Prepaid cash cards have become cash cows for most major retailers and banks, from Starbucks and Home Depot to American Express and Citibank. Sales of the heavily marketed cards have doubled since 2001 and are expected to reach $72.8 billion this year, up from $65 billion in 2005. But even as consumers have flocked to buy more of their mochas, iPods, and cashmere sweaters with these cards, a patchwork of state laws regulating everything from expiration dates to unspent credit could slow their growth.

State lawmakers say their interest in regulating these products springs from a growing chorus of consumer complaints that the disclosures and sales pitches made by companies can be confusing, even deceptive: failing to state clearly that the cards will expire after a set period of time, for example, or that the customer will have to begin paying a fee if the money isn’t spent by a certain date. Consumer watchdog groups and states attorneys general have battled in court to punish companies accused of violating consumer protection laws, and state officials and others are calling on Congress to enter the fray with national legislation. In August, the Office of the Comptroller of the Currency, which oversees federally chartered banks, became one of the first federal agencies to take the issue head on by advising banks to carefully disclose their cards’ terms and conditions. “The problem becomes when you try to operate [the cards] on a national level,” says Dennis Moroney, an analyst with TowerGroup, a research and consultancy firm. “That’s when you’ll see the federal government step in.”

On the market since the mid-1990s, gift cards are issued by almost all major retailers and credit card companies and carry a wide assortment of expiration and fee policies. Best Buy and Starbucks, for example, issue cards that never expire or charge service fees. Visa prepaid cards, on the other hand, expire within a couple of years and begin assessing a monthly maintenance fee of $2.50 the seventh month after purchase. American Express cards never expire but they do assess a $2 monthly maintenance fee two years after the purchase date.

The differing approaches arise from how the two main groups of prepaid card issuers—retailers and banks—profit from the branded plastic. Since retailers’ gift cards can only be used in their stores, the full value will eventually flow back in purchases. Typically, these cards don’t charge fees or carry expiration dates. Bank-issued cards are redeemable anywhere credit cards are accepted, and the firms argue that state laws banning service fees make it all but impossible to recover the costs of handling the cards, let alone to earn a profit.

Currently, at least 29 states have some sort of law regulating prepaid card expiration dates or fees, most passed within the last few years. They range from the most restrictive, such as Rhode Island’s 2004 law banning all expiration dates and fees, to regulations that focus only on disclosure, such as New Jersey’s requirement that expiration dates be conspicuously displayed on the gift card or certificate. Six states expressly prohibit expiration dates, while most merely require adequate disclosure and set the time that must elapse before a card can expire—ranging from 12 months to seven years. And about 11 states prohibit all service fees. Wisconsin, Iowa, and Kansas are among the states considering placing restrictions on gift cards. “States are continuing to enact new laws,” says Tacie Yoon, a Washington, D.C., lawyer who advises franchisors. In the absence of federal guidelines, “the most restrictive law becomes the norm.”

Laws prohibiting the fees spurred American Express, the New York based financial company, to stop selling its prepaid cards directly to citizens of five states with laws prohibiting service fees— Rhode Island, Connecticut, New Hampshire, Vermont, and Hawaii. A similar ban under consideration in Massachusetts might compel American Express to retreat from that market as well. The company will continue to sell its cards without service fees indirectly in several chain stores with which it has contractual obligations, including CVS Pharmacy and the Food Emporium. But the goal isn’t to abandon this market. Sales of the prepaid cards have doubled every year since they first hit the market in 2002, according to American Express spokesman Robert Sherman. “We’re not a merchant. We don’t sell a product. We sell a financial service, that’s what a gift card from us is,” he says. “We’re trying to help lawmakers understand the differences [between the two types of cards], so that they can make the right decisions in regard to customer choice.”

Some states, such as Tennessee and California, have crafted legislation that differentiates between the two types of cards and clearly exempts national prepaid cards from their regulations. But the most viable solution, according to many state officials, is for federal lawmakers and agencies to step in and legislate uniform nationwide regulations. After a district judge in New Hampshire concluded in a case involving a national mall chain that the state’s gift card laws were pre empted by a federal authority, Connecticut Attorney General Richard Blumenthal and State Treasurer Denise Nappier called on Congress to clarify what authority states have to regulate cards’ expiration dates and dormancy fees. “Congress needs to make clear that companies cannot hide under the shelter of federally chartered banks to bilk consumers, and action on this issue is long past due,” Nappier said in a statement.

At first blush, Congress has shown little appetite for new legislation. Rep. Rodney Frelinghuysen, a New Jersey Republican, introduced a bill last January that would ban all expiration dates and fees, but the measure has languished in the House with no co sponsors, as has a Senate measure backed by Sen. Charles Schumer, the senior Democrat from New York. Instead, some members of Congress have looked to federal agencies to take the lead. Two senior members of the House Energy and Commerce Committee wrote a letter to the Federal Trade Commission (FTC) last year asking the agency to investigate the gift card industry and determine whether issuers are deceiving consumers in how they market and sell the cards. The FTC released a bulletin in February offering consumers tips on handling gift cards and in July notified Darden Restaurants Inc., which runs food chains such as Red Lobster and the Olive Garden, that the company violated federal law by failing to adequately disclose that its gift cards began assessing a dormancy fee after 24 months without use, according to Darden’s annual statement filed that month. Yoon thinks the FTC action may mean the agency has taken the hint that the federal government needs to step in. “It would certainly be helpful…and clear up some of the confusion if there was a national standard,” she says. “That the FTC is now stepping in sends a signal that some sort of guidance may come out of them.”

But amid a federal regulatory void and consumer pressure, states are likely to continue handling the issue on their own. Wisconsin Republican state Sen. Mary Lazich sponsored a measure last year that would have required disclosure of expiration dates and other information on gift cards. The bill passed the state Senate but failed in the other chamber earlier this year as Democrats pushed a competing but stricter measure that would have prohibited expiration dates and dormancy fees. Lazich, who plans to reintroduce the measure next January, says she crafted the bill after a constituent complained of trying to use a gift card only to be discover that it was worthless because undisclosed fees had zapped its value.

“I was kind of surprised that the value would go and that she didn’t get a good explanation of the rules,” Lazich says. “My philosophy is that retailers can have any type of gift card they want but just put information on there so customers know what they’re getting.”

Dis-carded
Dozens of states offer a wide array of policies regulating gift cards. A sampling:

State	Expiration Date	Fees
California	Prohibited	“Dormancy fee allowed; all other fees prohibited”
Connecticut	Prohibited	Service fees prohibited
Georgia	Must be conspicuously displayed	Amount of dormancy fees must be conspicuously displayed
Illinois	Date or toll-free phone number to inquire about card’s expiration must be conspicuously displayed	All fees and how they’ll be assessed must be conspicuously displayed
Iowa		None unless there is a contract
Kentucky	Must not be less than one year from the date of issuance. If no date is printed on card, it is presumed valid until redeemed or replaced	None that reduce value of card before expiration
Nebraska	Must be conspicuously displayed. Excludes general-use prepaid cards	Terms of any fees must be printed on card/certificate. Excludes general-use prepaid cards
New York	Must be conspicuously displayed	Must be conspicuously disclosed to purchaser. No service fee may be assessed before the 13th month after issuance
North Dakota	Must be more than six years after date of purchase	Service fees prohibited
Tennessee	Prohibited if less than two years after issuance. If sold without expiration date, gift certificate is valid until redeemed or replaced with new card	Issuance fee prohibited. Service charges less than two years after issuance prohibited
Washington	Prohibited unless no money was paid for gift certificate or when certificate is valid for artistic or cultural organizations and disclosed to the user	“Can enforce a dormancy or inactivity charge if: (1) disclosed as specified; (2) The remaining value of the gift card is $5 or less each time the charge is assessed; (3) The charge does not exceed $1 per month; (4) The charge can only be assessed when there has been no activity on the gift card for 24 consecutive months, including but not limited to, purchases, the adding of value, or balance inquiries; (5) The bearer may reload or add value to the gift card; and (6) After a dormancy or inactivity charge is assessed, the remaining value of the gift certificate is redeemable in cash on demand.”

Source: National Conference of State Legislatures

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