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Philly Fed considers gift card protections

Jeremy Simon

Gift cards may not provide the same level of protection as credit cards and debit cards, but gift card users are not left completely unguarded, according to a report released this month by the Federal Reserve Bank of Philadelphia.

In a report entitled, “The Laws, Regulations, Guidelines and Industry Practices That Protect Consumers Who Use Gift Cards,” the Philly Fed found that thanks to actions taken by state legislatures, state attorneys general, federal agencies, financial institutions and payment networks, “today’s gift-card programs by and large provide substantial consumer protections.”

The Philly Fed looked at both closed-loop (typically store issued) and open-loop (typically bank issued) gift cards. For example, a closed-loop gift card issued by Best Buy would only be redeemable at that retailer’s stores. Separately, an open-loop mall gift card would be redeemable at any store in the shopping center, while an open-loop gift card issued by American Express could be used anywhere that AmEx credit cards are accepted.

Currently, there are no federal laws or regulations to protect consumers who buy and use closed-loop gift cards, although the Federal Trade Commission has issued two public orders regulating the practices of large retailers that issue closed-loop gift cards. Instead, state laws tend to offer the majority of protections for closed-loop cards. These laws establish disclosure and other operation requirements for gift-card programs and state abandoned property law and funds reimbursement provisions of gift-card laws, “which require unused or forgotten underlying card funds to be turned over to the state or refunded to consumers.”

gift-card-state-statutes.jpgMost Americans live in a state that allows their closed-loop gift cards to have their value reduced or lost completely — about 40 states and the District of Columbia currently allow closed-loop gift cards to lose their value through issuance fees, service fees, dormancy charges for nonuse or expiration (provided the gift card issuer follows various related rules). However, research by CreditCards.com found that the gift cards issued by most major retailers do not expire.

Closed-loop gift card protections come from a variety of sources, but “there is some consistency among regulatory effects,” the Fed says. “Essentially, these regulations protect value loaded by consumers at the time of purchase by limiting the fees charged and the expiration practices permitted.”

Meanwhile, states have less to say when it comes to open-loop gift cards, the Philly Fed said. Open-loop gift card protections mainly come from two sources: gift-card program guidelines established by federal financial institution regulatory agencies and payment network rules. For example, the Office of the Comptroller of the Currency “expects to see” banks communicate expirations dates, fees and “a method for obtaining additional information disclosed on the gift card or affixed to the gift card with a sticker,” as well as disclosure materials that come with the purchase of the gift card, including fees not listed on the card face, the process for getting a replacement card any restrictions on card use.

Just as Visa and MasterCard credit cards and debit cards offer consumer protections, “payment network policies extended to open-loop gift cards can protect consumers from losing all or a portion of the value loaded on the card by shielding consumers from fraudulent card use or erroneous debits of underlying funds.” These protections are essentially the “zero liability” policy for unauthorized transactions and the card issuer chargeback to reverse questionable changes — concepts that are already familiar to most credit cardholders.

Readers: What has your experience been when it comes to gift card protections?

See related: Troubled times call for speedy gift card redemption, Gift card survey shows it pays to comparison shop, Gift card survey: Details of biggest issuers’ cards, How to claim expired gift card funds, Retailers, states compete for gift card funds

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ABBA fans (and anyone else) can read my post “Houston credit union nixes loose change” in Finance Fiesta #7: Mamma Mia Edition. Thanks for the inclusion, LivingAlmostLarge!

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  • I read this study. It’s great. I work for a company that manages and tracks gift cards, and I follow gift card issues on savvywallet.com. I think every gift card holder needs to read it. It is very dry, but very necessary. Consumers need to be protected, and they should know the truth behind gift cards.