It’s November already. Can you believe it? Can the sounds of jingle bells be far behind? I don’t mean to rush the holiday shopping season, but if gift cards are on your holiday shopping list, or if you’re a merchant who offers gift cards, there are a few things you’ll want to be aware of.
I know, I know, gift cards are great. I love them too. They’re convenient for the gift giver because one size fits all. They’re also convenient for the gift recipient because you can buy want you really want or more once the holiday sales are in overdrive. What’s not to like?
Well, beneath their smooth shiny plastic surface some cards contain legal loopholes in the form of expiration dates and dormancy fees and other service charges. In May of this year, President Obama signed a new law (Credit Card Act of 2009) that tries to close those loopholes.
The new law distinguishes between three types of credit cards. The first is a general use prepaid card that can be used at multiple stores, for example a card issued by a mall owner for use anywhere inside the mall, or “open loop” cards issued, for example by banks, and can be used by payment networks such as Visa or MasterCard.
The second type of card is the traditional “gift card” issued by a merchant for use in stores that share the same name. For example a Macy’s gift card is good at any Macy’s store. Finally, the third type of card is the “store gift card” which works like a gift certificate and can be purchased in any amount which is then loaded onto the card when you buy it.
For the sake of discussion, I’ll refer to all three types collectively as “gift cards.”
Anyhow, the concern with these cards relates to dormancy fees, small amounts deducted from the value of the card because they are not being used, and expiration dates.
Dormancy fees are an embarrassing nuisance. Imagine how the recipient feels when presenting a gift card for payment only to discover it is worth a fraction of its “just like cash” face value, or nothing at all. Expiration dates aren’t much better.
The U.S. Federal Trade Commission clamped down on dormancy fees last year requiring businesses to disclose them. As a result, many businesses dropped dormancy fees altogether. So if you’re buying a gift card be sure to check the fine print for disclosures about fees or expiration dates. Nobody likes a surprise.
The new Credit Card Act takes things a step further. It makes expiration dates and dormancy fees unlawful unless certain conditions are met. So if you’re a merchant you’ll want to be sure that your cards are properly within the guidelines and disclose what they need to disclose because the penalties for non-compliance with the new federal law are pretty steep: civil penalties of up to $1,000 per violation in a civil suit and $500,000 or 1% of net worth in a class action suit. You can also get hit with criminal penalties if the violation is knowing and willful. We’re talking serious here.
Merchants also need to keep in mind that in addition to the new federal law, the states in which you operate have the power to impose even stricter consumer protection laws. It pays to check with an attorney knowledgeable about your particular state laws.
In a struggling economy folks buying gift cards also need to be mindful about retailers who file for bankruptcy or go out of business altogether. As it stands now, if the store shuts its doors for good your gift card can no longer be redeemed. If the store files for bankruptcy, gift card holders stand in line with other unsecured creditors. Either way, you can kiss a power shopping trip good bye. It’s not pretty.
Don’t get me wrong, gift cards are still great. Avoid embarrassment and shop with confidence by reading the fine print.