By Rebecca S. Reagan, Supervisory Examiner, and Aaron M. Thompson, Senior Examiner, Federal Reserve Bank of Richmond
On May 22, 2009, the Credit Card Accountability Responsibility and Disclosure Act of 2009 (Credit CARD Act)1 was signed into law. While the law’s title suggests that it only applies to credit cards, the law also created new consumer protections for gift certificates, store gift cards, and general-use prepaid cards through amendments to the Electronic Fund Transfer Act (EFTA).2 Specifically, section 401 of the Credit CARD Act requires disclosures for gift certificates, store gift cards, or general-use prepaid cards fees and expiration dates; limits dormancy, inactivity, and service fees for these cards and certificates; and establishes a minimum period of five years before the underlying funds for these cards and certificates can expire. Section 401 also excludes certain gift certificates, store gift cards, or general-use prepaid cards from these requirements. Section 402 of the Credit CARD Act amends the EFTA to provide that the EFTA does not preempt any state laws that address dormancy, inactivity, or service fees, or expiration dates for gift certificates, store gift cards, or general-use prepaid cards if such state laws provide greater consumer protection than the gift card provisions in the EFTA. The Federal Reserve Board (Board) published a final rule amending Regulation E to implement Sections 401 and 402, which became effective in 2010.3 This article reviews the compliance requirements of the final rule.
A gift card is a type of prepaid card (or other electronic access device) typically purchased by one consumer and given to another as a present or to express appreciation or recognition. Merchants and vendors are increasingly opting to use electronic gift cards instead of paper certificates because of lower costs and because electronic cards are less vulnerable to fraud or counterfeiting.4
Gift cards are generally categorized as either closed-loop or open-loop. Closed-loop gift cards, which represent the majority of the gift card market,5 are accepted at a single merchant or group of affiliated merchants as payment for goods and services and cannot be reloaded with additional value after issuance. Open-loop gift cards are branded with a payment card processor network such as Visa, MasterCard, American Express, or Discover, and are generally issued by financial institutions. An open-loop card can be used at merchants participating in the payment network and are more likely to be reloadable.6
The final rule applies to gift certificates, store gift cards, and general-use prepaid cards that are sold or issued primarily for personal, family, or household use.7 Gift certificates, store gift cards, and general-use prepaid cards include cards, codes, or other devices issued in a specified amount, regardless of whether they are issued in card form. Therefore, the final rule may apply to an account number or bar code that can access underlying funds; a device with a chip or other embedded mechanism that links the device to stored funds, such as a mobile phone or sticker containing a contactless chip; or an electronic promise.8 An electronic promise means a person’s commitment or obligation communicated or stored in electronic form made to a consumer to provide payment for goods or services; for example, a code given as a gift that can be redeemed in an online transaction would be an electronic promise.9
The regulation contains six exclusions from the definitions of gift certificate, store gift card, and general-use prepaid card for certain types of cards, codes, and devices.
Cards for telephone services are excluded. However, the final rule interprets telephone services narrowly, so the exclusion does not apply to cards redeemed for prepaid Internet access and similar technology services.10
The term “reloadable” means funds can be added to the card, code, or other device by the consumer or other persons. For compliance purposes, this is determined by the terms and conditions of the prepaid card, rather than by the technical ability of the issuer to add value to the card.11
The Official Staff Commentary (Commentary) to the rule contains a robust discussion of what constitutes “marketed or labeled as a gift card or gift certificate.” Cards and certificates are deemed to be marketed or labeled as such if anyone other than the consumer who purchased the card (including the issuer, the retailer, the program manager that may distribute the card, or the payment network on which a card is used) promotes the use of the card as a gift card or gift certificate.12
In certain cases, multiple parties may be involved in a card program. For example, a retailer, such as a grocery store or a drug store, may be marketing the product and not the card issuer. Display racks at the retailer may make gift cards available as well as general-purpose reloadable cards and telephone cards; therefore, the retailer is offering both excludable and nonexcludable products. In this case, the card issuer may not always be able to verify how excludable cards are displayed at each retail outlet to ensure that they are not being marketed as gift cards or gift certificates through signage, advertisements, or otherwise.13 Recognizing the compliance risks involved when multiple parties are involved in a card program, the final rule provides that the exclusion applies so long as a certificate or card is not marketed or labeled as a gift card or certificate and if persons subject to the rule maintain policies and procedures reasonably designed to avoid such marketing.14
The Commentary provides examples of such reasonable policies and procedures, which may include contractual terms and conditions that prohibit the general-purpose reloadable cards from being marketed as a gift card or certificate and controls to regularly monitor or otherwise verify that cards are not being marketed as such.15 In one specific example in the Commentary, the issuer or program manager sets up a single multi-sided display at the retailer on which a variety of prepaid products are sold. Gift cards are segregated from excluded cards, with gift cards on one side of the display and excluded cards on a different side of the display.16 Signs of equal prominence clearly differentiate between gift cards and other types of prepaid cards that are available for sale, and the retailer does not use any more conspicuous signage suggesting the general availability of gift cards, such as a large sign stating “Gift Cards” at the top of the display or located near the display. In this case, the exclusion applies because policies and procedures reasonably designed to avoid the marketing of the general-purpose reloadable cards as gift cards or gift certificates are maintained.
Loyalty, award, and promotional gift cards are typically not funded by the consumer but by the entity sponsoring the card program. To qualify for the exclusion, the card must meet three requirements. It must 1) be issued on a prepaid basis primarily for personal, family, or household purposes to a consumer in connection with a loyalty, award, or promotional program; 2) be redeemable at one or more merchants for goods or services, or it can be used at an automated teller machine; and 3) make certain disclosures. To facilitate compliance, comment 20(a)(4)-1 provides seven illustrative (but not exhaustive) examples.
While loyalty, award, or promotional gift cards are not subject to the Credit CARD Act’s substantive restrictions on fees and expiration dates, certain disclosure requirements still apply. In particular, the front of the card must disclose the expiration date and state that it is issued for loyalty, award, or promotional purposes. Printing “Reward” or “Promotional” on the front of the card satisfies this requirement.17 Issuers must also disclose a toll-free number anywhere on the card and (if applicable) a website address that a consumer can use to obtain fee information. Finally, any fees and the conditions under which they may be imposed must be disclosed on or with the card, code, or device.18
In determining whether cards are marketed to the general public, the regulation focuses on the means or channel through which the card, code, or device is obtained by the consumer, the subset of consumers eligible to obtain the card, and whether the availability of the card is advertised or promoted in the marketplace.19 Comment 20(b)(4)-2 provides some examples illustrating the exclusion, including a card containing insurance proceeds provided by an insurance company to a customer to settle a claim; a card containing store credit provided by a retailer to a customer following a merchandise return if the card states that it is issued for store credit; and a card containing tax refunds provided by a tax preparer to a customer. Examples that do not meet the definition include the following: a merchant selling its gift cards at a discount to a business that may give them to employees or consumers as incentives or rewards, if the card can also be purchased through retail channels; a bank marketing gift cards only to its customers, if a member of the general public can become one of the bank’s customers; and a card issuer advertising a reloadable card to teenagers and their parents, promoting the card for use by teenagers and by parents to monitor spending, if the card is marketed and sold to any member of the general public.20
This exclusion applies when the only means of issuing the card, code, or other device is in paper form.21 For example, the exclusion would not apply if a bar code or certificate number is provided to the consumer in electronic format and can be reproduced in paper form because the information necessary to redeem the value was initially issued to the consumer in electronic form.22
This exclusion is limited to cards, codes, or other devices that do not state a specific monetary value but instead are redeemable for admission to an event or venue. Furthermore, the exclusion covers any goods or services that may be obtained at specific locations affiliated with and in geographic proximity to the event or venue.
The Commentary clarifies these requirements.
Comment 20(d)-1 provides three examples of this requirement:
Restriction on Imposing More Than One Fee Per Month. Comment 20(d)-4 includes an example of this requirement. If after a year of inactivity, a dormancy fee is imposed on January 1, 2014, a balance inquiry fee could not also be imposed in January 2014 because a dormancy fee was imposed in the same calendar month.26 To prevent circumvention of this requirement, Comment 20(d)-5 prohibits the accumulation of fees. This refers to the practice of accumulating dormancy, inactivity, or service fees for previous periods into a single fee that would circumvent the restriction on charging more than one fee per month. Comment 20(d)-5 provides this example: “If a consumer purchases and activates a store gift card on January 1 but never uses the card, a monthly maintenance fee of $2.00 a month may not be accumulated such that a fee of $24 is imposed on January 1 the following year.”
Requirements for Disclosures on Card/Certificate and Before Purchase. To ensure that consumers are aware of dormancy, inactivity, and service fees before purchasing a gift card or certificate, disclosures must be made available pre-purchase and appear on the card or certificate itself. In some circumstances, a single disclosure will satisfy both requirements, but in other cases, two sets of disclosures are required: those on the card/certificate and those made available pre-purchase. For example, if the disclosures on a certificate or card required by 12 C.F.R. §1005.20(d)(2) are obstructed by the packaging, the disclosures would also have to appear on the packaging sold with the card or certificate. But if the disclosures were visible to the consumer without removing the packaging, additional disclosures would not be required.27
The expiration date of the underlying funds of a gift certificate, store gift card, or general-use prepaid card must be no less than five years after the date of issuance (in the case of a gift certificate) or five years after the date of last load of funds (in the case of a store gift card or general-use prepaid card).28 No person may sell or issue such a certificate or card with an expiration date unless the person has established policies and procedures that provide the consumer with a reasonable opportunity to purchase a product that has an expiration date at least five years from the date of purchase. Note, however, that this requirement ceases to apply once the certificate or card has been fully redeemed.29
The expiration date for the underlying funds, or a statement that the underlying funds do not expire, must be disclosed on the certificate or card.30 Additionally, as applicable, the issuer must disclose on the card or certificate a toll-free number and a website, if one is maintained, that a consumer may use to obtain a replacement card or certificate after expiration if the card or certificate expires before the underlying funds expire.31
To prevent consumer confusion, a disclosure is also required when the certificate or card expiration date differs from the expiration date of the underlying funds. This disclosure must be stated with equal prominence and in close proximity to the certificate’s or card’s expiration date. This disclosure requirement does not apply to nonreloadable certificates or cards that have an expiration date of at least seven years from the date of manufacture.32 All of these expiration date disclosures are required to be made prior to purchase.33
The regulation also prohibits imposing fees to replace an expired certificate or card if the underlying funds remain valid to ensure that consumers have full use of the underlying funds for the minimum five-year period.34
Information related to additional fees that are not considered dormancy, inactivity, or service fees, such as initial issuance and cash-out fees, is also required to be disclosed, as applicable. The type of fee, the amount of the fee (or an explanation of how the fee will be determined), and the conditions under which the fee may be imposed are required to be disclosed. Whereas dormancy fees and expiration dates must be disclosed on the card or certificate, the information related to these additional fees can be stated on or with the card or certificate and must be provided prior to purchase.35 The final rule also requires disclosure of a toll-free number on the card or certificate and a website, if one is maintained, that a consumer may use to obtain fee information.36
Generally, the disclosures must be provided in written or electronic format and in a manner that is “clear and conspicuous.” As explained in the Commentary, this means disclosures that are readily understandable and in a location and size that are readily noticeable to consumers.37 While the final rule does not require a particular type size, the print must contrast with and otherwise not be obstructed by the background on which it is printed.38 The disclosures must be made on the certificate, card, code, or other device.39 A disclosure made in an accompanying terms and conditions document, on packaging surrounding a certificate or card, or on a sticker or other label affixed to a certificate or card does not constitute a disclosure on the certificate or card.40 In some cases, gift certificates or cards are issued in the form of a code provided by telephone. In this instance, the disclosures may be provided orally prior to purchase. After the disclosures are provided orally, the issuer must promptly provide to the consumer a written or electronic copy of the code or confirmation and the required disclosures must be contained on the copy.
The Regulation E gift card amendments impose disclosure requirements and substantive restrictions on store gift cards, gift certificates, and general-use prepaid cards concerning fees and expiration dates. Persons offering these products must ensure compliance with the required disclosures and restrictions. To satisfy the disclosure requirements, institutions should consider whether they meet the clear and conspicuous standard and whether the disclosures are the correct size and in the correct location. Specific issues and questions should be raised with your primary regulator.
Complete Issue (1.42 MB, 20 pages)
Kenneth Benton, Editor
FEDERAL RESERVE SYSTEM
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