Gift Card Report

STATE OF NEW YORK OFFICE OF THE ATTORNEY GENERAL THE ATTORNEY GENERAL’S GIFT CARD REPORT: Perils of Gift Cards, Knowing Your Rights and Improving Our Laws ANDREW M. CUOMO ATTORNEY GENERAL December 2008 I. Background ........................................................................................................... 1 • Store Cards versus Bank-Issued Cards .............................................................................. 1 • Gift Cards at the Supermarket – Non-traditional Sources for Gift Cards ............... 1 • E-Gift Cards and Mobile Phone Gift Cards .................................................................... 2 The Perils of Gift Cards ....................................................................................... 2 II. • • • • • • • • • • Hidden Fees and Restrictions .............................................................................................. 2 Frequently Imposed (and Sometimes Unexpected) Fees ............................................ 3 Expiration Dates...................................................................................................................... 3 Gift Cards Are Not Credit Cards – Even When They Look Like Credit Cards! . 4 Restrictions on Using Gift Cards For Partial Payment ................................................ 4 Getting Cash Back for Small Balances ............................................................................ 5 Lost Value ................................................................................................................................. 5 What If the Store Goes Into Bankruptcy? ....................................................................... 5 Defective Cards ....................................................................................................................... 6 Consumers May be Required to Use a Credit Card in Addition to a Gift Card...6 The Attorney General’s Work on Behalf of New York Consumers.…………7 III. • Mediation of Consumer Complaints.……………………………………...…….7 • The Office of the Attorney General's Enforcement Actions………………..…...7 • Interventions into Bankruptcy Proceedings on Behalf of Consumers...…..…….9 IV. The New York Gift Card Law and the Attorney General’s Commitment to Strengthening Consumer Protections ............................................................... 10 • • Consumers’ Rights Under the New York Gift Card Law......................................10 Legislative Innovations Addressing The Perils of Gift Cards ..............................10 What You Should Know About Gift Cards..................................................... 13 V. I. Background After nearly two years in office protecting the rights of real people with real problems, New York Attorney General Andrew M. Cuomo is issuing this report on an issue affecting almost every New Yorker. The ever popular gift cards consumers will receive this holiday season present perils and challenges that diminish their value at a time when families are struggling to make every dollar stretch. This report presents important tips consumers should read before purchasing gift cards for relatives and friends, and to get the most value out of the gift cards they will receive this holiday season and throughout the year. Gift cards have exploded in popularity in recent years. Large, colorful kiosks offering gift cards for every imaginable store, product and service are an everyday sight at the grocery store, pharmacy, coffeehouse, and many other retail outlets. Last year, consumers spent an estimated $88 billion on gift cards, and nearly 70 percent of consumers reported receiving a gift card in lieu of a gift or cash. While more and more people are purchasing and receiving gift cards, consumers are often surprised and dismayed to discover an array of bewildering fees and restrictions on card usage. These fees and restrictions contribute to an estimated $8 billion in unredeemed gift card value during last year alone, or around 10 percent of the total amount of gift card purchases. To help New York consumers make good decisions when purchasing gift cards and to protect the value of the cards they receive, this report discusses the fees, restrictions, and other unexpected perils associated with gift cards. It also includes important advice to consumers on their rights under the law. Finally, the report considers the current state of the law relating to gift cards and discusses needed changes to those laws. • Store Cards versus Bank-Issued Cards Gift cards come in two basic types – store cards, which are for use at a particular store or retail chain, and bank-issued gift cards, which often bear credit card company logos, and may be used at multiple merchants. In recent years, many major retailers have eliminated most fees and restrictions for their store gift cards. Bank-issued gift cards, however, are usually subject to an array of fees and other restrictions. Because bank-issued gift cards have more fees and restrictions, store cards may be a better choice. • Gift Cards at the Supermarket – Non-traditional Sources for Gift Cards As gift cards have grown in popularity, more consumers are purchasing gift cards from non-traditional sources, such as drug stores and supermarkets that sell gift cards for a variety of national retail chains. Consumers are also shopping for gift cards online and even participating in specialized gift card auction websites. These new venues for purchasing gift cards may present additional traps for consumers, such as the sale of store cards for retailers which filed for bankruptcy protection and may already have stopped accepting the cards. • E-Gift Cards and Mobile Phone Gift Cards Recently, some gift card issuers have started to offer electronic or “e-gift cards.” Electronic or e-gift cards are generally available for purchase online and may be delivered to the recipient via email. This feature makes electronic gift cards a faster way for a consumer to purchase and deliver gift cards. E-gift cards also work well with certain consumer electronic devices such as iPods or other MP3 players (e.g., e-gift cards that permit the user to download a set number of songs). Some companies are now exploring mobile gift cards that are conveyed to recipients’ cell phones via text messages. This gift card format may become increasingly popular as mobile phone technology advances. Some electronic gift cards can be printed and redeemed at a store location. Yet others can only be redeemed by telephone or online at the issuing company’s website, and will not be honored at the company’s store locations.1 Conversely, some traditional, “physical” gift cards can only be redeemed at an actual store, and not at a store’s website.2 II. The Perils of Gift Cards • “What we’ve got here is a failure to communicate” - Hidden Fees and Restrictions Many gift cards are subject to fees that detract from the value of the cards and to terms and conditions that restrict the manner in which the cards can be used. These fees and restrictions are not always adequately disclosed, leaving consumers surprised and dismayed to find the value of their cards reduced, or the cards rendered unusable, as a result. Even when fees and terms and conditions are properly disclosed to the purchaser, gift cards are often given as presents, and the ultimate user of the card may not receive all of the information provided to the card’s original purchaser. While fees and other terms and conditions may be printed directly on the gift card or on a sticker placed on the card, they may be also be printed on packaging that holds the gift card, or in the fine print of a document accompanying the gift card. Sometimes, consumers must call a telephone hotline or visit a website to obtain a full list of the terms and conditions. Disclosures concerning fees and usage restrictions may appear in several different places for a single card. Because of the haphazard disclosure of terms and conditions, many consumers are never adequately informed of important terms, conditions, and fees that apply to their gift cards. 1 For example, see http://www.anntaylorloft.com (“Ann Taylor LOFT E-gift Certificates may only be redeemed at anntaylorLOFT.com. At this time we do not accept E-Gift Certificates at our retail stores.”); http://www.modells.com; http://www.petsmart.com. For example, Modell’s In Store Gift Cards are not redeemable for purchases at Modells.com. See http://www.modells.com/giftCertificates/index.jsp. 2 2 In some cases, card issuers and marketers do not disclose the cards’ fees and restrictions at all, or at least not until after the cards are purchased. Failure to provide adequate disclosure of material terms such as fees, prior to purchase, is a deceptive business practice. If you encounter such a practice, you can notify the Office of the Attorney General by filing a complaint. • “Life is like a box of chocolates; you never know what you’re going to get”- Frequently Imposed (and Sometimes Unexpected) Fees Many consumers are surprised to learn that the $25 gift card they purchased is worth less than $25 by the time they use it because of fees imposed after the card is purchased. Under current New York law, many fees are permitted. However, New York law requires that gift card issuers disclose any fees that are assessed. Some common fees associated with gift cards include: • • • Monthly “service fees” Dormancy fees, which are fees assessed during periods of non-use Retroactive fees, which are monthly fees assessed retroactively after a particular period of time. Retroactive fees are one of the few types of fees that are illegal under New York law Balance inquiry fees, which are fees assessed, for example, when a gift card holder calls a customer service line to check the card’s remaining balance Replacement fees, which are fees charged to replace lost or stolen cards Reactivation fees, which are fees charged to reactivate a gift card after a period of non-use, or replace an expired card. • • • • Diamonds are forever, but gift cards are not - Expiration Dates How many times have you reached down to the bottom of your drawer only to find a three-year old gift card that you completely forgot about? There’s a good chance that the card may have expired. Depending on the terms and conditions of the card, an expiration date will either render the card valueless and leave the card holder with no recourse, or require that the card holder pay a “renewal fee” to receive a new card. As with many other restrictions, expiration dates are more common for bank-issued gift cards. However, store gift cards may also be subject to expiration dates. Many cards with expiration dates disclose the expiration date directly on the card. This is required under New York law. However, in some cases, the disclosures about expiration may be missing or misleading. For example, a gift cards’ disclosures may state that the card expires ninety days after activation, but without explaining that purchase of the card, not use of the card, is considered “activation.” 3 Even cards that don’t have explicit expiration dates may be subject to so many fees and restrictions that they do, in effect, expire. For example, some cards impose significant monthly service fees that consume the value of the card long before a consumer is likely to use the full original value of the card. Although these cards may not appear at first glance to expire, the result is the same. Gift cards with expiration dates often result in a windfall for card issuers. Some card issuers make it difficult or impossible for card holders to use the remaining balance of a card after the expiration date. Even where consumers may renew their gift card after expiration, issuers often impose substantial renewal fees that reduce or wholly consume the value of the card. The end result is that card issuers pocket the remaining balance, to the detriment of consumers. • All that glitters is not gold - Gift Cards Are Not Credit Cards – Even When They Look Like Credit Cards! Gift cards that are branded with payment network logos such as VISA and Mastercard may look very much like credit or debit cards. The familiar logos may create the false impression that these gift cards are subject to the same policies, laws and regulations that protect consumers who use credit or debit cards. However, these policies, laws, and regulations may not apply. For example, while credit or debit card issuers generally replace lost or stolen cards, gift card issuers are not explicitly required by statute to replace lost or stolen cards. Those gift card issuers that do replace lost or stolen cards often impose a replacement fee. In addition, unlike debit cards, gift cards usually cannot be used to withdraw cash from an ATM. In addition, gift card holders do not receive the same protections from fraudulent, erroneous, or disputed charges that may be afforded to credit or debit card holders. While gift card holders may receive some protection against unauthorized charges based on company policies, those policies do not carry the force of law. Moreover, policies on unauthorized charges vary widely from one company to another. Some issuers, for example, require card holders to report unauthorized charges within as few as two days; consumers who report charges outside that time period are responsible for the unauthorized charges. Many issuers also limit the circumstances under which card holders are protected from unauthorized charges. • “No soup for you!” - Restrictions On Using Gift Cards For Partial Payment Consumers are often surprised to discover that some gift cards cannot be used as partial payment when the purchase price exceeds the value of the gift card. This problem is especially frustrating; a consumer who has only a few dollars left on a gift card may be unable to use the balance toward any purchase exceeding that amount. 4 Even where a gift card may be used for purchases that exceed the card’s value, consumers often encounter difficulties using the card for such partial payment transactions. Consumers report that some stores refuse to accept gift cards for use as partial payment, despite the card issuer’s policy permitting such use. There are also complaints that stores that accept gift cards as partial payment sometimes have difficulty completing the transaction. For example, in most cases, the consumer must know the exact balance on the card in order to complete a partial payment transaction. • “You can’t always get what you want” - Getting Cash Back For Small Balances In some cases, the terms and conditions of a gift card prohibit the consumer from redeeming any portion of the gift card as cash, even if just a few dollars are left on the card after purchases. This sometimes causes consumers to essentially forfeit some portion of the value of their gift cards. • Gone With The Wind - Lost Value The terms “breakage” or “slippage” refer to gift card value that goes unused by consumers. According to a 2007 survey by Consumer Reports, 27 percent of gift card holders had not used one or more of their gift cards. Last year, an estimated nearly $8 billion of gift card value was never redeemed. Under New York law, gift cards that are not redeemed within five years will be considered abandoned property that must be paid to the State Comptroller.3 Consumers who have outstanding balances on gift cards that are more than five years old may check with the State Comptroller to see if there are any funds in their names to recover. • A fate worse than debt - What If the Store Goes Into Bankruptcy? Retailer bankruptcies present a growing problem for gift card purchasers. The recent bankruptcies of national retail chains such as the Sharper Image and Tweeter have cost consumers millions of dollars in unredeemable gift cards. In mid-December, KB Toys filed for bankruptcy for the second time in four years. One research group has estimated that retailer and restaurant closings could cost consumers $75 million in gift card losses for 2008 alone. KB Toys reports it is currently holding $12 million in unredeemed gift cards. As described below, the Attorney General secured a commitment from KB Toys to honor New Yorkers’ gift cards through the 2008-09 holiday season. 3 See N.Y. General Business Law § 369-i(3-c); N.Y. Abandoned Property Law § 1315(1). It has been reported that only a very small percentage of unredeemed gift card value has actually been paid to the State Comptroller. Ron Schubin, Director of Holder Education and Research, NYS Comptroller’s Office of Unclaimed Funds, Powerpoint Presentation to the NAST Southern State Treasurers & National Association of Unclaimed Property Administrators Annual Conference, May 2005. Available online at www.nast.org/2005.Southern_NAUPA/presentations/400pm%20Gift%20Certificates%20Schubin.ppt. Last accessed December 17, 2008. 5 As increasing numbers of retailers shut their doors, more consumers will be holding unusable gift cards. While some stores continue to honor gift cards even after filing for bankruptcy, others stop accepting gift cards or lack the funds or merchandise to honor them. Sometimes, as in the Sharper Image bankruptcy, consumers’ confusion increased as the retailer repeatedly reversed course on whether and where gift cards could be redeemed, and at what value. In some instances, retailers have given consumers little, if any, notice of a change in redemption policies. When stores stop accepting gift cards or close their doors (and websites) altogether, consumers may only be able to receive reimbursement for the value of their unused gift cards if they file a proof of claim in the retailer’s bankruptcy proceeding. In bankruptcy proceedings, gift card holders are considered “unsecured creditors” and must stand in line behind secured creditors. By filing a proof of claim, gift card holders do have a priority claim and may be able to receive reimbursement for the value of their cards. 4 This is especially true in Chapter 11 bankruptcy cases where there is a reorganization. However, consumers’ chances of receiving value are significantly diminished if there is a liquidation. Fear of retail bankruptcy is driving some consumers to purchase bank-issued cards, rather than store cards. However, consumers should keep in mind that bank-issued cards are frequently less consumer-friendly than store cards. Bank-issued cards generally have more fees and other detrimental terms and conditions. • If it’s broke, we won’t fix it - Defective Cards Another peril is the large incidence of defective or malfunctioning gift cards. Because of some defect, gift cards may be declined by all merchants, or may not post the value that the consumer actually purchased. Unfortunately, federal and New York state law do not currently require that gift card issuers replace defective gift cards. Consumers should nevertheless report these incidents to the card issuers whose policy may be to replace the card if the consumer complains. • The Squeeze - Consumers May Be Required to Use a Credit Card In Addition to a Gift Card Some gift cards require consumers to provide a valid credit card number when using a gift card online or by telephone. If the consumer uses the card to make a purchase in an amount greater than the gift card’s value, the consumer’s credit card will be charged the difference.5 Gift card purchasers should watch out for cards with such terms if they present a concern. Moreover, children and teens get many presents in the form of gift cards and e-gift cards. Since most do not have their own credit cards, parents should closely supervise 4 See 11 U.S.C. § 507(a)(7). For example, see http://www.origins.com, www.clinique.com, and www.tenthousandvillages.com. 5 6 children’s use of their credit cards to redeem gift cards’ value online or by telephone, or they may find themselves paying for gifts they never intended to give their children! III. The Attorney General’s Work on Behalf of New York Consumers • Mediation of Consumer Complaints The Office of the New York State Attorney General (“OAG”) works to protect the interests of consumers who purchase and receive gift cards through enforcement of the consumer protection laws, legislative work to strengthen consumer protections, and mediation of consumer complaints related to gift cards. The OAG’s Consumer Frauds and Protection Bureau receives numerous consumer complaints related to gift cards every year. The most common complaints concern fees assessed against gift cards, such as costly monthly service fees or “dormancy” fees that eat up gift cards’ value. In many cases, consumers complain that these fees were not adequately disclosed. Another common complaint concerns gift card expiration. Many consumers are surprised to discover that their cards have expired, or that they must incur hefty fees for a replacement card after expiration. Other complaints relate to store closings that render gift cards unusable, defective cards, cards that are not accepted by merchants despite issuers’ claims that the cards will be accepted, the online sale of fraudulent or stolen cards and theft of card holders’ value. Many of the most common issues complained of by consumers, such as hefty fees that devour the value of the cards and expiration dates that render cards unusable, are in fact legal and permissible under the current New York gift card law. The many consumer complaints related to these issues evidences a need to reform the gift card law to offer better transparency and consumer protections. • The Office of the Attorney General’s Enforcement Actions In June 2002, the OAG investigated national retailer Home Depot for failing to replace lost, stolen, or damaged gift cards. The OAG ultimately entered into a settlement agreement with Home Depot in which the company agreed to implement a new, nationwide policy of providing replacement gift cards to consumers whose cards were lost, stolen, or damaged. Home Depot also agreed to print statements on the back of each gift card in both English and Spanish reflecting its change in policy. Following the settlement with Home Depot, the OAG reviewed the policies of other national retailers and determined that many companies lacked gift card replacement policies. In February 2003, the OAG obtained commitments from seventeen national retailers to amend their policies regarding lost or stolen gift cards. As with Home Depot, these retailers agreed to reissue lost or stolen gift cards for those customers who provide reasonable evidence of gift card ownership, such as a receipt or a “transaction register” from the consumer’s credit card issuer. The retailers that agreed to the replacement policy included: Best Buy; 7 Bloomingdale’s; Borders; Circuit City; CompUSA; Disney Stores; Eckerd; J.C. Penney; Kohl’s; Macy’s; Musicland; Nordstrom; Sears, Roebuck & Co.; The Sports Authority, Inc.; Target; Toys ‘R Us, Inc.; and Walden Books. In 2005, the OAG filed a lawsuit against Simon Property Group, Inc. (“Simon”), one of the nation’s largest shopping mall chains, alleging that certain fees Simon assessed on its gift cards violated New York’s gift card law, codified as General Business Law (“GBL”) § 396-i. Simon charged a $2.50 monthly “administrative” fee commencing in the seventh month after purchase. The OAG lawsuit alleged that this fee violated New York State’s gift card law which prohibits monthly service fees except where the card has been unused for twelve full months. In addition, Simon charged a $5 fee to replace a lost or stolen gift card without clearly and conspicuously disclosing such fees on the gift card itself. The OAG lawsuit also alleged that Simon’s failure to disclose this fee violated the provision of the gift card law which requires that certain terms and conditions of a gift card, including whether a fee will be charged to replace a lost or stolen gift card, be clearly and conspicuously stated on the gift card itself. In March 2005, the OAG obtained a Consent Order and Judgment in which Simon agreed to comply with New York’s gift card law. Simon agreed not to assess any service fees on its gift cards unless and until a card was unused for twelve consecutive months. Simon also agreed to disclose certain fees on its gift cards, including fees to replace a lost or stolen card and fees to reissue an expired card. In addition, Simon paid $125,000 in penalties and costs. More recently, the OAG’s investigation of the student loan industry revealed that some student loan providers offered gift cards in connection with marketing student loans directly to students and their parents. The OAG reached a settlement with Nelnet, Inc. (“Nelnet”), one of the nation’s largest student loan providers, in August 2008.6 The OAG’s investigation of Nelnet revealed that certain of Nelnet’s advertisements, and certain of the gift cards Nelnet provided in connection with such advertisements, violated New York’s gift card law and other state consumer protection laws.7 For example, Nelnet advertised that consumers could receive “cash back” if they took out a Nelnet loan. However, Nelnet actually provided gift cards, not cash, to consumers. The gift cards Nelnet provided were subject to various fees and other terms and conditions that could reduce the value of the cards. The OAG found that advertisements stating that consumers would receive “cash,” when in fact they received less valuable gift cards, was misleading. In addition, certain of Nelnet’s advertisements failed to disclose that terms and conditions applied to the gift cards, which violated New York’s gift card law. Nelnet agreed in the settlement to comply with all the requirements of the New York gift card law and to make a $200,000 contribution to the 6 This settlement followed a previous settlement Nelnet had entered into with the OAG in July 2007 addressing conflicts of interest in the student loan industry. Pursuant to that earlier settlement, Nelnet agreed to the Attorney General’s Code of Conduct for the industry and to contribute $2 million to the Attorney General’s fund for educating and assisting students and their parents about student loans. The investigation also addressed the propriety of offers of gift cards in connection with referrals to, and other marketing of, Nelnet’s federal student loans. 7 8 Attorney General’s fund to educate and assist students and parents with regard to the financial aid process. The OAG’s ongoing investigation of other student loan companies and marketers continues to address potential violations of New York’s laws relating to gift cards and deceptive practices in connection with gift cards. • Interventions Into Bankruptcy Proceedings on Behalf of Consumers The New York Attorney General has also intervened in bankruptcy proceedings to protect the value of New York consumers’ gift cards. For example, the OAG secured a commitment from KB Toys to honor the gift cards of New York consumers through the holiday season and at least until January 11, 2009. KB Toys, one of the largest mall-based toy retailers in the nation, filed for bankruptcy on December 11, 2008. This is the second time in four years that the Pittsfield, Massachusetts-based company has filed for bankruptcy. KB Toys operates 53 stores in the state of New York and seven in New York City. The company is preparing to close all of its stores. KB Toys sold as much as $2 million in gift cards this year alone and currently holds a total of $12 million in unredeemed gift cards. The bankruptcy court authorized, but did not require, KB Toys to honor gift cards. The OAG stepped in to ensure that New Yorkers who have KB Toys gift cards that were purchased by individuals will be able to use the cards at KB Toys stores through the holidays and during the immediate post-holiday period. KB Toys also committed to notifying the OAG in advance of any decision to stop honoring New Yorker’s gift cards and to posting notices in its stores alerting consumers of any decision to stop honoring the cards at particular stores. The OAG has intervened successfully on behalf of consumers in a number of other bankruptcy cases. For example, in 2004, the OAG and Attorney Generals from other states demanded that consumers have the right to redeem gift cards and certificates and merchandise returns at New Weathervane, a teen clothing and accessories retailer with outlets in several states, after the retailer filed for bankruptcy. The OAG has also successfully intervened on behalf of consumers in bankruptcy cases involving retailers such as the Sharper Image; Princeton Ski Shop; The Wiz; K-Mart; Ames; the Museum Company; Quality Stores; Bob’s Stores; FAO Schwartz; Zainy Brainy; Footstar; Woodworkers Warehouse, Inc.; and Workbench Furniture, Inc. 9 IV. The New York Gift Card Law and the Attorney General’s Commitment to Strengthening Consumer Protections • Consumers’ Rights Under the New York Gift Card Law The current New York gift card law was enacted in 1997 and was last amended in 2004. New York’s gift card law, codified as General Business Law § 396-i, provides a number of important protections to New York consumers. The gift card law requires companies to make certain disclosures and prohibits certain fees associated with gift cards. The following are some of the protections that the law gives to New Yorkers: • Advertisements for gift cards must disclose that terms and conditions apply whenever terms and conditions apply to the advertised cards. Certain terms and conditions must be printed on the gift card, including an expiration date, fees assessed against the balance of a gift card, and fees to replace a gift card if it is lost, stolen, or destroyed. All additional terms and conditions must also be disclosed, but those terms and conditions may be disclosed on packaging or on a document accompanying the gift card. • • The gift card law also bans two types of fees: (1) monthly service fees, except where the card has been unused for twelve consecutive months, and (2) retroactive fees, which are monthly fees assessed retroactively after a particular period of time. The gift card law also provides that gift card issuers may not alter the terms of a gift card after it has been issued. • Legislative Innovations Addressing The Perils of Gift Cards State legislatures across the country have enacted laws that address many of the gift card problems that rob consumers of gift card value. Attorney General Cuomo is committed to working together with the New York State Legislature and Governor Paterson to explore legislative solutions to these problems for the benefit of New Yorkers. A number of states have enacted laws in recent years that limit fees and usage restrictions associated with gift cards. Several states prohibit all post-purchase gift card fees,8 and many states also restrict expiration dates. Several states ban expiration entirely,9 while 8 Fourteen states prohibit post-purchase gift card fees, including Connecticut, Florida (with exceptions for certain types of gift cards issuers), Hawaii, Illinois, Louisiana, Michigan, Minnesota, Montana, New Hampshire, New Mexico, North Dakota, Oregon, Rhode Island, and Vermont. California, Connecticut, Florida, Maine, Minnesota, Montana, Oregon, Rhode Island, and Washington prohibit expiration in all or almost all circumstances, and New Hampshire prohibits expiration for gift cards with values of less than $100. 9 10 others provide for a minimum time period before a card can expire.10 In addition, several states have enacted laws that provide consumers with the option of redeeming a gift card for cash after the balance is reduced below a certain level, such as $5 or $10.11 New York’s law could be strengthened with similar measures that restrict fees and expiration and require cash back options. New York law would also be improved by making it explicit that companies must replace lost, stolen, damaged, or defective cards. As described above, the OAG obtained commitments from 18 major national retailers to replace lost, stolen, damaged or defective gift cards. It is a deceptive practice under the New York consumer protection laws to claim that lost, stolen, damaged or defective cards cannot be replaced in situations where the retailer has the information which makes replacement possible. New York should explore making a requirement to replace lost, stolen, damaged or defective cards an explicit part of the gift card law. The gift card law could also be improved by requiring that the specific terms and conditions of gift cards be disclosed in advertising. In addition, the law could be amended to expressly prohibit false or misleading statements in advertisements concerning gift cards, including claims that the consumer will receive “cash back” when, in fact, the consumer will receive a gift card, unless the gift card has all of the attributes of cash, such as unlimited acceptance, usage and redemption. There are also several ways that New York gift card holders could be better protected against retail bankruptcies. First, retailers who have filed for bankruptcy could be required to let consumers who purchase gift cards know that the retailer has filed for bankruptcy and that the card holder may not be able to redeem the cards. Retailers who enter bankruptcy could also be required to notify third-party vendors of the retailer’s gift cards of the bankruptcy filing and direct them to stop selling the retailer’s gift cards. Another way to protect consumers in the event of a bankruptcy would be to require retailers to post a bond or otherwise ensure that funds are available to repay gift card holders in the event of bankruptcy. Under current New York law, health club operators and other businesses must set aside funds that will be available to reimburse consumers in the event the company goes out of business. An alternative proposal would be to require retailers to contribute to a general fund for the reimbursement of gift card holders in the event of a retail bankruptcy. Either method would ensure that funds would be available to reimburse consumers for the lost value of gift cards from retailers who file for bankruptcy. 10 States that impose a statutorily-mandated time period before gift cards may expire include: Arkansas, Hawaii, Illinois, Kansas, Kentucky, Louisiana, Maryland, Massachusetts, Michigan, New Jersey, New Mexico, North Dakota, Ohio, Oklahoma, Tennessee, and Vermont. For example, California’s gift card law provides that gift cards with balances less than $10 are redeemable for cash. Four other states (Maine, Massachusetts, Montana and Washington) allow consumers to redeem cards for cash when the card balance is less than $5, while Vermont sets the figure at $1. 11 11 While strengthening the New York gift card law would provide substantial new protections for New Yorkers, federal gift card legislation is also needed to ensure that these protections extend to consumers across the nation and to all card types. Much could also be done on the federal level to improve protections for gift card holders in the event of a retailer’s bankruptcy. In September 2008, a coalition of consumer advocacy groups including the U.S. Public Interest Research Group, Consumers Union, the National Consumer Law Center, and the Consumer Federation of America, petitioned the Federal Trade Commission (“FTC”) to put forth new rules requiring retailers to segregate gift card funds and to hold those funds in trust for gift card holders. The petition also requested that the FTC rule: (a) require retailers who file for bankruptcy to honor gift cards at stores and websites as long as they remain open for business, and (b) require retailers and third-party vendors to stop selling gift cards after a bankruptcy filing. The advocates also proposed that the FTC maintain a public registry of bankrupt retailers and information about whether the retailer is accepting gift cards. The advocates’ proposals provide a step in the right direction to addressing the risk to consumers of retailer bankruptcies on a national level. 12 V. Get Smart - - What You Should Know About Gift Cards Returns: • Always save gift cards, even if they have no balance. Some stores require the gift card when a consumer returns a purchase made with the card. Bank-issued Cards - What if the bank fails? • Holders of bank-issued gift cards may be eligible for reimbursement through FDIC insurance if the bank that issued the gift card fails. To qualify, the funds underlying a gift card must be held in an FDIC-insured bank, and certain additional requirements must also be satisfied.12 The FDIC does not extend this protection to store gift cards because, unlike bank-issued cards, store gift cards do not provide access to funds held at a depository institution. Hidden Fees and Restrictions: • • • • Read the “terms and conditions” of gift cards prior to purchase. When purchasing gift cards as gifts, pass along any disclosures about fees and restrictions to the gift card recipient. When receiving a gift card as a gift, read all the terms and conditions that apply to the card. Consider avoiding gift cards that include certain fees and restrictions, such as: • • terms that permit the card issuer to change the terms at any time and for any reason terms that state that the card issuer is not responsible for lost, stolen, or malfunctioning card, or charges substantial fees to replace lost, stolen, or malfunctioning cards. terms that limit or prevent consumers from redeeming the unused balance of cards. • • Keep good records of purchases made with gift cards, and have your balance handy when using the card. This will ensure you don’t waste value on checking balances, and it may expedite your transactions at the store. 12 Insurability of Funds Underlying Stored Value Cards and Other Nontraditional Access Mechanisms, 73 Fed. Reg. 67155, 67157 (Nov. 13, 2008) (Notice of New FDIC General Counsel’s Opinion No. 8). Additional requirements include: the account records of the insured depository institution must disclose the existence of the agency or custodial relationship between the depository institution and the card holder; the records of the insured depository institution or records maintained by the custodian or other party must disclose the identities of the actual owners and the amount owned by each such owner; and the funds in the account actually must be owned by the cardholder and not by the depository institution or another party. 13 Bankruptcies: • If you hold a card from a company that files for bankruptcy, check the company’s website or go to one of the company’s stores to find out the company’s policies for honoring gift cards. Keep in mind that the policies may change, so check back with the company frequently. If you hold a card from a company that files for bankruptcy, you may be able to recover the value of the card if you hold onto the card and file a proof of claim with the bankruptcy court. Keep records, such as receipts, to document gift card purchases. Avoid purchasing gift cards from retailers that are likely to file, or have already filed, for bankruptcy. Note that while bank-issued cards are unlikely to be effected by retailer bankruptcy, they are often accompanied by higher and more varied fees and restrictions on use. If you purchased gift cards with a credit card, contact the credit card company to check if they will give you a refund. • • • • • Expiration: • When you purchase a gift card, check to see if there is an expiration date on the card. If not, examine any terms and conditions provided along with the card. Consider choosing cards that do not expire. If you are giving the card as a gift, make sure to inform the recipient of any expiration date. If you receive a gift card, check the card to see if and when it will expire. It is a good idea to use a gift card soon after you purchase or receive the card. By doing so, you can avoid losing the value of the card due to expiration, and any fees that may reduce or wholly consume the value of the card. • • • Ask for a receipt: • Ask for a receipt when you purchase a gift card and include the receipt when giving a gift card. Some companies will replace a lost or stolen gift card if you are able to provide a receipt. Cards may require use of a credit card: • Some gift cards require you to provide a credit card number when using a gift card online or by phone. When you make a purchase in an amount greater than the gift card’s value, your credit card will be charged the difference. Watch out for cards with such terms if they present a concern. 14 Using Gift Cards as Partial Payment: • Carefully read disclosures prior to purchasing a gift card to determine whether the gift card may be used as a partial payment. You may wish to avoid gift cards that prohibit using the card as a partial payment. Small Left-Over Amounts on Gift Cards: • If you are unable to receive cash back for small left-over amounts on a gift card, consider using the remaining value as a partial payment for a purchase. In other words, ask the store if you can use the remaining balance of the gift towards your purchase and pay the difference with another form of payment such as a credit card or cash. Unauthorized Charges: • Immediately report any unauthorized charges to the gift card issuer. Online Purchases: • • Make sure to shop at reputable online websites. Before you purchase a card online, check what security measures are offered to ensure that the card you receive is not fake or stolen. For example, check to see whether the gift card has a PIN or “scratch off” hidden code. Reporting Fraud or Deceptive Practices: • Report fraudulent or deceptive practices to the OAG. You can get a complaint form by visiting the OAG’s website at www.oag.state.ny.us or calling 1-800771-7755. 15