The Federal Reserve finalized rules on Tuesday to protect consumers from having the value of their gift cards trickle out or suddenly vanish.
Under the rules, which take effect Aug. 22, 2010, gift cards typically cannot expire in fewer than five years, are restricted from losing their value due to fees and must come with terms and conditions that are clearly disclosed prior to purchase. Those rules come as part of the landmark Credit CARD Act of 2009, which aims to protect consumers from the card industry's worst abuses.
Consumers had expressed anger that their gift cards can unexpectedly lose value or expire. "A gift card purchase shouldn't be treated differently than any other purchase," Diane M. Mogavero said in comments submitted to the Fed after the gift card rules were proposed in November 2009. "If a consumer purchases a table, does the vendor have a right to come later and remove a portion of the table, say a table leg, if the table isn't being used? Hardly."
Mogavero was one of more than 200 commenters, including consumers and industry groups, who spoke their minds about the original proposal. The major details of the final rules were largely unchanged from the original proposal.
What the rules require
The final rules say gift cards cannot expire earlier than five years after the date the card was first issued or when money was last loaded onto the card. In the past, consumers complained that if they bought a gift card and either set it aside or forgot about them for a year, they would find that the plastic had expired or that a parade of fees would have eaten up its value. The rules released today make that less likely.
The rules also ban a number of fees that can drain the value from gift cards over time. So-called dormancy fees, inactivity and service fees -- including recurring maintenance fees, and fees for reloading, checking your balance, using an ATM and more -- cannot be charged unless:
- The gift card hasn't been used for at least one year.
- No more than one of these fees is charged each month.
- The consumer is provided with "clear and conspicuous" explanations about the fees.
The Federal Reserve, America's central bank and chief banking regulator, requires that these disclosures be provided to the consumer before the card is purchased. Along with providing details about fees, issuers must also include a toll-free phone number (and a Web site, if one is available) that cardholders can use to learn about card fees or request replacement cards.
There are some types of cards to which the rules will not apply. The exceptions include:
- Prepaid cards for long-distance telephone services, wireless telephone service and voice over Internet protocol (VoIP) access time.
- Reloadable cards that are not marketed or labeled as gift cards or gift certificates, including payroll cards and flexible-spending account cards.
- Cards that are not available to the general public.
- Loyalty, award or promotional gift cards.
Mixed reaction to the rules
Not everyone is a fan of the Fed's rules. The Network Branded Prepaid Card Association, a trade association for the gift card industry, supported the bill in general, but issued a warning: Given the tight time frame for preparing, we just may run out of gift cards. "[T]he NBPCA does have significant concerns about the short deadline of Aug. 22, 2010, for companies to make card products that comply with the new rules," the association said in a release Tuesday afternoon. "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. This will be disappointing and inconvenient for consumers and costly for retailers struggling to weather the recession."
Dan Horne, a marketing professor at Providence College in Rhode Island, said the rules aren't tough enough. "These set a bar that retailers have been over for years," said He warns that the announcement could have a negative effect -- inspiring some issuers to adopt practices outlined in the rules that make gift cards more costly for consumers. "I'm fearful that some guy in a finance department is going to say, 'Hey, look what we can do,'" Horne said.
One industry analyst said the new rules are already shifting consumers' use of plastic, toward gift cards and away from credit cards. "We are seeing annual fees emerging on credit cards and the alternative payments such as gift cards are becoming fee-free. This is causing an exodus from credit to some of these alternative payment methods," said Anuj Shahani, director of competitive tracking services for Synovate's financial services group.
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