Durbin Economics Begin to Impact Vibrant Market for Open-Loop, Big-Bank Gift Cards

By John Stewart

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The inexorable economics of the Durbin Amendment are beginning to make themselves felt in the vibrant business of network-branded gift cards.

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JPMorgan Chase & Co., one of a handful of major banks that offer Visa- and MasterCard-branded gift cards, this spring stopped selling its Visa gift cards in its more than 5,500 U.S. branches. Instead, consumers can buy them only on Chase’s Web site, with the bank waiving its $4.95 shipping fee. While Chase will not comment on the move beyond confirming it, it is likely tied to Durbin, experts say.

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“The thinking is the [open-loop] gift card business has gotten a lot tougher,” says Ben Jackson, an analyst who follows prepaid cards for Maynard, Mass.-based Mercator Advisory Group. “This is a very smart move on Chase’s part. It’s hedging its bets.”

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With the uncertainty created by a recent court decision that could make Durbin’s restrictions even more stringent, more big banks may soon be similarly hedging their investments in gift cards, Jackson predicts. “My guess is all the major banks offering this [product] are taking a hard look at how do we offer open-loop gift cards,” he tells Digital Transactions News. “It’s not going to be a profit center.”

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A quick online check of three other big banks—Bank of America Corp., US Bancorp, and Wells Fargo & Co.—found no changes in gift card marketing similar to, or on a par with, Chase’s decision to cease branch sales. While BofA’s site says it sells its Visa-branded gift cards only to “business customers,” not consumers, a bank spokesperson says this policy has been in effect since 2005.

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Meanwhile, open-loop gift cards—cards that can be used at any store that accepts the card’s network brand—remain a popular consumer product. Some 214 million were sold last year, up about 7% from 201l, according to Mercator data.

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The Durbin debit card rules, which were codified in 2011 by the Federal Reserve Board, hit gift cards because, while the law carved out an exemption for general-purpose reloadable prepaid cards, it excluded gift cards from the carve-out. That means issuers with more than $10 billion in assets are limited to about 24 cents in interchange per transaction, or roughly half what the market rate for debit transactions had been.

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Moreover, all issuers, not just the largest ones, are subject to the law’s routing rules, which require cards to work on at least two competing debit networks. That dramatically raises the costs for gift cards. “This has been a struggle for gift card providers,” says Jackson. “It complicates the operation of these programs.”

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The consequence for the largest issuers is reduced fee income and increased costs. “The card becomes less of an opportunity to make money and more of a cost center,” Jackson says. “At best you’re looking at break-even prospects.”

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Jackson speculates Chase’s decision to take the cards out of its extensive branch network is related to these economics. The move relieves the bank of having to create and send card stock to thousands of locations, and then worry about having to recall or destroy that card stock should the law change. And moving the card to the Web exclusively opens the opportunity for on-demand, just-in-time card fulfillment.”You don’t want to be over-invested in this product,” Jackson says. “Chase saw the handwriting on the wall.”

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The prospects for changes in the Fed’s Durbin rules were heightened at the end of July when a federal judge threw out the Fed’s 2011 interchange cap along with its routing rules, which took effect in 2012. Arguing the Fed had strayed too far from Congressional intent, the court’s decision appears to mandate a much lower cap and more complicated routing rules, including a minimum of four network choices, two for PIN and two for signature. The court has stayed the decision for the time being, and the Fed has said it will appeal it.

While no one can say for sure what shape the rules will finally take, it seems likely the uncertainty surrounding Durbin could further hamper gift cards from major banks. “Even before this [latest decision], there was a lot of thought given to what are the economics of open-loop gift cards,” Jackson says.