Federal Gift Card Law Should Also Address Bankruptcy & Gift Cards

Sen. Charles Schumer of New York plans to introduce in 2009 a federal legislation that will set some standards on gift cards. The legislation, to be called the “Fair Gift Card Act”, will require a five year minimum life span on gift cards and also eliminate some fees. Schumer plans to have the bill passed in time for the 2009 holiday shopping season. Sen. Schumer should be commended for standing up for consumers and I hope there is broad support in Congress for this legislation.

However, I do not think the proposed legislation goes far enough. First, the federal government is late to the party when it comes to limiting gift card fees and expiration. A majority of states now have laws restricting fees, expiration dates and disclosure policies on gift cards. While a federal standard will help in these areas, the two most important gift card issues that the federal government can help alleviate are merchant bankruptcies and their impact on gift cards, and regulating fees and expiration on bank issued gift cards (which are not regulated by the states but through the federal Office of the Comptroller of the Currency).

The recent surge in retailer bankruptcies and the negative impact they have had on consumers requires federal legislation to protect consumers. For example, customers of The Sharper Image and Bombay Company, both of which went bankrupt within the last year, were left with gift cards they could not redeem, with customers of the Sharper Image on the hook for over 20 million dollars in unredeemable gift cards. Customers of Bombay Company were only able to get 25 cents on the dollar in bankruptcy proceedings for their gift cards. The situation is even worse with small and local retailers, who continue to sell gift cards up until they declare bankruptcy, leaving their gift card holders with little to no option to redeem their gift cards. State law has not been effective here. What is required is federal law that forces merchants to set aside money to redeem gift cards during bankruptcy.

Another area federal legislation will help is with bank issued gift cards, otherwise called “open-loop” cards. These are gift cards that carry Visa, American Express, Discover, or MasterCard logo and can be used anywhere the card issuer is accepted. These cards are notorious for charging exorbitant fees for the convenience and flexibility they provide. Some of the fees include Initial Handling or Issuing Fee, Dormancy Fee, Renewal or Replacement Fee, Transaction or Statement Copy fee (charged for requesting a copy of gift card transactions or a copy of your gift card statement, typically $5), Foreign Currency Conversion Fee (charged for using your gift card to make purchases outside the United States, typically 3% of the purchase value in U.S. Dollars), Check issuance fee (charged when you ask the bank to send you a check for the rest of the gift card balance, typically $15), and Transaction fee / Balance inquiry fee (charged for point of sale (POS) balance inquiry).

This clearly is gift card fees run amok and should be reined in. While bank issued gift cards provide more flexibility than retailer cards (closed-loop cards), the convenience they provide does not justify the outrageous fees they charge, some of which are not apparent to buyers. Some have argued that retailers can afford not to charge fees on their gift cards since consumers typically spend more than the gift card value, thereby boasting sales, which compensates for the fees. Banks on the other hand only have two opportunities to make money on gift cards – through the card processing fees and upfront fees charged for buying the card. If that is the case, then why the need to charge all these additional fees, like Dormancy Fee, Renewal or Replacement Fee, and Check issuance fee? Congress should step in and protect the consumer from these over the top charges. If the federal Office of the Comptroller of the Currency is not up to the job, then Congress has a duty to act.