[IMGCAP(1)]
Consumers who buy and use open-loop gift cards long have complained to providers and issuers how dormancy or inactivity fees erode the card's value.
The Credit Card Accountability, Respon-sibility and Disclosure Act of 2009 will address these fees, but two gift card issuers have jumped ahead of the new federal regulations and have eliminated all after-purchase fees.
GiftCards.com two weeks ago eliminated expiration, transaction and replacement card fees on its Visa-branded gift cards; in 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 trumpted the elimination of a $2 monthly fee it deducted starting 12 months after the purchase date. The change applied to cards consumers already purchased and to cards yet to be sold, Alpesh Chokshi, president of AmEx's global prepaid division, said during a conference call. The company also eliminated expiration and replacement card fees.
Gift cards generally have an expiration dates on them so cardholders can use the plastic for online transactions where the information is required for payment. Funds in the card accounts associated with American Express and GiftCards.com do not expire; users can ask for replacement cards with new expiration dates.
In both instances, AmEx and GiftCards.com cited consumer feedback as the primary reason they eliminated after-purchase fees.
"The majority of customer-service calls we had gotten prior [to the announcements] were about the administrative fees," Jason Wolfe, GiftCards.com CEO, wrote in an e-mail to ATM&Debit News. "These are now eliminated, and customers are more confident in buying our product."
AmEx at the time of the announcement believed the changes would give it an advantage with consumers. But its moves to cut fees do not necessarily translate into more consumers purchasing the issuer's cards, says Adil Moussa, an analyst with Aite Group, a Boston-based consulting firm.
"The question is [whether] the American Express [network] is large enough to really entice people to buy the cards," he says.
Preference and loyalty ultimately will factor into which open-loop gift cards consumers buy, regardless of the fee structure, says Brian Riley, research director in the bankcards practice at TowerGroup Inc., a Needham, Mass.-based consulting firm.
Other gift card issuers and providers currently have no plans to drop fees.
Discover Financial Services, which, like AmEx, issues its own gift cards, has no plans to drop fees, the company wrote in a recent e-mail to ATM&Debit News. Discover charges a $2.50 inactivity fee after 12 months unless prohibited by state law.
NetSpend Corp., which offers open-loop MasterCard- and Visa-branded gift cards through retail partnerships, says it is not aware of any imminent changes to the cards' fee structure by it partnering issuers.
Under the Credit CARD Act, gift cards cannot expire within five years of activation or of when the cardholder last loaded funds into the card account. The law also bans inactivity fees or service fees on gift cards unless there is inactivity during a 12-month period and the issuer clearly discloses all fees before consumers purchase the card. Issuers also can charge the fees only once per month.
Most of the provisions are scheduled to take effect in February, but Congress is debating whether to make them effective sooner in an effort to stop credit card issuers from increasing interest rates.
While eliminating fees now may appear to reduce a gift card issuer's or provider's bottom line, "providers will need to seek ways to generate revenues outside of these fees," Wolfe writes.
Indeed, new government regulations and changing pricing models have put the gift card sector in a state of "trying to find itself" and somehow build long-term relationship with consumers, Riley says.
"It's a very different model than the credit card model," Riley says. "With a credit card model, you're assuming a long-term relationship with somebody; [gift cards] tend to be one-time transactions, unless they're reloadable." GiftCards.com offers its customers the option of purchasing a customized standard greeting card or one customized with a personal picture on the card.
The company charges $4.95 for its gift cards plus $1 per customized feature. "These [additional services] are making up for lost revenue from administrative fees," Wolfe writes.Breakage, which is a term used to describe unused value left in card accounts, may come into play for networks that issue their own cards, says Moussa. Some issuers consider the funds theirs, though some escheatment laws require them to turn over such funds to the state.
Despite the changes, gift cards still remain popular, especially during a down economy and during the holidays, industry data suggests.In April, the National Research Network and Hartman Group Inc. revealed in a study report that the percentage of consumers purchasing gift cards increased significantly during the previous six months.
Fifty-seven percent of U.S. consumers purchased at least one gift card within the past year, compared with 52% of consumers who purchased a gift card between September 2007 and August 2008, the report says.Consumers purchased an average of five gift cards during the 12-month period, but the average load was down, to $46 from $54 the previous year, the study found. Based on past trends, open-loop gift card sales should grow this year, Wolfe believes. "In 2008, sales increased to 44% from 35% the previous year," he wrote. ATM
