are just common sense.
But implementing the required changes will be a challenge, and many worry the short time frame for doing so could hurt sales just as the busy holiday season starts to get underway.
The rules limit the fees collected on dormant cards and require better disclosure of the fees and expiration dates.
Though the changes are part of last year's Credit Card Accountability, Responsibility and Disclosure Act, the deadline for complying had been left open initially. Then in March the Federal Reserve Board decided on Aug. 22 as the effective date.
"The industry was hoping they could keep the old plastic on the shelf until January because of the holiday season coming up," says Judith Rinearson, a partner at law firm Bryan Cave, who represents the Network Branded Prepaid Card Association and Retail Gift Card Association. Instead, "everyone is scrambling," she says.
Prepaid players such as American Express and Green Dot Corp. prepped for the regulations by dropping fees, adding disclosures or making changes to the expiration dates on their gift cards. Still, many in the industry are worried about upfront costs that issuers are likely to pass on to consumers—which ultimately could dampen sales.
They also anticipate a possible shortage of prepaid cards for sale to consumers, because issuers are going to have to replace cards sitting on retailers' shelves that won't pass the Fed's muster after August.
That's a massive amount of cards to change out. "I would say hundreds of millions," says Ralph Calvano, senior vice president and general manager for prepaid solutions at Fidelity National Information Services, a technology vendor.
Under the new regulations, fees for inactive or dormant cards are barred in the first year after purchase, and allowed only on a limited basis afterwards. Cards cannot expire for at least five years, and expiration dates among other disclosures must be printed on the cards.
The existing cards won't do since they not only lack the disclosures, but the old expiration dates and fees are embedded in the mag-stripe.
By the NBPCA's estimate, more than 90 percent of prepaid gift cards are drained of funds within a month after they are purchased. But the regulations are specifically targeting those dormant gift cards that consumer groups argued were eaten up by monthly maintenance fees and had hard-to-find expiration dates.
The gift-card market is vast—and growing quickly. According to Mercator Advisory Group, the number of branded gift cards issued in 2008—the latest data available-jumped 54 percent from the year earlier, to 7.77 billion.
Open-loop cards are the most impacted by the new rules. Often branded by Visa, MasterCard, Discover or Amex, these gift cards can be used anywhere their regular credit cards are accepted.
Closed-loop cards, which are good only at one retailer or group of retailers, largely are unaffected, because most don't have expiration dates or fees, according to Rinearson.
The new rules don't apply to branded payroll, insurance or government benefit cards. Also excluded are the reloadable, branded, prepaid cards that retailers sell—though the Fed requires that they now be displayed apart from the branded gift cards.
John Barbella, senior vice president of the payment solutions group at the $2 billion-asset Bancorp Bank in Wilmington, Del., says the main challenge for prepaid issuers like his company is coordinating with all touch points in the gift-card loop—distributors, card associations and retailers—to account for the whereabouts of the stock that needs to be replaced.
"We're going to have to work closely with our program managers," who, in turn, must coordinate with many thousands of retail stores to change out the cards, Barbella says. "We are also working on behalf of the associations to gain approvals on what the cards need to look like."
Rinearson says manufacturers are having trouble including all the necessary disclosures of terms and conditions on the cards. "The rewards cards have to have the words 'promotional rewards card' on the front—it can't be a sticker," she says. And if a card expires in less than seven years, then there also has to be a disclosure on the card's face explaining that the "card expires, but the funds do not," says Rinearson.
The front of the card also needs to have a phone number to call for a replacement card. (Never mind that, if a card is lost, having the number on it is unlikely to be helpful at that point.)
"We are still very early on trying to figure out how this is going to play out," says Rinearson. "I'm talking to a lot of issuers, and we're trying to figure out how to squeeze out the data and fit everything in."
Prepaid gift cards are a low-margin, high-volume business. So replacing the stock only further challenges a business model in which issuers charged fees on dormant cards to help offset upfront costs. Those monthly maintenance or inactivity charges helped supplement a lower cost to purchase the card—usually between $4 and $6.
A higher initial cost might turn off consumers. "I think there's a price sensitivity that would have them say, 'I'm not going to pay more than 'X' for this card,' " says Barbella, who does not know what that breaking point might be. "I don't think they are going to pay $14.95, but they seem to have no problem paying $5.95."
Despite such concerns, industry trade groups supported the changes, saying many players already do much of what the Fed aims to accomplish. NBPCA president Kirsten Trusko conceded that the new rules are "tough but fair and reasonable" in a comment letter on the issue this past fall.
But besides the impact on fees and stock replacement logistics, the industry is struggling with other loose ends, such as conflicts between the new Fed rules and state laws.
For example, card companies have to follow state escheat laws that revert abandoned property to public coffers after a certain period—often three years. If the Fed requires cards to be active for five years, how do banks and issuers comply with both the federal regulations and state laws?
"What do you do with escheat? The rules are not in sync," says Calvano.
The Fed also was unclear about how banks and issuers should contend with state laws that are more restrictive on fees (some states disallow any fees, even after a year). "The regulations indicate that the Fed is going to be the entity that makes that determination," says Rinearson. "They haven't yet."