Fed Gets Into The Holiday Spirit By Regulating Gift Cards

Just in time for the holidays, the Federal Reserve today announced a new proposal to regulate gift cards. The new rules would be a present for consumers, as they would prohibit companies selling gift cards from imposing excessive penalties for not using gift cards in a timely manner. Although, I've had trouble with some parts of the credit card regulation that's come down the pipe this year, this aspect is one of the most reasonable. In fact, I think the Fed could have gone even further.

Here's the detail from the Fed press release:

The proposed rules would prohibit dormancy, inactivity, and service fees on gift cards unless: (1) there has been at least one year of inactivity on the certificate or card; (2) no more than one such fee is charged per month; and (3) the consumer is given clear and conspicuous disclosures about the fees. Expiration dates for funds underlying gift cards must be at least five years after the date of issuance, or five years after the date when funds were last loaded.

If I knew a gift card had the kind of fees that this rule seeks to regulate, then I would surely think twice before purchasing it. It's completely unreasonable to have excessive fees or quick expiration limits on gift cards -- they are essentially a substitute for cash, directed at a specific merchant.

Frankly, I can't understand why a vendor would want to impose such rules, other than to rip off customers. Retailers should be encouraging gift card purchases, as they generally make more in a sale than the value of the card, so that customers can utilize the entire amount. And if they don't -- that's even better for the stores. Then they get money without a sale for whatever portion is unused.

Time expiration makes even less sense. Prices tend to increase, not decrease, due to inflation. So five years out, the real value of a gift card has already declined, which means that the company who issued it is better off the longer you take to use the card. And that doesn't even take into effect the time value of money, another advantage to stores that sell gift cards.

The only argument I can see for expiration limits at all would have to do with accounting treatment. At some point, you want to be able to get very old liabilities off of your balance sheet. If you've got gift cards sitting out there for 10 or 15 years, chances are they aren't going to be cashed in. That assumption should be reflected in a company's financials. But that has nothing to do with the idea for imposing fees or otherwise penalizing gift cardholders for not using their card quickly enough in the shorter-term.

So I would have liked to have seen even stricter regulations. Why allow fees at all before 5+ years? Companies are already better off issuing gift cards in the first place without playing these games. I guess better disclosure will help, if people actually read it. Unfortunately, even though this proposal coincides with the start of the holiday shopping season, the actual regulatory change won't take effect until next August.