Gift cards are consistently rated as one of the most sought after presents during the holiday season, and reports indicate that Americans will spend approximately $651 billion on prepaid cards this year. The prepaid and gift card industry has increasingly become subject to scrutiny by federal and state regulators, and these products are currently regulated by various disclosure requirements at the federal and state level, money transmitter licensing laws, abandoned property laws, and anti-money laundering laws. Retailers attempting to comply with the varying regulations find it akin to legal “whack-a-mole” as the satisfaction of one set of regulations may result in a new set of requirements under unrelated laws. Among the recent developments affecting the industry is a proposed rule that was issued by the Consumer Financial Protection Bureau (CFPB) in November 2014 related to prepaid financial products, as well as a new rule effective as of October 2015 that exposes merchants to liability for fraud-related losses if they have not implemented chip-embedded checkout technology.

Generally speaking, gift cards can be grouped into two categories: open-loop or closed-loop. Open-loop gift cards are affiliated with payment processors such as Visa, American Express or MasterCard and can generally be used anywhere the cards are accepted. On the other hand, closed-loop cards can only be redeemed by the merchant, or affiliated merchants, that issued the card as payment for goods or services.

Federal Rules and Regulations

Credit CARD Act. Among the federal regulations applicable to gift cards is the Credit Card Accountability Responsibility and Disclosure Act of 2009 (Credit CARD Act) that was enacted on May 22, 2009 and amended the Electronic Funds Transfer Act (EFTA). The Credit CARD Act created new protections for consumers by setting forth disclosure requirements for gift certificates, store gift cards, and general-use prepaid cards as defined in the Act. Among these protections are restrictions on an issuer’s ability to impose dormancy and service fees, as well as restrictions on expiration dates of less than five years after the date when a gift card is issued. Expiration dates and fee-related disclosures must also be clearly and conspicuously stated on the gift card under the Credit CARD Act.

Anti-money laundering rules. A final rule focused on anti-money laundering efforts for the prepaid card industry was issued by the Financial Crimes Enforcement Network on July 26, 2011. This rule established reporting requirements for suspicious activity and information collection requirements for customers and transactions in order to combat terrorist financing, money laundering, and other illegal transactions in connection with stored value cards. Issuers of closed-loop prepaid cards sold in amounts of $2,000 or less are exempted from the rule. Issuers of prepaid cards that do not fall into one of the exemptions or exclusions under the rule are required to maintain an anti-money laundering program if the prepaid cards are within the scope of the final rule and certain conditions are met.

CFPB proposed rule. The CFPB, as the independent agency of the government that has the authority to issue rules and regulations to protect consumers, released a proposed rule on November 13, 2014 to extend comprehensive federal consumer protections to the prepaid card industry by broadening the scope of the EFTA to include certain prepaid products. As proposed, the rule applies to prepaid accounts and other devices that can be used at unaffiliated merchants and does not apply to gift cards redeemable only at a single merchant or group of affiliated merchants. The CFPB is not focused on closed-loop network payment products at this point in time because, unlike open-loop prepaid cards, they cannot be used in lieu of traditional banking products and consumers are less likely to load a significant amount of funds on closed-loop cards. The proposed rule would modify Regulation E to the EFTA to require financial institutions to provide specific disclosures to consumers both before and after the acquisition of a prepaid account and would also restrict overdraft services and other credit features. Some industry reports indicate that the final rule will be issued in May or June of this year.

Texas Rules and Regulations

Texas Business and Commerce Code. In addition to the aforementioned federal rules, the sale and issuance of gift cards are also subject to a number of state rules and regulations in Texas. Section 604 of the Texas Business and Commerce Code applies to issuers of “stored value cards,” with certain exceptions, and sets forth requirements related to the imposition of fees and disclosure requirements. Similar to the Credit CARD Act, Section 604 requires that the expiration date or policy, fee or material restriction on the contract term applicable to a stored value card be clearly and conspicuously disclosed to the purchaser at the time the card is sold.

Texas Finance Code. The Texas Finance Code requires that a person who engages in the business of money transmission obtain a license from the Texas Department of Banking unless an exclusion or exemption applies, or the person is an authorized delegate of a licensed holder (§151.302(a)). The sale of gift cards falls within the definition of “money transmission” under the Finance Code, which is defined as “the receipt of money or monetary value by any means in exchange for a promise to make the money or monetary value available at a later time or different location,” which includes selling or issuing stored value cards (Tex. Fin. Code §151.301(b)(4)). Accordingly, the Texas Department of Banking considers gift certificates and gift cards to be stored value products for licensing purposes.

In order to obtain a license under the Finance Code, a person must meet a number of qualifications, which include minimum net worth requirements and the maintenance of a financial condition that will enable the applicant to safely and soundly engage in the business of money transmission. Under §151.003(3) of the Finance Code, federally insured financial institutions are excluded from the money transmitter licensing requirements and any person acting as an agent of a federally insured financial institution is also excluded pursuant to §151.003(5), provided certain requirements are met. A non-exempt person engaging in the business of money transmission may submit an application to the Texas Department of Banking seeking an exemption by setting forth evidence that the person (a) engages in money transmission only incidentally to the extent necessary to accomplish an unrelated primary business objective, (b) only advertises or offers money transmission services to the extent necessary to advertise the primary business objective, and (c) either does not charge a fee to transmit money or transmits money exclusively in connection with commercial contracts in interstate commerce (Tex. Fin. Code §151.302(c)). The Banking Commissioner may grant an exemption upon a finding that these requirements are met and that granting the exemption is in the public interest.

Escheat laws. Escheat laws vary by state, but generally state law requires that issuers remit underlying funds to the state within three or four years after the purchase of a gift card. In Texas, if the existence and location of the owner is unknown, a stored value card is presumed abandoned to the extent of the unredeemed value of the card on the earlier of the card’s expiration date, or the third anniversary of the date of issuance, if the card was not used after issuance, or of the date when the card was last used or value was last added (Tex. Prop. Code §72.1016(b)(1)-(2)). Separate restrictions apply if the card represents wages. Stored value cards generally include gift cards and gift certificates, but cards that do not expire and for which the seller does not charge a fee other than handling, access and replacement fees are excluded from the escheat requirements in Texas (Tex. Prop. Code.§72.1016(a)(1); Tex. Bus. & Comm. Code §604.002(5)).