Tis the Season for Gift Cards, But Credit Unions May Have New Regulatory Hurdles to Consider

ARLINGTON, Va. – Gift cards, prepaid card products that usually carry the Visa, MasterCard or American Express logos and which can be given as gifts in place of the more traditional gift certificates, seem poised for a strong holiday season in 2004 and a very active 2005. They can be used anywhere that credit cards can be used, carry the same charge back and other consumer protections that credit cards carry and are generally very affordable. But even as more credit unions move toward offering their members the popular gift option, there are indications that a number of different legal card details surrounding the cards remain to be worked out and that has led some credit unions to either back off from offering cards to put off making a decision about them. “While I am cautiously optimistic that the regulatory questions surrounding gift cards will be worked out,” said Tim Kaliban, assistant vice president with Certegy, “certainly right now they remain to be worked out.” Certegy processes credit card transactions for 2,500 credit unions and began offering gift cards that carry the Visa logo this year. Kaliban explained that the regulatory questions around the cards touch upon three broad areas: how to handle money which are put onto the cards and then not used, whether gift cards and payroll cards need to have a paper statement attached to them and whether and how regulators should address the fee structures that accompany the cards. In addition, questions have come up about whether state laws which could seem to cover gift cards would do so for cards issued by national banks or federally chartered credit unions, Kaliban explained. The Three Regulatory Categories Normally, when banks or credit unions have savings or checking accounts whose funds are apparently abandoned they are required by law to try their best to find the account holders and, if they cannot, to turn the funds over to the state as part of something called escheatment. Regulatory questions have arisen, Kaliban said, over whether these cards are depository products and, if so, whether they should be treated in the same way as far as escheatment is concerned. “One problem of course is that many of these cards are purchased anonymously and for relatively small amounts of money,” he said. “It’s unclear how a credit union would track down a cardholder who had been given the card as a gift and likely not know where the gift card had come from,” he said. The second regulatory question, whether a gift card is required to receive a printed statement as according to the Federal Reserve’s Regulation E. This issue really has more to do with payroll cards than gift cards, Kaliban explained, but gift cards have been caught up in it. “Obviously it would be very expensive for card issuers to have to provide paper statements for each gift card,” Kaliban said, “so the hope is that card issuers will be able to provide statements online or only have to provide paper statements for payroll cards.” The last regulatory area is the one that could be a killer for the product, Kaliban said, the question of fees and fee structures. While almost all the gift card products have a nominal fee up front to the purchaser, they also have an additional fee structure which covers things like balances left on cards for more than six months or refreshing the card. These additional fees, Kaliban said, are necessary to keep the cost of the card to the purchaser low enough that the cards will remain viable consumer options. “Right now a gift card might cost the purchaser $1.50 or $2.00 to buy,” Kaliban said, “but if additional fees are not allowed the price might rise to $6.00 or $8.00 and that is just not nearly as marketable to consumers,” he said. The fee issue plays into the preemption issue as well, Kaliban explained, because national banks have asserted that their gift cards are not subject to state regulations and laws which might preclude additional fees but the matter has not been placed before a court for resolution. Until these questions are resolved, Kaliban opined, gift card demand is likely to remain strong but some credit unions may hang back until regulators signal more clearly where they plan to go with this new product. Significantly three credit unions, in Connecticut, Massachusetts and New Hampshire, have told Liberty Card Services that they would hold off starting their own gift card programs using Liberty’s products until some of the bad press regarding gift cards had dropped off. Liberty Card Services is a branch of Liberty Enterprises, the noted check provider for credit unions which began offering credit unions a gift card product that they can offer their members with a minimum of start-up costs or difficulty. The Attorneys General of the three states have joined together to sue Simon Malls, whose gift cards are issued by Bank of America, over the company’s policy of deducting $2.50 from balances that remain on gift cards longer than six months. “They really just wanted to let some of the press attention this case has brought die down before they rolled out their cards,” said Michelle Thornton, president of Liberty Card Services. “They really weren’t concerned about the case itself since our cards are also issued by a national bank.” Thornton said she would not feel comfortable releasing the names of the bank or the credit unions involved. Both Thornton and Kaliban reiterated that they feel bullish about the market and that these regulatory questions would eventually be resolved. “Our credit unions have told us that these cards have enormous appeal to their members,” Thornton said. “We don’t see that ending any time soon.” For example, even though the three credit unions have recently slowed down their gift card efforts because of worries over bad publicity the cards have been getting, Liberty Card Services has signed up over 100 other credit unions for the gift cards since it announced their availability in early October 2004. -