The issue of "dormancy fees" attached to prepaid gift cards - penalties for not using a card for a set period - is gaining legislative attention and will probably remain a hot topic for some time.
A handful of states, including California, Massachusetts, Connecticut, Georgia, and New Hampshire, have enacted laws to rein in fees on gift or prepaid cards, and Sen. Charles Schumer, D-N.Y., is considering introducing federal legislation on the topic.
Most people who buy gift cards from banks know that the products come with up-front load fees of $3 to $5, but fewer people know that after a certain period in which the card is not used, most banks deduct a dormancy fee from the value each month it remains unused.
These general-purpose cards differ in many respects from retailers' gift cards, which typically do not bear either load or dormancy fees.
The American Express Gift Card states on the back that it will assess a $2 monthly fee if a balance remains on the card after 12 months, said Stephanie Stegich, a spokeswoman for American Express Co. The card, introduced in 2002, has a load fee of $3.95 to $5.95, depending whether the consumer buys it from Amex or an intermediary.
The majority of consumers who use the card spend use up the value within a year, so they are not charged a dormancy fee, Ms. Stegich said.
"There are a number of benefits and services that are associated with the card, and obviously there are costs on our side to provide those to the consumer," she said. "It's not as simple as giving out a Banana Republic card that can only be used in a Banana Republic store."
Those benefits include the ability to call Amex to learn the balance, getting a refund or a new card if it is lost or stolen, and being able to use the card anywhere Amex cards are accepted.
First Horizon National Corp. introduced two gift cards in December; it charges $4.95 for cards worth up to $200 and $6.95 for cards worth between $201 and $500, the maximum value. Dondi Black, a vice president of consumer deposits at First Horizon, said the fees cover the cost of maintaining the cards.
The Memphis banking company, which has issued between 8,000 to 10,000 cards to date, will charge a $2 monthly dormancy fee if the balance is not used after 13 months. The fee simply covers the maintenance of the card, Ms. Black said - it's not meant to be a revenue source.
"We make money strictly on the interchange" associated with purchases on the card, she said.
Some gift cards offered by banks are reloadable, and can produce ongoing fee income for the banks, but Ms. Black said the First Horizon cards are not. They also cannot be used at ATMs, because they are strictly signature debit cards.
Last year consumers spent between $40 billion to $45 billion on gift cards, but only about 10% of the total was spent on the type of general-purpose cards that bear these fees, according to TowerGroup, the Needham, Mass., research and consulting firm owned by MasterCard International. The bank products are newer than the private-label gift cards retailers offer.
Bank issuers say that dormancy fees are necessary to help pay for the cost to maintain the accounts, even if the cards are all but forgotten by the consumers.
But John Gould, the director of bank cards at TowerGroup, said legislation has come up in almost every state, much of it still pending, on various issues related to gift cards, including dormancy fees, expiration dates, and how escheatment laws are applied to the cards. Escheatment laws deal with abandoned property, which is held by the state but can later be claimed by the owner or heirs.
Daniel Horne, a marketing professor at Providence College in Rhode Island, said that Connecticut's law, which took effect last month, bans dormancy fees and expiration dates on gift cards but makes the cards subject to escheatment after three years.
Georgia's recently enacted law contains similar language, he said. California's, which has been on the books for a number of years, does not permit dormancy fees, nor does it require escheatment. Also, California gift cards not affiliated with a particular retailer may have an expiration date only if it appears on the card.
Many consumers are not aware of the dormancy fees and would avoid general-purpose gift cards if they knew about the fees, according to a May survey by Synergistics Research Corp. of Atlanta. The firm called 1,000 consumers, 476 of whom said they had purchased a gift card or were likely to do so. Among that subset, 63% said they were not aware that some gift cards carry dormancy fees, and 77% said that in the future they would either avoid gift cards with such fees or stop buying gift cards altogether.
William H. McCracken, the chief executive officer of Synergistics, wrote in a report about the survey that there is a "strong feeling that these fees are not fair," and that without clearer disclosures about the fees, there is a potential for consumer backlash.
Most retailers do not charge an up-front fee for their cards, because they will eventually get the entire card balance once the sale is made. Some retailers have dormancy fees, and some do not.
"The sting to this product" is that in 12 months the card will no longer have the same value as it had when it was issued, Mr. McCracken said. "It's a gift that keeps on giving, but a gift that keeps on taking."
