In The Blogs

The Gift Card Scam

| Tue Nov. 17, 2009 10:11 AM PST

Here's the latest good-news-bad-news on the financial regulation front:

The Federal Reserve today proposed new rules that would protect gift card users from fees and other unexpected restrictions.

....Under the proposed rules, gift cards would not expire until at least five years from the purchase date. Service and inactivity fees could only be charged once a month and only after a card had been inactive for at least a year.

The good news is obvious: at least the Fed is finally doing something. But the bad news is equally obvious: Why did it take so long? These things are plainly marketed as replacements for cash, after all. And why, even now, are the rules so lame? California flatly prevents both expiration dates and fees, and guess what? Gift card business is booming.

On a more analytical level, I'll say this: I can understand why gift cards might eventually expire, both for accounting reasons and for common sense reasons. But inactivity fees? Come on. There's no reason to make a card inactive in the first place, and there's no cost to re-activating if you do. This is just plain and simple robbery. The fact that the Fed caved in to industry pressure to allow this is exactly why we need a Consumer Finance Protection Agency. A CFPA would never allow scams like this.

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Kevin Drum is a political blogger for Mother Jones. For more of his stories, click here.

Comments

Not just cash replacement

Submitted by Walker (not verified) on Tue Nov. 17, 2009 10:40 AM PST.

A significant part of the gift card market is to allow teen agers to shop online without having access to their parents credit card. Ideally, kids could have generic debt cards that parents refuel. Right now, this does not work, because of the service costs on maintaining an account with such a small balance.

In activity fees? How about

Submitted by Anonymous (not verified) on Tue Nov. 17, 2009 10:47 AM PST.

In activity fees?

How about this: if the card has been inactive for a year, a one time charge of $10 is made and a check is sent to the address of the card holder, with a note explaining the card has expired.

Problem with that -- they

Submitted by Anonymous (not verified) on Tue Nov. 17, 2009 10:57 AM PST.

Problem with that -- they probably won't have the address of the card holder. Maintaining such a database would be a big expense.

I buy a gift card and send it to someone for their birthday, or Christmas. Hence the term "GIft Card." They should be able to just take it to the store and use it. Period.

Starbucks, yeah I know, has

Submitted by Anonymous (not verified) on Tue Nov. 17, 2009 11:27 AM PST.

Starbucks, yeah I know, has a nice online registration. If you lose your card or have it stolen, they will send you out a new card with the remaining balance. Of course, they offer this because they want you to recharge your card online and buy all sorts of burnt coffee nastiness.

But it should be pretty cheap to make people that offer these cards to have an online registration to get their stored value back when the card expires.

So, these rules are only

Submitted by David in NY (not verified) on Tue Nov. 17, 2009 10:54 AM PST.

So, these rules are only "proposed" right. How do people comment to the Fed about the idiocy of "inactivity fees" before they go into effect? And I really like Anonymous's suggestion that if an inactivity fee is charged, the remaining principal must be refunded. (Of course, finding the owner might be hard.)

Low expectations

Submitted by g. powell on Tue Nov. 17, 2009 10:54 AM PST.

"A CFPA would never allow scams like this."

Don't be so sure, because industry capture of the agency that will give cover to these nickel-and-dime predators is very likely. I just hope that the protection agency, if it is in fact established, won't be completely useless.

You're right, G.

Submitted by thersites on Tue Nov. 17, 2009 10:59 AM PST.

But I sort of assumed Kevin was being sarcastic.

I'm not bright enough to

Submitted by g. powell on Tue Nov. 17, 2009 11:01 AM PST.

I'm not bright enough to understand sarcasm.

I wasn't really being

Submitted by Kevin Drum on Tue Nov. 17, 2009 4:37 PM PST.

I wasn't really being sarcastic. Regulatory capture is a problem, but the CFPA will probably be in decent shape at least for a decade or two, and that's better than nothing. What's more, if its culture gets shaped as a genuinely consumer-focused agency, it might hold out even longer. Not a panacea, in other words, but better than letting the Fed do it.

VISA-type gift cards are the real problem

Submitted by wahoofive (not verified) on Tue Nov. 17, 2009 10:55 AM PST.

Actually California only forbids these ridiculous practices for cards issued by specific vendors, such as Target or Borders. If you get a generic VISA-branded card, it can still expire, tack on ridiculous fees (such as charging you for finding out your balance), etc. Since the intent of these cards is to be gifts, it's insane that the recipient has to pay these fees.

The only charges that should be allowed on such cards is a premium over the face value at the time of sale.

Retailers love gift cards

Submitted by Arachnae on Tue Nov. 17, 2009 10:58 AM PST.

Retailers love gift cards and gift certificates because a significant minority - like 20-30 percent - of them will never be used; lost, forgotten or the recipient just doesn't care for the kind of merchandise the retailer they were bought from carries. (Give your grannie a gift card to Hot Topic, for example) So it's often free money to the issuer. But they're an accounting pain if the certificate is bought in one calendar year and redeemed in another. Just saying.

"This is just plain and

Submitted by alex (not verified) on Tue Nov. 17, 2009 11:00 AM PST.

"This is just plain and simple robbery."

No, no, no. In the modern definition anything that benefits finance, like charging you to hold onto your money, is "good for the economy".

If you don't like gift cards

Submitted by MacGruber on Tue Nov. 17, 2009 12:17 PM PST.

If you don't like gift cards - don't buy them.

If you don't read the fine print - that's your fault.

But by all means, let's regulate the market for them - to death. That's what the Founding Fathers envisioned: a government to protect its citizens from their own stupidity.

I for one can't wait for CFPA. I will email them every day, asking them if X product is safe or Y financial product is a scam. Since it is the government, I'm sure I'll get a prompt, coherent and correct response.

The problem with gift cards

Submitted by g. powell on Tue Nov. 17, 2009 12:30 PM PST.

The problem with gift cards was not for the buyers, it was for the receivers, who probably didn't ask for them in the first place.

That's why they are called "gift cards".

Kevin is a 50 year old man,

Submitted by Another Brad (not verified) on Tue Nov. 17, 2009 1:09 PM PST.

Kevin is a 50 year old man, and yet he needs the federal government to protect him from every single inconvenience or allegedly unfair treatment that life throws his way. Yes, by all means let's start a new 10 billion dollar a year federal agency to deal with the terrible devastation gift cards are wreaking all over the land. Because apparently legislators don't do anything anymore.

"he needs the federal

Submitted by alex (not verified) on Tue Nov. 17, 2009 2:12 PM PST.

"he needs the federal government to protect him from every single inconvenience or allegedly unfair treatment that life throws his way"

Needs? No. Wants? Yes. And considering the trillions that the Fed and the Treasury have been throwing at the financial industry, who can blame him for wanting to get a little cut?

"let's start a new 10 billion dollar a year federal agency"

Only 10 billion? These days that's a rounding error - Goldman-Sach's cut of the AIG bailout alone was more than that.

I don't think I've ever held

Submitted by daveadams (not verified) on Tue Nov. 17, 2009 1:23 PM PST.

I don't think I've ever held onto a gift card more than a week without blowing the entire balance. But this seems like a weird thing to spend time worrying about. Sure, common sense says retailers shouldn't be able to screw people over on these, but surely this is tiny potatoes compared to any other random scammish aspect of the retail industry, like store credit cards, or what they pay their employees, or their return policies, or the vast wastelands of empty big box stores that you can find at least one of in any major metro area, or the subsidies they extort from municipalities to build those future wastelands tax free, or the labor conditions under which their merchandise is manufactured or harvested...

Sure, it's a small problem

Submitted by Kevin Drum on Tue Nov. 17, 2009 4:44 PM PST.

Sure, it's a small problem in the great scheme of things. But that's why it works so well. It's like outrageous overdraft fees on debit cards. They're small enough in absolute terms that no one worries about them too much, but they add up to a pretty big ripoff when taken as a whole. If a bank steals a dime from each of its customers, hardly anyone notices even though the bank ends up making a lot of money on the deal. That's what makes it so attractive. And that's why it should be illegal.

Cash -- always the right

Submitted by trotsky (not verified) on Tue Nov. 17, 2009 1:41 PM PST.

Cash -- always the right color, always the right size.

I think the government

Submitted by JeffF (not verified) on Tue Nov. 17, 2009 3:51 PM PST.

I think the government should make two changes:
1) No fees can be deducted from card balances.
2) Card balances revert to the government after five years.

Suddenly the incentives for retailers would be to get people to use cards rather than to lose them.

OH, btw in some states

Submitted by JeffF (not verified) on Tue Nov. 17, 2009 3:55 PM PST.

OH, btw in some states unused cards do eventually go to the government as unclaimed property.

Definitely the way to go.

Incentives like charging an inactivity fee?

Submitted by jrw on Tue Nov. 17, 2009 6:12 PM PST.

Full disclosure: I've owned a retail business for nearly 30 years. We sell gift cards. I don't make people buy them; they do so of their own free will. We do not charge inactivity fees nor do we reduce balances. I can't make people use their gift cards, nor can I ensure people do not lose them. Once they buy a gift card, what they do with the card is up to them.

Why should unused card balances revert to the government? Please tell me the logic of that. Is it just because there might be some money there? Because businesses are bad? If I buy a concert ticket and don't show up, should that money go to the government, too? What if I pay for the all-you-can-eat buffet and just have a salad? Does the government get the lasagna?

I'm guessing you think all retailers are big, bad fat cats sitting on piles of the little people's lost gift card money. Maybe some are, but this one isn't.