More States Sold on Reforming Gift Cards

By: - October 17, 2006 12:00 am

It has taken a few years, but state legislatures are catching up with glitches in the popularity of gift cards, the quick-fix solution for those too befuddled or time-pressed to find the perfect present.

At least 25 states have strengthened their consumer protections for the credit-card-sized scrip that more Americans now give in lieu of a hand-picked, boxed-and-bowed gift, according to the National Conference of State Legislatures. U.S. shoppers are expected to spend as much as .8 billion in 2006 on gift cards. But only in three states can consumers be guaranteed that their gift cards will be worth full value when they go to spend them at a store, restaurant or online.

Around the country, expiration dates and “processing fees” are the bane of gift card users. Shoppers might find the value of their cards eaten away by fees charged by retailers and banks – or stripped to zero if too much time elapses between when the cards were purchased and redeemed.

Starting in 2004, lawmakers in many states began responding to consumer complaints by introducing bills that would have forbade all fees and made the cards’ value perpetual. But that type of legislation rarely survived, and today only Connecticut, Montana and Rhode Island prohibit all fees and expiration dates. California, which started the movement with its gift card law of 1996, prohibits expiration dates but allows fees in certain circumstances.

More typical is Kansas’ new law, an example of the compromises that lawmakers and business groups often reach on the gift card question. Sponsored by state Rep. David Huff, a Kansas City-area Republican, the idea for the law came in 2003, after one of Huff’s constituents bought his wife a gift card to a spa and the card expired before she could redeem it, meaning the money was lost.

Huff introduced a bill that would have prohibited gift cards from expiring and taken effect on July 1, as with most Kansas legislation. But after lobbying from retailers’ groups, the final bill only guarantees that cards will be valid for at least five years after purchase, and involve no fees within one year. Also, the new law won’t take effect until Jan. 1, 2007, after this year’s holiday shopping season.

“They were not that enthused,” Huff said of businesses’ reaction to the bill.

Huff said part of the opposition came from businesses that count on a certain number of gift cards to be forgotten under Christmas trees or to flutter out of birthday cards. Unredeemed cards can add up to a lot of pure profit: Home Depot, the nation’s second-largest retailer, announced in 2005 it had made million from gift cards it didn’t expect to be redeemed. About 10 percent of the value of gift cards in the United States goes unredeemed each year, said Dennis Moroney, an analyst with the financial research firm TowerGroup.

There are two main types of gift cards: store-issued cards that work like cash when redeemed at cash registers or online, and cards issued by banks and credit businesses such as Visa or American Express that can be redeemed anyplace that takes credit cards.

Retailers’ groups say that the fees go to third-party vendors who handle and process the cards, and complain that the variety of different state regulations can confuse consumers. Advocates for bank-issued gift cards say fees and limited-use dates help keep the cards’ overall costs down for consumers. Unlike retailers’ cards, banks and credit card companies charge an upfront fee for gift cards in addition to the value buyers add.

Some large retailers, including Wal-Mart, Target and The Gap, voluntarily don’t charge service fees or impose expiration dates on their gift cards. Chain restaurants also avoid the restrictions, according to the National Restaurant Association; even if restaurant patrons wait a few years to redeem a gift card, they tend to spend more money than the card is worth.

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