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How Retailer Gift Cards Stack Up to Prepaid Gift Cards

By Industry Insider | Published August 27, 2013 | Google+

With the holiday season just a few months away, people will soon be buying gift cards in droves. Since there are many choices, I wanted to explore the advantages and disadvantage of retailer cards versus prepaid debit cards.

 Gift Card Designs

While several retailers put out impressive gift card designs and gift card holders, my favorite gift card is the Visa® prepaid debit card I once received from my great aunt. It had one of our family pictures printed on the front. That card had special meaning to me, because the picture brought back memories of the trip we took to her lake cottage one summer.

 In addition to the card design, most gift cards also have rules and regulations printed on the back of the card or in accompanying packaging. Retailer gift cards are typically quite simple because they can only be used at the store that issued the card. Visa gift cards, on the other hand, come with a little more fine print. Gift cards from GiftCards.com also include helpful hints such as how to use the card most effectively. Both cards referred me to customer service numbers and cardholder websites.

 Government Protection

For better or for worse, the government gets involved in many parts of our lives … even our holiday gifting. The Federal Trade Commission (FTC), the nation’s consumer protection agency, has a great deal of information on their website. Here are a few things I gleaned and believe are important things to know about both retailer and bank gift cards.

  • New rules for gift cards went into effect on August 22, 2010 as part of the “Credit Card Act of 2009.” Though passed in 2009, companies had a grace period in order to get their cards and processes in compliance – but that timeframe has expired. So all companies must now comply with the new rules.
  • Gift cards cannot expire for at least five years from the date on which the card was activated, or from when money was last loaded onto the card. If there is an expiration date listed on the card earlier than the five year deadline, the money can be transferred to a replacement card free of charge.
  • Inactivity fees can only be charged once a month after a card has gone unused for at least a year.
  • The expiration date and fees must be clearly disclosed on the card itself or on its packaging.

While bank-issued gift cards tend to have expiration dates and non-use fees, several retailers offer gift cards with “no fees and no expiration.” Since bank issued gift cards can be used anywhere, the issuing company only makes a profit on gift cards that are unused. Retailers, on the other hand, make money when you use the cards in their store. They don’t have to charge a fee,  because your shopping is what pays their bills, and if you don’t use the card at all, they may retain the unused balance of the gift card on their books as well. Both retailer and bank-issued gift cards are profitable, but in different ways.

 Complaints Options

While I’ve never had a problem with a gift card, others have. The best place to start addressing a problem is with the issuing merchant or bank. If they can’t fix the problem to your satisfaction, you can file a complaint with the following organizations:

  • FTC or state Attorney General for retailer-issued gift cards.
  • Comptroller of the Currency’s (OCC) Customer Assistance Group for bank-issued gift cards.

 Bankruptcy Impact

The new gift card rules do not protect consumers if the card issuer files for bankruptcy or goes out of business. Several large retailers have gone bankrupt in the last two years, including The Sharper Image, Linens ‘N Things, Circuit City, and KB Toys. In each case, some gift card holders were left with worthless gift cards because they missed the small window provided by the retailers for gift cards to be redeemed during the liquidation sale. Bankruptcy and store closures are less likely to impact the usability of bank-issued gift cards since they can be used almost anywhere.

 Lost or Stolen Gift Card Recovery

Lost or stolen retail gift cards are difficult to replace. Unless the person who gave you the gift card can prove to the merchant that he or she purchased the card and reported the loss prior to the balance being used, the gift card recipient is out of luck. Some retailers provide the ability to register a gift card which is a nice safeguard for this type of situation. Although individual retailer policies vary, you may be able to cancel and reissue a lost or stolen gift card if it has been registered.

 Bank-issued gift cards, on the other hand, come with far greater protection. Visa gift cards are covered by Visa’s Zero Liability policy and MasterCard® gift cards are covered by their Zero Liability Protection. These programs generally mean that cardholders won’t be held responsible for fraudulent purchases as long as the loss or theft is reported promptly. There are some exceptions, such as Visa purchases made with a PIN and not processed on the Visa network, for example. Consumer Action pointed out in its prepaid cards survey that there are some gaps in this protection, so be sure to read the fine print.

 To be on the safe side with either type of card, register the card if possible, and keep the activation receipt in case there is a problem.

 The Choices

 Both retailer and prepaid gift cards have a place on holiday wish lists. While retailer cards are free and will not expire, bank-issued gift cards offer greater protection against bankruptcy and theft. Both are convenience to use, but bank-issued gift cards can be used at more places. And finally, though retailer gift cards and generic bank-issued gift cards may have nice designs, neither compares to the heartwarming response you’ll get with a personalized bank-issued gift card—especially one from a great aunt who took the time to create lasting, loving lake house memories … twice. Once when she invited us to her home – and again when she put a cherished photo of our visit on a gift card.

~~ Doug Blasiman, Former CFO of GiftCards.com

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