Gift Cards

Gift Cards

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A gift card is a prepaid financial product that can serve as a replacement for a paper-based
payment instrument such as a gift certificate. Current federal consumer protection laws do not
regulate gift card programs. Typically, a gift card is a credit card-sized piece of plastic with a
preloaded value. First introduced as closed-system prepaid products, gift cards were redeemable
at a single merchant or at a set of locations, such as a retail chain. These were followed by open-
system cards (also called “branded”) that can generally be used at any merchant location
connected to the card’s payment network (Visa, MasterCard, American Express, or Discover).
Gift cards are becoming increasingly popular with consumers.
Terms and conditions (including fees, lost or stolen card policies, and expiration dates) for
individual card products vary. Gift card programs have different features and applications. In
addition, the varying capabilities of merchants’ data processing systems can affect card usage.
This can be confusing to both recipients and givers. Federal regulators have responded to
concerns. Advisories were issued providing consumers with information and tips on gift cards. In
addition, regulatory guidance articulates practices to be followed by financial institutions that
establish and administer gift card programs. Some states have consumer protection laws that
cover gift cards. Consumer advocates have urged Congress to create a set of national disclosure
standards for gift cards and to curb or prohibit fees. This report will be updated as warranted.

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Background ..................................................................................................................................... 1
Policy Issues and Regulatory Response .......................................................................................... 3
Consumer Advisories ................................................................................................................ 3
Regulatory Guidance................................................................................................................. 4

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Author Contact Information ............................................................................................................ 4

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In the United States, gift cards were introduced in the 1990s and are currently a large and growing
business. According to one estimate, gift card sales were expected to exceed $80 billion in 2006.1
Approximately 30% of gift cards are purchased during the Christmas season (between the day
after Thanksgiving and Christmas Eve).2 Sales of gift cards exceeded $27 billion during the 2006
Christmas season.3 Gift cards are part of a wide-ranging variety of stored-value payment products
that include transit, disaster-relief, travel, medical benefit, and payroll cards. The card is usually
made of plastic and is the size of a credit card. The cards are loaded with a prepaid value. Prepaid
cards serve as a replacement for paper-based financial products such as gift certificates, transit
tickets, tokens, currency, and paper checks.
Generally, gift cards fall into two broad categories: closed-system and open-system. Closed-
system gift cards are issued by retailers and are purchased from and redeemable at a single store
location or a merchant chain. Some retail gift cards can also be purchased and redeemed online.
Merchants have also marketed their gift card products to customers as a fast and easy way to
make reoccurring purchases (e.g., a morning cup of coffee or groceries) or simply as a convenient
substitute for cash. The merchant point-of-sale (POS) electronic terminal must be programed to
accept the gift card. Third-party processors support the operational requirements. After each
transaction, the amount of the purchase is deducted and the card stores any remaining value.
Merchants do not refund cash. Often, the cards are sold in fixed amounts (e.g., $25, $50, or
$100), and there is a maximum on the total card value. Some closed-system cards may be
reloaded.
Open-system gift cards are branded with the logo of a payment card network, such as American
Express, Discover, MasterCard, or Visa. A major difference between closed- and open-system
cards is that the latter offer the possibility and flexibility of being redeemed anywhere the card’s
logo is accepted. The prepaid card transactions are authorized and settled by using the payment
networks established for traditional credit and debit cards. Open-system gift cards can be
purchased from participating providers, including banks, thrifts, and retailers. The prepaid cards
can be purchased and used online, over the phone, or in person. The maximum total value for a
gift card is established by the card issuer. Each time the card is used, the amount of the purchase
is deducted from the card balance. Open-system cards can be reloaded. In addition, some open-
system card programs allow cash back from a retail purchase and may include ATM (automated
teller machine) access as a option. As new applications and innovations for open-system cards
emerge, the potential range of differentiation among individual prepaid gift card programs
increases.
The functionality of both types of gift cards depends on the sophistication of the merchant’s POS
terminal processing system. Merchants may not be able to tell gift card holders how much money
remains on their card. Consumers may have to verify their remaining balance online or by phone.
The handling of a shortfall when the card’s balance cannot cover a purchase may also be
problematic. A card may be automatically rejected if the purchase amount is greater than the

1 Gift Cards Fees Could Be Targets Of New Congress. ATM & Debit News, Dec. 7, 2006, p. 5.
2 Ibid., p. 5.
3 Bureau of National Affairs, Daily Report for Executives, Jan. 25, 2007, no. 16, p. EE-2.
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balance. A merchant’s terminal may be incapable of handling more than one form of payment for
the same transaction. If a card cannot be reloaded, a consumer may find it difficult to spend the
card’s entire value.
Currently, federal consumer protection laws do not regulate gift card programs. Consumer
advocates have urged the Federal Reserve System to extend the provisions of Regulation E to
cover all types stored-value or prepaid card products. Regulation E implements the Electronic
Funds Transfer Act,4 which establishes the rights, responsibilities, and liabilities for participants
using electronic fund transfers systems (e.g., ATMs and POS terminals). Regulation E protections
include initial disclosures, periodic statements, and error resolution rights. Federal financial
regulatory agencies have traditionally exercised restraint in regulating new financial products
because premature regulation could stifle innovation. The regulators closely monitor new banking
activities to ensure safety and the soundness of financial institutions. They may issue guidance for
the depository financial institutions they regulate and/or consumers. The variety of prepaid card
products, and therefore the types and degrees of risk they present to cardholders and issuers,
complicates regulation of these payment instruments with a “one-size-fits-all” approach. On
August 24, 2006, the Federal Reserve issued a final rule5 that makes one sector of prepaid
cards—payroll card products—subject to Regulation E. These cards were singled out because of
certain characteristics, including that they “represent a recurring stream of payments that is likely
the primary source of the consumer’s income.... They are replenished on a recurring basis and
designed for ongoing use at multiple locations.”6 The Federal Reserve stated that gift cards and
other prepaid cards were not covered, in part, because these products are generally not intended to
be held and used over a long period of time. In addition, the funds held on individual cards were
minimal. The costs to the issuer of providing Regulation E protections are significant.
Gift cards are addressed by the laws of some states, and those states vary in their treatment. Some
state consumer protection laws prohibit or set a time limit for an expiration date. Various types of
fees are addressed in different ways (some prohibited and some capped). A number of states have
adopted escheat laws. These laws determine who can claim the value of an “abandoned”or unused
gift card (the consumer, the vendor, or the state government). Escheat laws generally presume
abandonment after a stated number of years. The National Conference of State Legislatures
(NCSL) tracks state statutes covering gift cards and gift certificates.7
Consumer advocates have raised concerns about the problems resulting from inadequate
consumer disclosure protections provided by gift card programs. The National Retail Federation
has suggested that uniform federal disclosures might be preferable to regulation on a state-by-
state basis. The Gift Card Protection Act (H.R. 85), introduced in the 109th Congress on January
4, 2005, by Representative Rodney P. Frelinghuysen, and referred to the Subcommittee on
Commerce, Trade and Consumer Protection of the House Committee on Energy and Commerce,
would have prohibited expiration dates, service charges, and dormancy fees on gift certificates.
The bill’s definition of “gift certificate” included prepaid, stored-value electronic cards. No action
beyond subcommittee referral was taken on the bill, nor has similar legislation been introduced to
date in the 110th Congress.

4 15 U.S.C. 1693.
5 Regulation E amendments are available at http://www.federalreserve.gov/newsevents/press/bcreg/
bcreg20060824a1.pdf.
6 Ibid., p. 6.
7 Information can be found on the NCSL website at http://www.ncsl.org/programs/banking/GiftCardsandCerts.htm.
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The rapid growth of the market indicates that gift cards have found wide acceptance among
merchants and their customers. Nevertheless, the popularity of gift cards raises a number of
consumer protection issues, generally involving charges and terms, of which consumers may be
unaware. The issue of adequate disclosure is complicated by the fact that the buyer of the card is
often not the ultimate card user.
The terms and conditions of individual gift card programs in both open and closed systems can
vary significantly. Factors include card acceptance, fees, expiration dates, a lost/stolen card
policy, a return policy, and the process used to file a complaint. Consumer advocates express
concern that gift card programs do not universally provide adequate, clear disclosure to both the
giver and receiver of a gift card. Of special concern are the expiration dates and various types and
amounts of fees. Expiration dates are not generally printed on the card. Not all cards have an
expiration date, and those that do may allow the cardholder to extend the date, usually for a fee.
Fees connected to gift cards include purchase fees, activation fees, inactivity or dormancy fees,
transaction fees, monthly maintenance fees, inquiry fees, and delivery fees for cards bought
online or by phone. The amounts charged vary. It is possible to lose a significant portion of the
gift card’s value to these charges. Expiration dates and dormancy fees are particularly unpopular
with consumers. Consumers may view an old gift card as an interest-free loan to the merchant or
card provider. In general, terms and fees are defended as being in line with charges and terms
associated with checking accounts and other financial products. The regulatory response to these
consumer protection issues are set out below.
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Three federal regulators, the Office of the Comptroller of the Currency (OCC), the Office of
Thrift Supervision (OTS), and the Federal Trade Commission (FTC), have issued consumer alerts
providing advice on the potential pitfalls that may be associated with gift card programs. The
alerts provide tips on what card issuers should disclose. The OCC and the OTS are offices within
the U.S. Treasury Department. The OCC charters, regulates, and supervises national banks and
the OTS regulates and supervises the U.S. thrift industry. The OCC’s advisory, Gift Cards: OCC
Provides Holiday Tips for Consumers, was first issued in December 2004.8 The OTS’s advisory
brochure, Consumer Fact Sheet: Buying, Giving, and Using Gift Cards, was issued in February
2007.9 The advisories caution consumers giving or receiving gift cards to request and carefully
check the terms and conditions connected to gift card programs. They warn consumers that
programs differ and outline some of the most important features to check. The advisories
highlight fees, expiration dates, card usage and replacement, and how to report problems.
The FTC is charged with enforcing laws that prohibit business practices that are anticompetitive,
deceptive, or unfair to consumers and with promoting informed consumer choice. In December
2006, the FTC issued an updated alert titled Buying, Giving, and Using Gift Cards.10 The two-
page alert outlines tips for buying and using gift cards. It also has a section on how consumers

8 Available on the agency’s website at http://www.occ.treas.gov/ftp/release/2004-108a.pdf.
9 Available on the agency’s website at http://www.ots.treas.gov/docs/4/480923.pdf.
10 Available at http://www.ftc.gov/bcp/edu/pubs/consumer/alerts/alt010.htm.
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can file a complaint or resolve a problem. The FTC’s enforcement work is done through
administrative proceedings and in federal court actions. As of April 2007, the FTC had
undertaken two law enforcement actions involving allegedly deceptive gift card sales.11
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Federal regulators of depository financial institutions issue guidance, in part, to advise institutions
on emerging and significant risks and to articulate the regulators’ expectations for institutional
practices for managing those risks and preventing problems from arising. On August 14, 2006,
the OCC issued guidance to national banks on marketing and disclosure issues raised by gift card
programs.12 On February 28, 2007, the OTS issued guidance on gift cards offered by OTS-
regulated financial institutions.13 The agencies recognized that the rapid growth of the gift card
market together with the assortment of fees and other terms and conditions required clear
disclosure policies.
The guidance from the two agencies is similar with respect to consumer protection
considerations. The guidelines recognize the need for both the purchaser and recipient to be fully
informed. The guidance illustrates information the regulator would expect to see disclosed on the
gift card itself (which may also be on an affixed sticker or tape) and in a separate set of
disclosures that would accompany the gift card. The expiration date, the amount or the existence
of fees, and contact information for customer service would be provided on the card. Disclosures
accompanying the card would include the name of the issuing financial institution, additional fee
information if applicable, where the card can be used, and what to do if the card is lost or stolen.
Finally, the guidance addresses misleading marketing and promotional practices to be avoided.
The OTS guidance also stated that (1) thrift institutions should consider anti-money-laundering
laws, regulations, and guidance for reporting suspicious activities in connection with their gift
card programs; and (2) institutions that issue open-system gift card products should develop
systems to apply the customer identification program to these products.

ž?‘˜›ȱ˜—?ŠŒ?ȱ —?˜›–Š?’˜—ȱ

Pauline Smale

Analyst in Financial Economics
psmale@crs.loc.gov, 7-7832

11 For information on the two cases see http://www.ftc.gov/opa/2007/03/kmart.shtm and http://www.ftc.gov/opa/2007/
04/darden.shtm.
12 The full text of the guidance can be found at http://www.occ.treas.gov/ftp/bulletin/2006-34.txt.
13 The full text of the guidance can be found at http://www.ots.treas.gov/docs/7/777012.html.
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