Court Sides with Mall Owner On Bank Gift Card Rules

  A U.S. district court in Concord, N.H., has ruled that states cannot regulate fees and expiration dates on network-branded gift cards issued by banks and thrifts regulated by the U.S. Office of the Comptroller of the Currency or the Office of Thrift Supervision.
  The ruling, issued in August in a case brought by mall owner Simon Properties Group Inc., appears to give certain issuers of prepaid debit cards greater latitude in setting fees.
  But issuers and third-party distribution partners of network-branded gift cards likely will continue to tread carefully. Moreover, the ruling seems to favor financial institutions regulated by federal agencies over those regulated by state agencies.
  At the center of the New Hampshire case is a state ban on expiration dates and fees on Visa-branded gift cards Simon sells at its malls. U.S. Bancorp, a nationally chartered bank, and MetaBank, a federally chartered savings and loan, issue the cards. The state argued that Simon set the terms on the cards, not the bank issuers, so the cards were subject to state laws regulating merchant gift certificates.
  State courts agreed with New Hampshire's argument, but the federal court did not. "If there are to be any restrictions on fees associated with the gift cards, or limitations imposed on expiration dates, they must come either from Congress or the federal agencies empowered by Congress to oversee national banks and federal savings associations," the court wrote.
  David Rienzo, New Hampshire assistant attorney general, says the ruling means that Simon gift cards sold in New Hampshire can impose fees and expiration dates as the issuers of the cards see fit. "Since the banks set the terms and conditions, they would preempt the state," says Rienzo.
  The ruling hinged on an interpretation by the court that Simon is acting simply as a distribution agent for prepaid debit cards issued by the banks, says Rienzo. If Simon's deal with MetaBank and U.S. Bank changes to Simon setting the fees and expiration dates, then New Hampshire would seek to enforce its laws again, he says.
  The ruling did not address an earlier relationship between Bank of America and Simon, Rienzo says. In that relationship, Simon set the fees and expiration dates and "bought the plastic" from BofA, which only collected interchange from merchants when the cards were used, he notes.
  The Simon relationship between MetaBank and U.S. Bank is more formal, says Rienzo. Simon gets a commission from the banks for card sales at its malls, although both Simon and the issuers brand the cards.
  Rienzo says a fee and expiration-date ban still is in effect for gift cards that carry only a store brand and for network-branded gift cards issued by state-chartered financial institutions. He also says the state's fraud laws will be enforced over any false or misleading information on card fees presented to consumers who buy the cards.
  The Simon case was being watched closely by prepaid debit card industry executives who have complained about the growing list of states imposing a myriad of laws involving network-branded gift cards ("A Mishmash of State Prepaid Card Laws," March).
  The federal-court ruling should better define relationships between issuers and network-branded prepaid gift card distributors, says John Focht, U.S. Bank senior product manager of prepaid cards. But Focht cautions that other states have different laws on gift cards, and more court actions could come.
  U.S. Bank claims to be the leading issuer of Visa gift cards, having issued 10 million cards in 41 states. The bank expects to surpass 15 million cards by the end of 2006.
  The numbers, while significant for a bank issuer of gift cards, are relatively small compared with sales of gift cards branded only by retailers for use in their own stores, according to numerous estimates by industry consultants.
  MetaBank also is a major issuer of network-branded gift cards. The Sioux Falls, S.D.-based thrift also has a large business as a behind-the-scenes issuer of other types of prepaid debit cards.
  Simon co-branded gift cards cost $2 to purchase and impose monthly maintenance fees after a year of nonuse, except in New Hampshire where such fees were banned. Focht says those fees are becoming common for U.S. Bank gift cards.
  Other banks may enter the network-branded gift card business as a result of the ruling, says Focht. But he warns against banks imposing higher fees and earlier expiration dates as consumers would avoid such cards in favor of the store-branded variety, which typically do not impose a purchase fee.
  Full disclosure of fees, expiration dates and the identity of the bank issuer on cards all would be necessary for network-branded, bank-issued gift cards to compete with store cards, says Focht.
  Soon after the ruling, the OCC in August offered guidance on disclosure and marketing issues associated with gift cards.
  The agency noted that nationally chartered bank issuers should display expiration dates on the front of cards, disclose the amount of any monthly maintenance, or dormancy, fees and notify cardholders where to go to get more information about their cards.
  (c) 2006 Cards&Payments and SourceMedia, Inc. All Rights Reserved.
  http://www.cardforum.com http://www.sourcemedia.com