The CARD Act Was No Gift

The Federal Reserve is required under the CARD Act to publish final regulations for gift cards before February 22, 2010. The effective date for the rules will be six months later, August 22, 2010. The comment period on the proposed rules published in November 2009 closed at the end of December.

The Federal Reserve’s initial proposal was well thought out and cognizant of the complex realities of the prepaid card market, although constrained by the contents of the CARD Act itself, for which the same claim can’t easily be made. Seemingly simple in concept, the gift card requirements of the CARD Act require bright line distinctions that the Federal Reserve struggled to implement in its proposed rules.

For instance, one of the several exclusions from coverage under the CARD Act is for reloadable cards, codes or devices that are not marketed as gift cards. Recognizing that there are many uses for reloadable prepaid cards, the proposed rules and accompanying official commentary would deny the exclusion in any instance where any party in the marketing and distribution chain of the prepaid product even hinted that the card could be given as a gift. For instance, celebratory graphics or other indication that the card could be given to others could constitute such a “hint”, even if the primary purpose of the card was, for instance, health care expenses or a general-purpose transaction account for the unbanked.

Thinking this through, the Federal Reserve realized that issuers or program managers would be at the mercy of other parties in the distribution chain, so tried to create a safe harbor in the proposed rules and official commentary. Issuers or other affected parties can preserve the exclusion for reloadable cards, codes or devices if they implement reasonable procedures to prevent the cards from being marketed as gift cards. This includes enforcement of contractual provisions with retail sellers requiring procedures designed to avoid the marketing of the prepaid cards as gift cards. Unfortunately, the examples given of what qualifies and does not qualify for the safe harbor are problematic.

The example given of a qualifying procedure is having sales displays for gift cards physically separated from displays for other prepaid cards. The example given for a non-qualifying procedure is having all prepaid cards, gift cards and otherwise, on one kiosk with a sign reading “gift cards.” Aside from the difficulty for many retailers in allocating more valuable selling floor space to two different types of prepaid cards, it is also not clear whether one kiosk with two different signs appropriately placed would qualify for the safe harbor, as perhaps it should.

There will be many other indistinct lines that participants in the prepaid card marketplace will need to grapple with once the proposed rules become effective. The prepaid card regulatory environment will be more complicated than ever.

Copyright Broox Peterson 2010. The author is a payments legal specialist with over 25 years in the industry providing legal consulting and transactional support services. and

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