Fed Surprises Prepaid Industry with a Tight Deadline for Compliance

Meeting the Aug. 22 deadline for complying with new rules for prepaid and gift cards released on Wednesday by the Federal Reserve will be a logistical nightmare for card companies and retailers that have to replace hundreds of millions of cards before the 2010 holiday shopping season, according to a prepaid card industry trade group. The 104 pages of rules, issued by the Fed to enforce the Credit CARD Act signed into law last year, mandate changes in disclosure, fee structures, card expiration dates, and related areas. The rule covers gift certificates, store gift cards, and general use prepaid cards. While the industry was expecting the changes, no one anticipated the August deadline, says a spokesperson for the Network Branded Prepaid Card Association (NBPCA). “Everything else, there were no surprises generally,” she says. “These are things most of the industry was doing anyway. They were moving towards longer expiration dates, the fees were being changed. A lot of what you saw on a practical basis was already being adopted by a lot of the companies. But we're very concerned about the August deadline.” Because it takes on average four months to get gift cards to market, hundreds of millions created for the holiday season already are in inventory or on retailers' shelves, the spokesperson says. Retailers typically begin selling holiday gift cards in November. The NBPCA estimates there are about 100 million to 150 million network-branded gift cards in distribution. A roughly equal number of private-label gift cards also may be in circulation, according to some industry estimates. “Because of the four months at a minimum it takes to produce gift cards and other types of prepaid cards, issuers really have to have everything in place no later than May so we can be assured we're going to have those cards available at the store level for consumers by November,” she says. The new prepaid card rules pose a “huge challenge” for issuers and retailers, says Tim Sloane, director of the prepaid advisory service at Maynard, Mass.-based Mercator Advisory Group Inc. “When they're in distribution, you have cards on the shelves, you've got cards in inventory waiting to be fulfilled, you have cards in production, and typically that's a significant volume of cards,” he says. “They're going to have to look at least at replacing some of the inventory they've already accumulated.” The prepaid card rules don't take into account the complex process needed to get gift cards to market, the NBPCA spokeperson says. “It's not just pulling a piece of plastic out of the clear blue sky and saying, 'here's your new gift card,'” she says. Because of the new disclosure rules, issuers must destroy all old cards and create new cards, the spokesperson says. “We now have to work with the packaging and design companies to get all the new disclosures written on not only the card, but also in the packaging that comes with the card,” she says. “Then once you get the plastic part, you have to create the magnetic encoding on that and that has to be updated for the five-year period. All these things work in concert with each other.” “Unfortunately, consumers can expect not to see all the gift cards they love and enjoy for the holiday season,” she adds. “There's a strong possibility the variety won't be there.” The Fed's prepaid card rules include the following provisions: –Dormancy, inactivity, or service fees may be assessed only for a card or certificate that has had at least one year of inactivity. There can be no more than one such fee charged per month. Consumers must be given clear and conspicuous disclosures about fees; –Service fees subject to the restriction above include monthly maintenance fees, balance-inquiry fees, and transaction-based fees, such as reload fees, ATM fees, and point-of-sale fees; –Expiration dates must be a minimum of five years after the date a certificate or card is issued or the date funds are last loaded. The expiration date restrictions apply to a consumer's funds, not to the certificate or card itself; –Fees are prohibited for replacing an expired certificate or card, or for refunding the remaining balance, if the underlying funds remain valid.