Issuers and third-party distributors have high hopes on the sale and use of network-branded gift cards, or so-called "open-loop" prepaid debit cards. However, the lack of a direct banking relationship with cardholders is muddying regulatory authority over the cards.
New Hampshire and the nation's largest mall owner, Simon Property Group Inc., are squaring off over gift card fee regulations in U.S. District Court in Concord, N.H. At issue is whether state or federal banking regulators have the authority to police the fees tied to network-branded prepaid cards that carry the Visa or MasterCard logo. Some experts believe the outcome of the case could weigh heavily in deciding whether any state can determine the fee policies for network-branded cards.
Simon sells its Visa-branded gift card at 170 malls across the country, including in New Hampshire. Minneapolis-based U.S. Bancorp issues most of the cards, though Sioux City, S.D.-based MetaBank issues some as well.
New Hampshire's consumer-protection law does not allow gift-certificate value to expire, and the state's attorney general contends the same policy should apply to network-branded gift cards marketed by shopping malls. Simon contends that because a nationally charted bank issues its prepaid mall card, the state lacks the authority to set the fee policies that apply to it.
Unlike traditional debit cards linked to checking accounts, buyers of prepaid cards do not have to have an account or direct relationship with the issuer. In many cases, a third party, such as Simon, will market and support the cards. Even though a bank actually must issue the plastic if it carries the Visa or MasterCard brand mark, it may do little else except collect interchange revenue when it is used to initiate purchases.
As a result, some states contend the issuer does little to promote and manage the card, so the plastic does not fall under the purview of federal regulation. As such, bank-issued gift cards sold by malls or other third-party marketers could face different fee regulations in every state.
A New Hampshire Superior Court recently declared the Simon cards in violation of state law because they impose maintenance fees applied to the card value after 13 months of nonuse. Such fees whittle down the card balance to zero over time, allowing the issuer or merchant, depending on the contractual relationship and state escheatment laws, to keep the unspent funds.
Simon has asked the federal court in Concord to rule on whether the state has authority to regulate its mall gift card fees.
Some marketers of network-branded prepaid cards are looking to the U.S. Office of the Comptroller of the Currency, which regulates federally chartered banks, to side with them on maintenance fees applied to cards issued by national banks. The OCC played a similar role in the late 1990s when bank ATM deployers began imposing surcharges on noncustomers who withdrew cash from their machines. Several states and local communities moved to ban surcharges, but the OCC argued successfully before various courts that it had sole authority to regulate the ATM fees of nationally chartered banks.
However, thus far the OCC has declined to intervene in the gift card suit in New Hampshire, or in similar cases in New York and Massachusetts.
In its filing with the federal court, Simon contends it is only the "program manager" of the cards, while the bank issuers own the cards, set card fees and contract with third parties to process transactions. WildCard Systems processes Simon's gift card transactions.
New Hampshire's attorney general, however, contends that the key relationships are between Simon, consumers who buy its mall card and WildCard as the card processor. The state notes that while Charlotte, N.C.-based Bank of America previously issued the Simon Visa Giftcard, the program remained unchanged after BofA stopped issuing the card earlier this year.
State's Position
The card purchaser has no direct relationship with the issuer, according to the state. "Any consumer wishing to purchase a card was and is required to do so through (Simon)," the state's filing reads. "At no time have the cards been sold through BofA or through any of the banks."
The state contends issuers do not even know the identities of cardholders. "It doesn't seem like a bank product to us," says David Rienzo, a New Hampshire assistant attorney general.
Ruling Crucial
Critical to the business case for prepaid gift cards is the ability to retain unspent funds through maintenance fees. Tim Sloane, an analyst for the Mercator Advisory Group who submitted an affidavit on behalf of Simon in the New Hampshire case, says the outcome of that litigation will play a significant role in determining the profitability of network-branded gift cards.
Four states currently ban expiration dates on gift cards, nine restrict fees and expirations, and numerous others are considering various fee restrictions, according to Simon's filing. If the court rules in favor of the states, Visa gift cards could not be sold in states that ban expiration dates. Visa requires all cards that carry its brand to have expiration dates as a fraud-prevention measure.
Subsequently, it would be virtually impossible for a nationally branded gift card such as Simon's to meet all states' restrictions and be profitable, Sloane says.
(c) 2005 Cards & Payments and SourceMedia, Inc. All Rights Reserved.
http://www.cardforum.com http://www.sourcemedia.com
