Having Stopped Branch Sales, Chase Exits the Open-Loop Gift Card Business Entirely

By John Stewart

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JPMorgan Chase & Co., which this spring stopped selling Visa gift cards through its network of branches, has now quit the business entirely. The decision comes weeks ahead of the biggest selling season of the year for gift cards but doesn’t surprise some observers, who point to the challenges recent regulation poses for bank issuers of the plastic.

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Chase’s move to stop accepting online orders for the cards took effect Sept. 22. In a notice on its Web site, the money-center bank says holders of active cards may continue to use them until the value runs out or until they expire.

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Chase will not disclose how many gift cards it has in circulation, but a spokesperson says the bank decided to get out of the business because of its size relative to other business lines that the bank believes offer better growth potential. “We are broadly exiting businesses where we don’t have scale, where we don’t have broad demand,” the spokesperson says. “It’s just a very small business.”

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The move follows the bank’s decision to quit selling its Visa gift card in its 5,500 U.S. branches. At the time, Chase billed the decision as a temporary move and said customers could continue to order cards at its Web site, with the bank forgoing its standard $4.95 shipping fee. The temporary pull-out from the branches is now permanent.

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While the decision to exit gift cards, especially open-loop, major-brand cards, may seem surprising with the holiday-shopping season just weeks away, some experts say the economics of the business could have dictated the bank’s thinking.

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The Durbin Amendment to the 2010 Dodd-Frank Act, for example, restricts debit interchange income for issuers with $10 billion or more in assets and requires at least two unrelated networks for transaction routing on all debit cards, regardless of the issuer’s size. What is often overlooked is that the rules also cover open-loop gift cards that work on the Visa or MasterCard networks.

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The regulations, which were codified by the Federal Reserve Board and took effect at separate times in late 2011 and early 2012, add costs and cut revenue for debit and gift cards and may have influenced Chase’s decision this spring to suspend branch sales of its Visa gift cards, says Ben Jackson, a senior analyst at Maynard, Mass.-based Mercator Advisory Group.

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In July, a federal judge threw out the Fed’s rules, arguing they did not fully reflect the apparently more restrictive pricing and routing language of the amendment. While the Fed has said it will appeal that decision, the court’s action has led many observers to believe even more draconian limits on interchange and expansive requirements for routing could be on the way.

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That may have played a role in Chase’s move to abandon the business entirely, Jackson says. “For Chase, if the only real income is going to come when the card is purchased, it quickly becomes fairly untenable,” he argues. “This is what it looks like to me, given the timing of everything.”

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The Chase spokesperson calls that reasoning a “stretch,” but if Durbin and the federal court decision did play a role in its thinking, Chase may not be alone in re-evaluating the economics of gift cards. Since the July court decision, “there’s been a lot of concern in the industry about whether Visa and MasterCard gift cards will continue to be viable,” Jackson says.