The Credit CARD Act which went into effect on August 22, 2010 has serious financial and operational consequences to issuers and distributors of prepaid cards especially gift cards. To prevent the estimated 125 million gift cards already manufactured from having to be destroyed, the requirement to place certain disclosures on the cards was extended to Jan 31, 2011.
So, what type of cards does the Credit CARD Act affect?
In general the Act covers non-reloadable gift cards that do not fit into one of the excluded categories. Just because a card has the technical ability to be reloaded does not prevent it from being considered a non-reloadable gift card and therefore subject to the Credit CARD Act. Reloadability refers to how the card is marketed. If a card that has the ability to be reloaded is marketed as a gift card then it may be deemed to fall under the jurisdiction of the Credit CARD Act. Prepaid program managers should be careful to not market legitimate reloadable cards along side gift cards either on j-hooks or on the web because regulators may determine that based on the confusing marketing messages consumers could confuse the reloadable cards with gift cards. The regulators may subsequently decide that the reloadable prepaid cards should fall under the restrictions of the Credit CARD Act.
How does the Credit CARD Act affect gift cards?
The area of most concern are the restrictions to the fees that can be charged to cardholders. The Act limits dormancy inactivity and service fees to only one fee per month only after 12 months of inactivity have elapsed. In general, “activity” includes any transactions that change the card balance with the exception of fees, failed transactions, corrected transactions, returns, balance inquiries or card replacement.
This rule severely restricts program managers from generating revenue from gift card between the initial sale until 12 months after the consumer ceases to use the card.
Card and Funds Expiration Dates
The Credit CARD ACT makes a distinction between the expiration dates of the card and the underlying funds:
- Card Expiration – Cards are required to have at least five years left until the card expires at the time the card is sold.
- Funds Expiration – Funds on the card must expire at least five years from the date the card was issued to the cardholder or the card’s expiration date, whichever is greater. So, if a card is purchased in January 2011 and the card expiration date is January 2018, the funds be maid available until January 2018 even though the minimum funds expiration period is five years.
In instances where a prepaid gift card expires before the funds expire the program has the option to distribute the funds to the cardholder or replace the card. However, the cardholder cannot be charged for either service.
Lost or stolen cards are not required to be replaced.
Which cards are excluded?
The Credit CARD Act does not apply to:
- Reloadable cards that are marketed as reloadable cards
- Phone cards
- Gift cards issued for loyalty, award or promotional purposes
- Cards that are not marketed to the general public
- Cards that are made of paper only
- Cards issued as a means of entry to a venue or event
Even if a card is excluded from the rules there must be certain disclosures on and or with the card including 1) the expiration date of the funds 2) card fees 3) methods to contact the issuer or program manager regarding fees and 4) that the card is issued promotional, loyalty or award purposes if applicable.
So, what does all this really mean to prepaid card program managers?
Program managers will have to rethink the revenue model for gift card programs. Revenue will have to be generated up front at the time of sale and inactivity fees will need to be increased in order to recoup as much of the remaining balance as possible after 12 months of inactivity. Gift card programs that were once revenue centers may also be shifted to the role of cost centers with the cost being recognized as a marketing or customer retention expense.
Program managers who distribute gift cards and reloadable cards will must be careful in the way these cards are marketed. This may require changes to websites to mark clear distinctions between the card types.