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"Card Act Part III "
August, 2010


CARD Acts Last Phase Means Big Changes
to Gift Cards and Banking

The third and final phase of the Credit Card Accountability Responsibility and Disclosure (CARD) Act will be going into effect on August 22, 2010 but many banks are trying to beat the legislation to the punch. Included will be new rules regarding how gift cards are processed and how banks charge on overdraft occurrences.

For businesses offering gift cards, know that new rules will now go into effect that protect the consumer from unfair gift card fees and expirations. A $50 billion dollar a year industry, gift cards present both a problem and a solution for retailers seeking to boost sales and satisfy unsure shoppers. For gift cards left on the business’ books, the CARD act forbids gift card maintenance or ‘dormancy’ fees unless the card has been unused for 12 months or longer. Further, gift cards cannot expire for a minimum of five years after date of issuance. The Federal Reserve has the power to cap these fees in an effort to prevent industry excesses of fees.

If your business offers gift cards, gift certificates or pre-paid cards, you’ll also need to beef up the explanations and rules surrounding their use in plain language that consumers can readily see and understand. The disclosure will need to outline all applicable dormancy fees, service charges and costs along with the frequency of their application. All of these disclosures must be made prior to the point of sale “regardless of whether the certificate or card is purchased in person, over the Internet or by telephone.”

As a consumer, you’ll want to look for the following information before you purchase these cards:

1. Expiration date or ‘valid through’ dates. Don’t purchase cards with relatively short life spans as inevitably, time will pass and the card will begin to decrease in value. Expiration for funds must be at least five years after the date of issuance, or five years after the date when the funds were last loaded. Know the 800-number and call if you think the card may expire before you can use it. Often the issuer will extend the ‘valid through’ date for you.

2. Look for ‘other fees’ or conditions that may apply to the card.

3. Exclusions. The new CARD Act regulations will only apply to conventional gift cards and not to
Pre-paid telephone cards, Reloadable cards that are not marked or labeled as gift cards, Loyalty, rewards or promotional cards, and Cards that are not available to the general public.

More Than Just Cards

In addition to gift cards, the CARD Act also covers specific areas of banking. As of July 1, 2010 the Federal Reserve is requiring that banks obtain their customer’s permission for charging overdraft protection and allowing purchases beyond the account’s balance. Big bank leaders in overdraft changes are Bank of America and JP Morgan Chase who are both providing their customers with an overdraft ‘opt-out’. Now their customers will need to decide if they want the bank to cover any charges above their zero balance and pay the overdraft fee, or if they would rather have the charges denied at the point of sale. If, however, customers of these banks elect to keep their overdraft protection, the fees will be substantially less than they were previously.

For example, Bank of America will be reducing the number of chargeable overdraft incidents in a given day and announced in March of this year that they would no longer be charging customers overdraft fees on charges made with bank debit cards – they will simply be declined.

Debit purchases amount to roughly 60 percent of all overdraft fees and represent a tremendous income loss for BOA. In an effort to continue the flow of cash from overdraft protection, banks are gearing up full marketing efforts to encourage their customers to sign up and continue overdraft protections. Before you agree to this arrangement, consider your options carefully.
Acceptance of overdraft protection means:

1. You will be charged a fee (anywhere from $32 to 39) for each overdraft incident up to a specified number each banking day that your account is overdrawn.

2. You will be able to spend without any indication you are overdrawn until the charges have accrued.

3. Some banks including BOA and JP Morgan Chase will not charge on small purchases under $5 (i.e. that coffee won’t cost you $43 if you’re overdrawn).

4. Banks will continue to charge overdraft fees on checks and automatic payments, but based on the consumer’s choice, will either decline ATM and debit purchases or cover them for a reduced fee. BOA will charge $10 each overdraft occurrence with either a credit card or savings account tied to the account.

5. Some banks will also limit the number of charges per day. JP Morgan Chase will reduce the number of overdraft fees to three per day.

6. Additionally, banks will process transactions in the order in which they were made. This is a significant change because banks processed the largest transactions first, which consumed the greatest portion of the account balance and often cause multiple overdrafts on significantly smaller charges. With this change, the transactions will process in the order they are received theoretically causing less overdrafts charges on small transaction amounts. The banking industry expects this change alone to cost them millions in lost revenue.

A majority of overdraft fees (93%) are paid by the delinquent minority of about 14% of the population according to a Federal Reserve 2008 study.