A Mishmash of State Prepaid Card Laws

  American Express Co. is drawing a line in the sand over AmEx-branded gift cards. The card issuer is discontinuing distribution of its gift cards in states with the most restrictive regulations on network-branded prepaid gift cards.
  AmEx does not distribute gift cards in New Hampshire, Rhode Island, Vermont, Connecticut and Hawaii. "There are certain states that have made it uneconomical to offer the cards," says Scott Scovel, AmEx vice president of gift cards.
  The distribution of network-branded prepaid gift cards is being hampered by fractious regulations, says Scovel. Some states, such as New Hampshire, ban monthly service fees on the cards, while others set limits on when a distributor can begin charging fees that would deplete remaining value on unused cards. Those restrictions can determine whether a network-branded card program is profitable, says Scovel.
  Still, other states are just now formulating rules on gift cards. And this includes determining whether to include network-branded prepaid cards in the definition of a gift card.
  There is pending legislation in New Jersey, for example, that excludes network-branded and bank-issued prepaid cards from gift card regulations. The measure only would regulate proprietary prepaid cards that are sold by retailers and redeemed for merchandise in their own stores. New Jersey's pending law, which amends the state's laws regulating gift certificates, describes such store cards as essentially replacements for paper gift certificates. As such, the law should not include prepaid cards issued by banks.
  Another distributor of network-branded gift cards, the Simon Properties Group Inc., which owns 170 shopping malls, does not black out certain states from its offerings. But Simon is embroiled in legal disputes over distribution of its Visa-branded cards, most of which are issued by U.S. Bancorp.
  New Hampshire successfully sued Simon in state court over alleged violations of state gift card laws. Simon now is suing New Hampshire in federal court, contending that federal regulators, not the states, have jurisdiction over fees on prepaid cards issued by federally chartered banks such as U.S. Bank.
  Spending on the Simon cards totaled $465 million in 2005, Michelle Sullender, a marketing vice president for Simon Brand Ventures, told the Stored Value Summit Jan. 31 in Coral Gables, Fla. In its 2002 launch year, Simon sold cards worth $221 million at 48 malls. The cards can be used at any merchant that accepts Visa, but about 75% of the spending is usually done at a store in a Simon mall, according to Sullender.
  Sullender says that half of the Simon gift cards are sold during the December holiday period. The average dollar amount loaded onto the cards is $67 and the average card transaction is $24. The cards can be loaded in value in a range from $20 to $500.
  For now, distributors, issuers and processors of network-branded gift cards, in addition to card networks, have a stake in persuading state legislators that the cards should be treated differently from store cards. "The key is the definition," Scovel says. "The store gift card is an advance purchase of merchandise. We are not selling merchandise. We are selling a service."
  Scovel says network-branded gift cards, which offer the convenience of being accepted at millions of locations, come with the expenses of maintaining networks and secure transaction-processing systems that store cards do not have.
  The issue of state regulations goes beyond any one distributor, issuer, network or processor, says Anil Aggarwal, chairman and founder of the recently formed Network Branded Prepaid Card Association. Aggarwal, who also is president of TSYS Prepaid, the prepaid processing arm of Total System Services Inc., says state regulations of network-branded prepaid cards will determine how fast the cards will proliferate in the coming years.
  Education Priority
  Educating and lobbying state legislators on gift card issues is a top priority for the association, says Aggarwal. "There is definitely some confusion in the (prepaid) market right now, and it does hamper some understanding of the value proposition," he says.
  Judith Rinearson, a partner with the Bryan Cave LLP law firm, says most of her law practice centers on regulatory issues concerning network-branded prepaid cards. "What I'm seeing is that more and more states are excluding network-branded cards" from gift card regulations, she says.
  But Rinearson predicts that lifting fee bans will be a slow process. Most distributors and issuers of network-branded gift cards do not mind fee-disclosure rules, but they bristle at fee bans, she says.
  The financial stakes appear to be high in the gift card market. Consumers purchased $45 billion in store gift card value in 2005, up 6.6% from 2004, according to the National Retail Federation. About $18 billion of the value was purchased during the Christmas holidays, according to the federation.
  A Merchant Gift
  Among the leading merchant gift card issuers is Starbucks Corp. During a conference call with analysts Feb. 1, Michael Casey, Starbucks executive vice president and chief financial officer, noted that the Starbucks card activity was a strong contributor to the January revenues. In January, Starbucks card redemptions accounted for an all-time record of $93 million, or 22% of company operated retail revenues in the United States and Canada, he said.
  During the company's fiscal first quarter, customers activated a record $221 million on Starbucks cards, up 35% from the previous year's first quarter. Customers loaded $165 million on the cards in December alone, Casey said. At the end of the quarter, more than $293 million was loaded onto Starbucks cards waiting to be redeemed, up 52.6% from $192 million at the end of the first quarter last year.
  Sales figures on network-branded gift cards were unavailable, but several industry studies place network-branded gift card sales a distant second to store card sales.
  Most merchants do not charge customers to purchase their store gift cards or impose a monthly service fee on unused value, and they have only passing interest in the regulatory debate, says Bob Skiba, general manager of Stored Value Systems, a gift card processor for about 500 retailer-branded card programs.
  EXISTING/PENDING GIFT CARD LAWS IN 2005
  Arizona: Requires disclosure of expirations and fees.
  Connecticut: Excludes gift cards from abandoned property laws.
  Georgia: Requires detailed disclosures for gift cards.
  Hawaii: Bans fees, requires two-year expiration dates.
  Maine: Limits fees, bans expiration dates.
  Maryland: Limits fees and expiration dates for four years, but excludes network-branded gift cards.
  Montana: Bans fees, requires disclosures.
  Nevada: Limits fees, requires disclosures.
  New Hampshire: Bans service fees, expirations*.
  New Jersey: Would limit service fees, ban expiration dates for 18 months, but excludes network-branded gift cards.
  North Dakota: Bans service fees, requires six-year expiration dates.
  Oklahoma: Limits service fees, requires five-year expiration dates.
  Pennsylvania: Bill would ban fees, expiration dates.
  Rhode Island: Bans service fees and expiration dates.
  Texas: Limits service fees, requires disclosures.
  Vermont: Bans fees, requires three-year expiration.
  Virginia: Requires disclosures.
  *The law is being challenged in federal court.
  SOURCES: EFunds Prepaid and ATM&Debit News.
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