Guest Post by Mark Romanelli
When it comes to gift card legislation, some regulations are in the best interest of consumers, while others may questionable—do they benefit the public, or just specific lobbying groups?
Since the 2008 Great Recession, the government has implemented a number of new banking regulations and laws in an effort to protect consumers and to attempt to prevent future financial meltdowns. Since gift cards are a financial instrument, specific rules have been carved out to cover these products because they impact consumers. When it comes to gift card legislation, some of these regulations are clearly in the best interest of consumers, while others could be seen as questionable—do they really benefit the public, or just specific lobbying groups? Here are my thoughts.
Laws that Made Gift Cards Better
Just a few years ago, it was not uncommon to receive a gift card that had an expiration date of one year from the date of purchase. By the time you received the gift card from a friend or a loved one, several weeks or months may have already transpired, leaving you with little time to use the gift card. As a result, people who tucked gift cards away in their wallets to use on special occasions often found the cards had expired and could no longer be used. Some recipients also discovered that the cards hadn’t expired, but had lower balances than remembered. The “slow drain” came as a result of companies charging monthly maintenance fees to systematically reduce unused card balances to zero dollars.
This was clearly a problem for consumers. So in 2009, the government passed a law called the “Credit CARD Act” which placed several consumer-friendly rules around gift cards. Among those are that gift certificates or cards cannot expire within five years of purchase, and also that fees that sellers are allowed to charge on gift cards are limited.
As a result, most major retailers and gift card providers do not charge usage or inactivity fees on their gift cards, and the funds never expire. Policies vary based on the card seller, though, so be sure to check the disclosure statement on the back of your gift card to see if any fees or expiration terms apply.
Laws that Made Gift Cards Confusing
For the past couple of years, there has been an ongoing battle in Congress over the fees associated with credit and debit payments. Two powerful lobbying organizations continue to argue their cases–big box retailers are represented by the Merchant Payments Coalition (MPC) and the major banks and payment networks are supported by the Electronic Payments Coalition. The primary issue at hand is the interchange fee retailers pay banks for the ability to accept payment cards (credit, debit, or prepaid.)
Historically, the interchange fee has been a small percentage of the total sale with the percentage varying according to the size of the retailer and the type of payment (debit, credit, and online transactions.) But, retailers argued that this fee is too high. They said the fee necessitated charging higher prices and hiring fewer employees to sustain their businesses. Conversely, the Payments Coalition believed that the fees were fair and, if reduced, the merchants would keep the profit rather than pass the savings on to consumers. They feared consumers would end up paying more through new bank fees (e.g. no more free checking accounts) as was the case in Australia 10 years ago when the Australian government capped interchange fees.
The retailer’s argument, however, prevailed. In 2010, the Senate passed an amendment (within three days of it being introduced) to cap the interchange fees that a financial institution is allowed to charge a retailer. This law went into effect just over two years ago on October 1, 2011. In addition, retailers were given the ability to charge consumers a new fee for choosing a debit or credit card provided they clearly disclose this fee at the checkout—though we have not seen this implemented at larger retailers yet.
How does this affect gift cards?
Gift cards have always been run as credit transactions. But by the end of 2013, an additional provision to the interchange law goes into effect that requires bank-issued prepaid card providers—Visa®, Mastercard®, Discover® and American Express®—to provide Personal Identification Numbers (PINs) so their gift cards can be run as debit transactions.
The reason behind this change is that PIN-based, debit card transactions are considered safer (less fraud risk) than credit card transactions. Thus, retailers pay a lower interchange fee for debit transactions than for credit transactions. In fact, retailers pay about a one-third less for a debit PIN transaction ($0.08 per) versus a credit transaction ($0.23 per.) So, theoretically, that extra $0.15 should go back to consumer pockets, if the retailers keep their promise.
By allowing retailers to process gift cards as debit transactions, the merchants will pay a lower rate. But the consumers will be confused. Most people associate a PIN with being able to use the card at an ATM or to receive cash back from a register. This is NOT the case. The gift card PIN can only be used to turn the purchase into a debit transaction. Consumers cannot get cash from their gift cards. We anticipate this leading to a lot of confusion at cash registers.
The good news for consumers, however, is that they can still use their Visa and Mastercard gift cards as credit transactions so they don’t need to remember the PIN codes. And the ruling only applies to bank-issued prepaid cards that can be used virtually anywhere. Gift cards you buy from merchants that can only be used a one location or at a chain will not have a PIN.
Retailers and financial organizations continue to do battle over this issue (and more, when it comes to gift card legislation!), so future law changes are likely. Hopefully the outcome is positive for consumers.
~~ Mark Romanelli