The Federal Reserve Board March 23 announced final rules that limit the fees and expiration dates for certain prepaid products, primarily open and closed-loop gift cards. The final rules take effect Aug. 22.
The gift card provisions fall under the Credit Card Accountability, Responsibility and Disclosure Act and are part of Regulation E of the Electronic Funds Transfer Act.
“This is just the affirmation of what was already in the act,” says Brian Riley, research director in the bankcards practice at TowerGroup Inc., a Needham, Mass.-based consulting firm.
The final rules prohibit dormancy, inactivity and service fees on gift cards unused for at least one year. The rules also state issuers may charge no more than one fee can per month after one year.
Other parts of the new rules stipulate the cards cannot expire within five years from being issued and that the terms of expiration must be clear and conspicuous.
Fee transparency is the most significant new rule, Riley says. “There was a lot of public outcry about it,” he says.
Most gift and prepaid card providers already were adhering to the proposed regulations when they were announced last year as part of the Credit Card Accountability, Responsibility and Disclosure Act of 2009. Prepaid companies such as Green Dot Corp. and nFinanSe Inc., for example, changed their card packaging to better highlight fees and expiration dates.
Some providers also already eliminated fees.
GiftCards.com late last year eliminated expiration, transaction and replacement card fees on its Visa-branded gift cards, and last March the Pittsburgh-based company eliminated the monthly maintenance fee. Pensacola, Fla.-based First Gulf Bank NA issues the cards.
American Express Co., which issues its own gift cards, in September trumpeted the elimination of a $2 monthly fee it deducted starting 12 months after the purchase date.
In both instances, AmEx and GiftCards.com cited consumer feedback as the primary reason they eliminated after-purchase fees.
An additional rule still is needed to address “the integrity of the funds, particularly when they are not insured,” as is the case when a retailer goes out of business, Riley says.
During the past couple of years, several high-profile retailers, including The Sharper Image Corp., filed for bankruptcy and went out of business. The high-end electronics retailer suspended gift card acceptance during the process, and consumers lost any funds on the cards.
Though gift card holders are considered unsecured creditors during a bankruptcy, they are unlikely to receive reimbursement after secured creditors have been paid, Riley says. A similar problem arose with Linens ‘n Things Inc.
“You’re in line with your $100 [gift card] claim against creditors seeking $400 million in liability,” Riley says. “You really have no chance of recovering that money.”
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