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Friday, March 26, 2010

Gift card regs put prepaid industry under pressure

On March 23, 2010, the Federal Reserve Board issued the final rules to implement the gift card provisions in the Credit Card Accountability, Responsibility and Disclosure Act of 2009 (The CARD Act). The rules, which amend Regulation E of the Electronic Funds Transfer Act of 1978, restrict fees and expiration dates on certain types of prepaid cards and require providers to "clearly" document terms and conditions on the cards.

The Fed said the rules cover gift certificates, closed-loop gift cards and open-loop, network-branded, general-purpose prepaid cards, but exclude cards not marketed or labeled as gift cards or gift certificates, such as some open-loop, network-branded reloadable cards and cards received through loyalty, award or promotional programs.

The rules restrict dormancy, inactivity and service fees, as well as expiration dates. Fees kick in only after cards have been inactive for one year, and then only one fee can be charged per card per month. Additionally, all cards covered under the regulations must come with at least a five-year expiration date.

Not enough time?

Prepaid card businesses have been given a deadline of Aug. 22, 2010, to comply with the rules. And that is where the Network Branded Prepaid Card Association takes issue. While the prepaid card industry's leading advocacy group supports the new rules, it believes an August deadline is problematic.

"The tight deadline will be logistically difficult to meet and may limit consumer access to what are consistently ranked as the most popular gifts during the holiday season," the NBPCA said in a statement. "This will be disappointing and inconvenient for consumers and costly for retailers struggling to weather the recession."

Terry Maher, General Counsel for the NBPCA, said approximately 100 million gift cards currently on racks and in gift card malls across the United States will have to be disposed of and replaced with new cards that comply with the rules – a difficult feat to accomplish by August. Among the steps that need to take place, he said:

  • Visa Inc. and MasterCard Worldwide will have to update their gift card regulations.
  • Cards and card packaging have to be redesigned and then undergo the card brands' approval processes.
  • New cards have to be manufactured and encoded.
  • Retail displays may have to be modified.
  • Card distributor agreements will have to be rewritten.
  • Back-end data processing systems will have to be reprogrammed.

Environmental impact

In addition, Maher said disposing the out-of-compliance cards will be costly and time consuming, not to mention the environmental impact. "Shredding a 100 million plus of cards, cardholder terms, card carriers, it's going to be a tremendous waste of resources," he said.

According to Maher, the NBPCA suggested to the Fed a January 31, 2011, deadline, to allow the old card stock to be displayed but electronically modified to comply with the five-year expiration date, and with fees suspended for 12 months. Through advertising, consumers could be informed of the new regulations that apply to the old cards, while giving the industry more time to complete the transition, he added.

"What unfortunately may happen is there might not be as much product on the shelves this August when the rule kicks in," Maher said. He believes this will make neither merchants nor consumers happy.

Given the logistical difficulties inherent in getting new cards through the distribution channels and into stores, and retailers' reticence to having distributors in their stores during the holiday season, the problem of reduced gift card inventory "might go all the way through until January," Maher said.

For more information on the new gift card requirements, go to federalreserve.gov/newsevents/press/bcreg/20100323a.htm. end of article

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