Feds Cracking Down On Bank Giftcards, Retail-Issued Giftcards May Be Next

Federal regulators on Monday clamped down on bank-issued giftcards, forcing the banks to much more prominently disclose expiration dates and any inactivity fees. Industry observers expect federal authorities to soon extend such rules to retailer-issued giftcards.

?The gift card market is growing rapidly, and the terms and conditions of various cards can vary widely,? said Comptroller of the Currency John C. Dugan. ?It?s very important that national banks engaged in this business adopt robust disclosure policies so that consumers understand what they are getting when they buy or receive a gift card.?

The government guidance said that bank giftcards "must put the expiration date on the front of the card, disclose the amount of any monthly maintenance or inactivity fees, and provide a phone number or Web address." Those giftcard-issuers must also take steps to make sure that the users of those cards know that information because the card purchasers are often not the consumer that will ultimately use the card.

"Issuers should not advertise a gift card as having 'no expiration date' if monthly service or maintenance fees, dormancy fees or similar charges can consume the card balance," a government statement said. "Similarly, if fees may consume the card balance before the stated expiration date, disclosures related to that expiration date should explain that possibility. Issuers should also avoid describing gift cards as if they are gift certificates or other payment instruments more familiar to consumers."

The issue is less one of consumers being misled and more of retailers trying to navigate a series of complicated state and federal tax rules for handling such payment forms. "Merchants apply expiration dates and inactivity fees to giftcards as a direct result of state escheatment laws, which require giftcard issuers to return the unused portion of a giftcard to the state as tax after a certain period of time," said Bruce Cundiff, a senior analyst for Javelin Strategy & Research and a former Jupiter Research analyst. "If merchants (and banks, for that matter) were able to recognize giftcard revenue at the time of the sale (rather than at the time of redemption), there would be little motivation to apply expiration dates or inactivity fees. The goverment, for its part, sees a lucrative source of revenue and wants to protect it. It's rather hypocritical to position the action taken as 'helping consumers.'"

These rules could actually help retailers as few retailers want to make a lot of money from keeping unspent giftcard dollars. First, the tax and related business issues make the money less profitable but the much greater concern is that a gift card's objective is to encourage more consumer spending and merchant loyalty. A card that dies with cash on it represents dollars not spent, up sell opportunities lost (where a consumer uses a $25 giftcard to pay for part of a $50 product) and likely yields a very unhappy customer.

With many retailers today?such as Subway--merging giftcards with CRM and loyalty cards, the incentives to very fully disclose giftcard limits become extreme. Let's say a consumer has a $25 giftcard and uses $23 of it, leaving a $2 credit. That consumer might be inclined to toss it in a drawer and forget about it. What if the merchant could E-mail that consumer and say, "We notice that you have $2 left on your giftcard. If you come in and use it in the next two weeks, we'll quintuple that owed amount." For a nomimal $10 cost, the retailer will likely bring the customer back in and boost loyalty.

"This is sort of a shot across the bow" of retailers that issue giftcards, Cundiff said, adding that the Federal Trade Commission might get involved in issuing rules for merchant giftcards. "It's a nightmare for merchants to handle" the tax tracking across many states and federal agencies, he said.

Another analyst?Paula Rosenblum of the Retail Systems Alert Group?said much of this comes down to consumer perception. "It is certainly better to inform customers up front about charges, fees and expiration dates than to surprise them after the fact," Rosenblum said. "It would be a shame if consumers? jaundiced view of rebate programs got extended to gift cards as well. Gift cards have been so well received it would be a pity if sleight of hand created ill will."