Will We Soon See Fewer Gift Cards on the Racks?

Gift cards have quietly consumed more and more space on retail displays over the years. They have seemingly been the perfect gift for those on our gift lists for whom we don’t want to waste precious dollars buying something that will not be used or appreciated. But if you've never cashed one in, you might be surprised to learn that many cards become worthless following a brief period prior to expiration and even deduct usage fees from the gifted value. Fortunately, these nefarious tactics will soon be restricted.

According to yesterday's Huffington Post "The Federal Reserve issued new rules on Tuesday to protect Americans from getting stung by unexpected fees or restrictions on gift cards." And Comsumers Union web site states: "The Credit Card Act of 2009 prohibits gift cards (store issued or bank issued "gift cards") from expiring before 5 years from the date of purchase or when money was last loaded onto a card, and prohibits fees for the first 12 months." Interestingly, CU lists 32 States that have previously enacted similar regulations but according to Eyewitness News: the Credit Card Accountability and Disclosure Act … announced by the United States Federal Reserve Tuesday … reinstates Connecticut's [and presumably other state’s] authority to enforce its gift card laws on all cards, including those issued by national banks ... [and that] Each year, consumers in Connecticut lose millions of dollars in unused and expired gift cards."

For us "free traders" out there who generally wince at regulation, this protection -- while clearly needed -- illuminates a very troubling issue: The companies that created this need for regulation have brought it upon themselves. If I correctly recall my Wharton Financial Accounting course work, prepayment for goods and services is carried as a liability on the balance sheet and reduces current income. And while prepayment to the tune of millions of dollars might be a welcome boost to cash flow, it would appear that the accounting complexities involved with the mass consumption of gift cards might well have originally presented a disincentive to sell them. That is unless the primary purpose behind implementing the programs was to extort fees and severely limit the terms of use in the first place.

If I'm correct in making this accusation, we can expect to see far fewer gift cards offered on retail store kiosks in the future. The new regulations are set to take effect this summer on the 22nd of August, 2010.

William Busch

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