Viewpoint: Gift Cards Need Stronger Regulation

The #1 gift this holiday season can come with a lump of coal in the fine print.

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Justin Sullivan / Getty Images

Gift cards from various retailers are seen on display at a Chevron service station convenience store Dec. 19, 2006 in San Francisco.

If you buy a Chase gift card for a friend or relative or employee, you may notice that it comes with snowflakes or bubbles or one of the other decorative choices the bank offers. One thing you may not notice is that it also comes with an “inactivity fee” which kicks in after twelve months and starts removing $2.50 in value from the card every month. For slow-to-spend shoppers, that works out to a $30-a-year fee for letting Chase hold onto your money.

Gift cards are expected to be the #1 gift this holiday season. More than 80 percent of shoppers will buy at least one this year, according to a recent retailer-backed study – and they will spend an average of $156.86 per card. Many cards come from traditional retailers like L.L. Bean and Dell, which are both also using gift cards as an inducement to buy other gift cards— so-called promotional cards. Some givers, knowing neither what their aunt or nephew might want nor where they would want to shop, will turn to bank gift cards like the one from Chase.

(MOREDon’t Give Hidden Fees This Holiday Season)

But while gift cards are an easy fix that seem more festive and considerate than simply handing over a wad of cash, they often come with lumps of coal in the fine print, which is why many feel they should be more stringently regulated. Sen. Richard Blumenthal (D-Ct.) has introduced a bill in Congress that would ban gift cards from imposing non-use fees or expiration dates altogether, which would strengthen a 2009 law that prohibits cards from expiring within five years or imposing no-use fees in the first year. ConsumerReports.org, which backs the bill, says it “would be the ultimate gift for those who give and those who receive.” But banks and retailers will no doubt fight it hard – because these gift card technicalities add a lot of money to their bottom lines.

Unlike the 2009 law, the new bill would also apply to promotional gift cards, which are notorious for their quick expiration dates— which are often hard to spot. The Dell $75 eGift Card, which the company is giving away to customers who buy $400 in gift cards, expires in just 90 days. Outback Restaurants is offering a “Bonus Card” for that comes with an even trickier catch – it can only be used during a 41-day window starting Jan. 1, 2013.

The bill would also require companies that go into bankruptcy to honor gift cards and prevent them from issuing new ones. As things now stand, all bets are off. In 2008, the Sharper Image announced that it would only redeem gift cards for 50 cents on the dollar – and then, after it declared bankruptcy, it stopped accepting them entirely, leaving customers with $43 million in useless gift card credit.

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When consumers’ rights bills like this one come along, companies often argue that they need the fees to remain profitable. But companies that issue gift cards are already getting a huge windfall from cards that are never redeemed. One retailing analyst estimated that from 2005-2011, as much as $41 billion in money on gift cards was lost or was not likely to be cashed in. The windfall has likely declined since 2009, when the new rules on expiration dates and inactivity fees were adopted. But there is still a lot of money from credit card “breakage” – industry-speak for unredeemed value – going to corporate bottom lines. In 2010, Best Buy reported $43 million in income from gift cards that were unlikely ever to be redeemed, and in 2011 that leapt to $53 million.

Although there is likely to be strong opposition to the Blumenthal bill in Congress, consumers have a right to expect that cards retain the value that they were sold for. After all, the gifts are supposed to be for the people who receive the cards—not the companies that issue them. Without more regulation, gift cards may end up being just one more piece of new technology that did not make life better – and more people may decide to return to the simplicity of sticking a few crisp bills into an envelope.

9 comments
TheArchitect
TheArchitect

I am a manager of a small business that issues In-House Cards (gift cards). As a consumer I agree that the window for use should be maximized.  However from a business perspective, it does cost money to carry balances, just like it does to carry a balance at a bank.  You'd be hard pressed to find a bank willing to hold an open account with a balance of $25 for an unlimited amount of time with no fees.  I don't want to deal with figuring out how to verify a balance after 20 years on a dusty old card someone found in the recesses of their drawer - we would probably have new technology, a new point of sale, a new accounting package, etc.  I think 10 years of inactivity is more than enough time for a card to be valid until deemed abandoned, and after two years of inactivity, a $5 annual 'carry fee' is not unreasonable either.  Use it or lose it.

hotandbothered
hotandbothered

I hate having to pay that activation fee for a gift card. Why? If the gift card companies are making such a hefty profit on unredeemed cards then why make us pay for activation, too? Why? Because the gov't hasn't stopped them and probably never will. That's why. grrr

NBPCA
NBPCA

For the past six years gift cards have topped the list as the most desired gift in a National Retail Federation (NRF) survey. Again this year the survey found that 59.8% of consumers said they want to receive gift cards as presents this year. Consumers value gift cards over other gifts – according to a new report from First Data 93% of consumers would prefer a $25 gift card to a gift valued at $25. Gift cards remain popular because consumers believe they are a useful gift and a good value. Branded gift cards allow consumers use the cards anywhere (including online) for any type of gift and they can be purchased online, at bank branches and in the check-out line. New rules and regulations adopted with the CARD ACT in 2010 ensure that no fees can be charged until after one year after last use and the gift card must have an expiration date of 5 years from last load. These new regulations provide adequate protections to consumers as shown by their continued popularity year over year and still allow branded gift card providers to operate a business with the myriad of options and protections that are built into each of these cards.

horsley1953
horsley1953

Who invented the con job that convinced people gift cards are somehow better gifts than cash? Even this article criticizing gift cards seems to accept the implicit scam that they are better than cash. Gift cards are largely a pain in the pa-toot. They can usually only be used in a limited number of places, and as the article notes they evaporate. Cash has none of these problems.

forajit
forajit

It is so siily to give gift cards, merchants love them because only 73% are used completely, rest is merchant profit...why not just give cash ??

mom40
mom40 like.author.displayName 1 Like

Why not give us a list of companies who do things on the up and up so we'll know what cards are good and what companies to reward with our business?

rcarifla
rcarifla

This practice by the gift card companies taking back your money after 12 months of non use should be illegal.  

BenJackson
BenJackson

The Card Act of 2009 requires all gift cards to be good for at least 5 years.

mightySteve
mightySteve

You have a fine grasp of the obvious.