Advisories & Insights

Gift Cards: Risks and Challenges Posed by New Federal Rules

Many in the electronic payments industry are anticipating the February 22, 2010 publication by the Federal Reserve Board ("FRB") of the final version of its amendments to Regulation E implementing the gift card provisions at Title IV of the federal Credit Card Accountability, Responsibility and Disclosure Act of 2009 (the "Credit CARD Act").[1] The Credit CARD Act's gift card provisions and the FRB's amendments to Regulation E take effect August 22, 2010. As August 22 approaches, it will be imperative for payment card industry participants to be thoroughly informed of the Credit CARD Act's gift card provisions and the FRB's related rules. Moreover, such companies must proactively devise and implement comprehensive compliance strategies specifically designed to safeguard consumer rights under the Credit CARD Act and to minimize risk of government enforcement actions, private litigation, and related challenges.

On November 20, 2009, the FRB published proposed amendments to Regulation E regarding gift cards and requested public comment through December 21, 2009.[2] Among the more detailed and thought-provoking public comments were those submitted by the Network Branded Prepaid Card Association ("NBPCA"),[3] the American Bankers Association ("ABA"),[4] the Consumers Union of U.S., Inc.,[5] and Connecticut State Attorney General Richard Blumenthal.[6]

The NBPCA and ABA comments in particular seek to identify several areas of concern for those who must comply with the FRB's final gift card rules and urge the FRB to define key terms and impose disclosure requirements in a manner that recognizes the practical realities and challenges inherent in marketing and selling gift cards and other prepaid card products. Regardless of their final form, the FRB's gift card-related amendments to Regulation E will inevitably create new compliance and litigation risks and challenges for card issuers, marketers, program managers, retailers, payment card networks, owners of ATMs that honor gift cards, and merchant acquirers and third-party processors that advertise or sell gift cards and other prepaid card products.

Some important highlights of the Credit CARD Act's gift card provisions include the following:

In general, what products are covered?
Gift certificates, store gift cards, and general-use prepaid cards (collectively, "Gift Cards"), as those terms are defined in the Credit CARD Act. Gift Cards include retail ("closed-loop") gift cards that can be used to buy goods or services at a single merchant or affiliated group of merchants, and network-branded ("open-loop") gift cards redeemable at any merchant that accepts the card brand.

In general, what products are not covered?
Other types of prepaid cards, such as reloadable prepaid cards that are not marketed or labeled as a gift card or gift certificate, or prepaid cards received through a loyalty, award or promotional program.

In general, who is potentially covered?
Any entities involved in the issuance, distribution, or sale of Gift Cards (or the issuance or distribution of loyalty, award, or promotional Gift Cards) potentially are affected by the new statute and the related amendments to Regulation E. Such entities generally include card issuers, merchants, marketers, program managers, owners of ATMs that honor Gift Cards, payment card networks, and merchant acquirers and third-party processors that advertise or sell Gift Cards.

What do the Credit CARD Act and the FRB's proposed amendments to Regulation E generally prohibit or require?

• Expiration date restrictions. It is unlawful to sell or issue a gift certificate, store gift card, or general-use prepaid card subject to an expiration date unless: (1) the expiration date is not earlier than 5 years after the date on which the gift certificate was issued, or the date on which card funds were last loaded to a store gift card or general-use prepaid card; and (2) the terms of expiration are clearly and conspicuously stated. The FRB is considering two alternative approaches for applying new Regulation E amendments to the expiration of a Gift Card. Both alternatives would require the issuer to ensure that the card's underlying funds do not expire until a full 5 years has elapsed from the date of purchase and to provide, upon request, replacement gift cards free of charge.
• Dormancy fees, inactivity charges, and service fees. Such fees are prohibited unless: (1) there has been no activity on the card account for one year from the date that the charge or fee is imposed; (2) certain disclosures are made on or with the card; (3) only one fee is charged in a given month; and (4) any other requirements that may be imposed by FRB are met. Fees subject to the proposed restrictions would include monthly maintenance or service fees, balance inquiry fees, and transaction-based fees, such as reload fees and point-of-sale fees.
• Disclosure requirements relating to fees. Gift Cards must clearly and conspicuously state (1) that a dormancy fee, inactivity charge or fee, or service fee may be charged; (2) the amount of such fee or charge; (3) how often such fee or charge may be assessed; and (4) that such fee or charge may be assessed for inactivity. Additionally, the purchaser must be informed of such charge or fee prior to purchase, regardless of whether a Gift Card is purchased in person, via the Internet, or by phone.

How do the Credit CARD Act and its regulations relate to state gift card laws?
The Credit CARD Act's gift card provisions preempt inconsistent state laws. A state law is not inconsistent with the Credit CARD Act or its implementing regulations if the state law provides greater protection for the consumer than the Credit CARD Act. Thus, the EFTA creates what is sometimes referred to as federal "floor preemption." More than 40 states regulate gift cards in some fashion. Many states restrict or ban service fees or expiration dates. Some states only require disclosure of fees or expiration dates. Many states apply abandoned property or escheat laws to funds remaining on cards. Some states require that consumers have the option of receiving cash back on balances below a certain amount. While all states that regulate gift cards address "closed-loop" (or proprietary) cards in some form, many states do not regulate "open-loop" (i.e., network-branded) cards issued by banks or thrifts.

Will non-gift card products be subject to the new gift card rules?
General use prepaid cards – e.g., prepaid cards for the unbanked, payroll cards, and government benefits cards – are specifically excluded from coverage under the Credit CARD Act if they are reloadable and not marketed or labeled as a gift card or gift certificate. However, general purpose reloadable debit cards and other such non-gift card products that are nevertheless marketed or labeled as gift cards at any point in the card's distribution chain will be subject to the Credit CARD Act's prohibitions and disclosure requirements. Compliance obligations could therefore arise if, for example, a retailer were to display non-gift card products within an in-store "gift card mall" or otherwise promote the use of such cards as a gift card or gift certificate. Under the FRB's proposed rules, however, such products would nevertheless be excluded from coverage if entities subject to the rules proactively maintain robust policies and procedures reasonably designed to avoid such marketing. Assuming the FRB follows this approach in its final rules, it will be critically important – starting as early as February 22, 2010 – for issuers and marketers of general use prepaid non-gift cards to begin formulating comprehensive compliance programs that include, for instance, procedures requiring close and frequent communications with retailers to ensure that such non-gift card products are not marketed or labeled as gift cards.

How can I learn more about this topic?
There are a variety of resources for this purpose including, for instance, the FRB's website at http://www.federalreserve.gov/. Industry trade association newsletters and conferences are an additional resource. You should consult your company's legal department or knowledgeable outside counsel for legal advice on these and other electronic payments issues.