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INSIGHT: Gift Cards—The Gift That Keeps Giving … to Lawyers

Oct. 4, 2019, 8:01 AM

Gift cards are consistently rated as one of the most sought after presents during the holiday season, and reports predict the global prepaid card market will reach $3.6 billion by 2022. As the popularity of gift cards continues to grow, so have new questions on policies and regulations surrounding them.

In fact, prepaid and gift cards have increasingly become subject to scrutiny by federal and state regulators, and are currently regulated by various disclosure requirements at the federal and state level, including money transmitter licensing laws, abandoned property laws, and anti-money laundering laws.

Retailers attempting to comply with the varying regulations find it akin to legal “whack-a-mole” as the satisfaction of one set of regulations may result in a new set of requirements under unrelated laws. Moreover, multiple retailers have been subject to class action lawsuits over the last several years over gift card disclosures and expiration dates.

As a result, retailers are now often seeking legal counsel on what types of disclosures need to be made in connection with gift cards. There is a growing concern among banks as well because some money transmit or other rules apply to financial institutions and they need to be sure that they are exempt or complying with such regulations.

Need some help navigating the new world of gift card laws and regulations? Here is a rundown of the important rules and regulations to understand.

Open-Loop versus Closed-Loop Cards

Generally speaking, gift cards can be grouped into two categories: open-loop or closed-loop. Open-loop gift cards are affiliated with payment processors such as Visa, American Express, or MasterCard and can generally be used anywhere the cards are accepted.

On the other hand, closed-loop cards can only be redeemed by the merchant, or affiliated merchants, that issued the card as payment for goods or services.

In most cases for retailers, closed-loop cards are more attractive because the card can usually only be redeemed for products at that retailer; while recipients of gift cards from friends and family prefer open loop cards because they have a much broader choice of where to spend the value of the card.

Federal Rules and Regulations

Credit CARD Act. Among the federal regulations applicable to gift cards is the Credit Card Accountability Responsibility and Disclosure Act of 2009 (Credit CARD Act), which amended the Electronic Funds Transfer Act (the EFTA).

The Credit CARD Act provides disclosure requirements for gift certificates, store gift cards, and general-use prepaid cards. Among these protections are restrictions on an issuer’s ability to impose dormancy and service fees, as well as restrictions on expiration dates of less than five years after the date when a gift card is issued. Expiration dates and fee-related disclosures must also be clearly and conspicuously stated on the gift card under the Credit CARD Act.

Anti-money laundering rules. Acting pursuant to the Credit Card Act, the Financial Crimes Enforcement Network issued the Prepaid Access Rule in 2011. The Prepaid Access Rule establishes reporting requirements for suspicious activity and information collection requirements for customers and transactions in order to combat terrorist financing, money laundering, and other illegal transactions in connection with stored value cards.

Issuers of closed-loop prepaid cards sold in amounts of $2,000 or less are exempted from the rule. Issuers of prepaid cards that do not fall into one of the exemptions or exclusions under the rule are required to maintain an anti-money laundering program if the prepaid cards are within the scope of the final rule and certain conditions are met.

CFPB rule changes. The Consumer Financial Protection Board (the CFPB) has the authority to issue rules and regulations to protect consumers and promulgated the Prepaid Rule in 2016 to extend comprehensive federal consumer protections to the prepaid card industry by broadening the scope of the EFTA to include certain prepaid products.

The Prepaid Rule applies to prepaid accounts and other devices that can be used at unaffiliated merchants; it does not apply to gift cards redeemable only at a single merchant or group of affiliated merchants. The CFPB is not focused on closed-loop network payment products at this point in time because, unlike open-loop prepaid cards, they cannot be used in lieu of traditional banking products and consumers are less likely to load a significant amount of funds on closed-loop cards.

The Prepaid Rule modifies Regulation E to the EFTA to require financial institutions to provide specific disclosures to consumers both before and after the acquisition of a prepaid account and also restricts overdraft services and other credit features.

The CFPB recently revised the Prepaid Rule’s error resolution provisions and added a limited exception from its credit-related provisions for traditional credit cards linked to digital wallets. These revisions became effective April 1, and, among other things, require consumers to register their prepaid accounts in order to receive error protection benefits, including protection against fraud and theft. Credit card accounts that fall into the digital-wallet exception are fully covered by other federal credit card protections.

State Rules and Regs

This article only focuses on federal regulations, but it is important to note that state regulations are not preempted by the federal rules and may provide more expansive consumer protections.

Many states have their own gift card statutes mandating certain limits or disclosures on expiration dates, fees and dormancy periods. Other state laws include consumer protection statutes, money transmitter laws and most importantly escheat laws that require the remittance of abandoned property to the state after a specified period.

With the holidays just around the corner, now is the time for both retailers and banks to take the time to fully understand gift cards laws. Being clear on the regulations and transparent with customers will ensure a happier holiday season for everyone.

This column does not necessarily reflect the opinion of The Bureau of National Affairs, Inc. or its owners.

Author Information

Mark S. Solomon is managing partner of Katten’s Dallas office, and he focuses his highly active mergers and acquisitions practice on representing private equity firms and public and private companies from diverse industries in transactions of all types, sizes and complexities.

Vic Zanetti is a partner in Katten’s corporate practice. Based in Dallas, he represents private equity funds, family offices and venture capital growth funds in mergers and acquisitions and corporate finance transactions.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.