Electronic Gift Cards:
Increased Opportunities Come with Increased Risks

Electronic gift cards are big business. Surveys by the National Retail Federation indicate holiday season gift card sales reached $17.34 billion in 2004 and $18.48 billion in 2005. As electronic gift cards have surged in popularity among retailers and consumers, they have also attracted the attention of both federal and state lawmakers. Most of the pending legislation has focused on consumer issues such as expiration dates or inactivity fees. In addition to the consumer focused legislation, electronic gift cards may also raise issues under state unclaimed property (“escheat”) and money transmitter laws, as well as federal laws pertaining to money services businesses.

Currently pending before Congress is the “Gift Card Protection Act”, a law which, if enacted, would require the Federal Trade Commission to promulgate a rule prohibiting expiration dates or dormancy fees on gift certificates, including electronic gift cards. Although some states already prohibit fees and expiration dates, the majority of states which have enacted legislation addressing these issues allow fees and expiration dates under certain circumstances, as long as they are conspicuously disclosed to the consumer.

Estimates indicate that approximately 10% of gift cards are never redeemed. Given the size of the emerging industry, this 10% may amount to billions of dollars. Although many retailers may hope to gain a windfall from gift cards that are never redeemed, many states also have an interest in these unclaimed funds. Although some states, such as Indiana, except gift cards from their unclaimed property laws, many states require that the value of unused, or abandoned, gift cards be reported and turned over to the state. In many states, failure to comply may lead to interest charges and penalties.

Issuing electronic gift cards, which are a form of stored value card, may also require registering as a money transmission business in many states and compliance with federal regulations. In addition to any potentially applicable state licensing requirements, federal regulations state that an issuer, seller, or redeemer of stored value which issues, sells, or redeems more than $1,000 of stored value to one person on any one day is a money services business. Among other requirements, money services businesses must develop and implement an effective anti-money laundering program. Although the $1,000 threshold may exclude most gift card retailers, the federal rule applies in the aggregate. Therefore, if a retailer sells two $500 gift cards to one person throughout the course of a day, they are deemed a money services business and must comply with the federal regulations.

The electronic gift card business is booming and may help retailers attract customers that would not normally shop in their stores, however, great care must be taken to ensure that business practices comply with the applicable state and federal laws in an ever evolving legal landscape.

For further information, please contact Roberto Ramirez.

This publication is intended for general information purposes only and does not and is not intended to constitute legal advice. The reader must consult with legal counsel to determine how laws or decisions discussed herein apply to the reader's specific circumstances.