Feds Crack Down on Bank Gift Cards, Retail May Be Next

The increased fee disclosure requirements could benefit retailers, as the purpose of a gift card is to encourage customer loyalty.

Federal regulators the week of Aug. 14 clamped down on bank-issued gift cards, forcing the banks to much more prominently disclose expiration dates and any inactivity fees. Industry observers expect federal authorities to soon extend such rules to retailer-issued gift cards.

"The gift card market is growing rapidly, and the terms and conditions of various cards can vary widely," said Comptroller of the Currency John C. Dugan. "Its very important that national banks engaged in this business adopt robust disclosure policies so that consumers understand what they are getting when they buy or receive a gift card."

The government guidance said makers of bank gift cards "must put the expiration date on the front of the card, disclose the amount of any monthly maintenance or inactivity fees, and provide a phone number or Web address."

Issuers of the cards must also take steps to make sure that the users of those cards know that information, because the purchasers of the cards are often not the ultimate users.

"Issuers should not advertise a gift card as having no expiration date if monthly service or maintenance fees, dormancy fees or similar charges can consume the card balance," a government statement said. "Similarly, if fees may consume the card balance before the stated expiration date, disclosures related to that expiration date should explain that possibility. Issuers should also avoid describing gift cards as if they are gift certificates or other payment instruments more familiar to consumers."

The issue is less that consumers are being misled and more that retailers are trying to navigate a series of complicated state and federal tax rules for handling such payment forms.

"Merchants apply expiration dates and inactivity fees to gift cards as a direct result of state escheatment laws, which require gift card issuers to return the unused portion of a gift card to the state as tax after a certain period of time," said Bruce Cundiff, a senior analyst for Javelin Strategy & Research, in Pleasanton, Calif., and a former Jupiter Research analyst. "If merchants (and banks, for that matter) were able to recognize gift card revenue at the time of the sale, rather than at the time of redemption, there would be little motivation to apply expiration dates or inactivity fees. The government, for its part, sees a lucrative source of revenue and wants to protect it. Its rather hypocritical to position the action taken as helping consumers."

These rules could actually help retailers, however, as few retailers want to make a lot of money from keeping unspent gift card dollars. For one thing, the tax and related business issues make the money less profitable. But the much greater concern is that a gift cards objective is to encourage more consumer spending and merchant loyalty. A card that dies with cash on it represents dollars not spent and upsell opportunities lost (in which a consumer uses a $25 gift card to pay for part of a $50 product) and likely yields a very unhappy customer.

With many retailers today—such as Subway—merging gift cards with CRM and loyalty cards, the incentives to very fully disclose gift card limits become extreme. Lets say a consumer has a $25 gift card and uses $23 of it, leaving a $2 credit. The consumer might be inclined to toss it in a drawer and forget about it. The merchant could e-mail that consumer and say, "We notice that you have $2 left on your gift card. If you come in and use it in the next two weeks, well quintuple that owed amount." For a nominal $10 cost, the retailer will likely bring the customer back in and boost loyalty.

/zimages/4/28571.gifRead more here about Subways merging of gift cards and loyalty programs.

Of the new rules, "This is sort of a shot across the bow" of retailers that issue gift cards, Cundiff said, adding that the Federal Trade Commission might get involved in issuing rules for merchant gift cards as well. "Its a nightmare for merchants to handle" the tax tracking across many states and federal agencies, he said.

Another analyst, Paula Rosenblum of the Retail Systems Alert Group, said an important issue is consumer perception. "It is certainly better to inform customers up front about charges, fees and expiration dates than to surprise them after the fact," Rosenblum said. "It would be a shame if consumers jaundiced view of rebate programs got extended to gift cards as well. Gift cards have been so well received it would be a pity if sleight of hand created ill will."

Retail Center Editor Evan Schuman can be reached at Evan_Schuman@ziffdavis.com.

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