Prepaid Gift Cards

For years, retailers have offered customers the ability to pay on account for their products and receive gift certificates or cards. This method of retailing has been widely popular and successful and hasn't gone unnoticed by major financial institutions. Since late 2002, major credit providers, VISA, Mastercard, American Express, and others have entered the prepaid gift card market with great results. Last year alone, according to one estimate, sales through gift cards were $30 billion, and this figure is expected to grow to $73 billion by 2007. Another estimate places last year's sales at $45 billion with a projection of $90 billion by 2007.

With new applications and new users, the market for stored value plastic cards is expected to continue at double-digit growth rates for the foreseeable future. Although it has a short history, the current realm of gift cards, re-loadable personal spending cards, prepaid gift cards, and travel cards appears to have an enduring future. Travel cards, for instance, are projected to make inroads into the $30 billion traveler check market.

However, the gift card story is not all positive. On the down side is the fact that not all prepaid gift cards are the same and there are major differences between retailer-issued and bank-issued gift cards.

When it comes to measuring bank gift cards against retail gift cards, possibly the greatest difference is that financial institutions have global acceptance at over 30 million merchants and that all the rights and protection afforded to credit cards are applicable to their prepaid products. These include chargeback rights, dispute management and "zero liability" protection if a card is lost or stolen. These are rights typically not afforded consumers purchasing or receiving retailer-issued gift cards. Furthermore, the residual value of bank issued cards never expires.

Since the phenomenon of gift cards is relatively new, many rights and protections are not clear. Therefore, it is the subject of proposed legislation in a number of jurisdictions. As examples, the issues of fees, devaluation, purchasers' rights, and expiration limits are under consideration in Florida, Hawaii, South Carolina, and Georgia.

In summary, prepaid gift cards are a growing and dynamic influence in the economy and lawmakers across the nation are scurrying to produce adequate legislation. Stay tuned.