New Gift Card Rules as Discourse Firestarter

American Banker published an article today by Andrew Johnson, titled Retailers May Shelve Prepaid Cards if Money Laundering Rule Passes. Johnson’s article raises an interesting topic that relates to a recurring theme here at the Journal of the American Bull Moose: regulation. Specifically, whether regulation constitutes harmful government interference, or helpful advancement of the public good. And of course, as is often the case in our discourse here, the truth is a little bit of both.

In 2009 Congress passed the Credit Card Accountability, Responsibility and Disclosure Act (Credit CARD Act), which amended the Truth in Lending Act. (Click here for the text of the Act. Click here for the Wikipedia entry about the Act.) Section 503 of the Act directed the Treasury Department to enact regulations under the Bank Secrecy Act (BSA) regarding stored value cards. Accordingly, the Financial Crimes Enforcement Network (FinCEN), the Treasury Department sub-agency charged with enforcement of the BSA, recently proposed the rules required by §503 of the Credit CARD Act. These proposed rules form the center of Andrew Johnson’s article. (Click here to read the proposed regulations.)

“Stored value cards” is the umbrella term that includes all manner of gift certificates or cards, which function as the equivalent of cash. A similar term, “prepaid cards,” may be treated as essentially synonymous for purposes of this discussion (though actual distinctions exist). Stored value cards include two main sub-categories: closed loop and open loop cards. Closed loop cards may only be redeemed at one store, chain, family of stores, or location; for example, a Best Buy gift card, or a mall-wide gift card useable at any store in a particular mall, or even by FinCEN’s definition, your subway metro card. Open loop cards may be used at any location that participates in a particular payment network; for example, a Visa gift card, usable wherever Visa credit cards are accepted.

Broadly, the Credit CARD Act pertains to both credit cards and stored value cards. And many of the Act’s provisions are surprising examples of good and necessary legislation, such as the protections against arbitrary interest rate hikes and double-cycle billing, the limit on issuing cards to teenagers, and restrictions on hidden fees. Also, the Act eliminated many of the more dodgy practices regarding stored value cards, especially as relates to the sometimes esoteric fee schedules companies employed which often resulted in various monthly fees leeching out the value paid into the card when purchased. Most of these provisions aim at consumer protection. But the Act also has an anti-money-laundering aspect, which forms the subject of Johnson’s article.

Specifically, FinCEN’s proposed rules would require retailers to record customers’ personal information when selling stored value cards, and store that information up to five years. Admittedly, stored value cards present an easy conduit to launder money, especially with open loop cards, which can be used to make almost any sort of purchase these days, and in many instances can be used to make cash withdrawals at ATMs. But in the case of closed loop cards, their utility in laundering money is severely limited. After all, what can a drug dealer do with a few hundred thousand dollars’ worth of Starbucks lattes, anyway? If he tries to sell a large block of these cards on eBay, FinCEN (among others) are likely to notice.

FinCEN tried to create exemptions for nearly all the common applications of closed loop cards. For instance, if the retailer does not sell any cards over a $1000 value, or if the card may only be used domestically at a specific retailer, they will likely be exempt under the proposed rule. So no need to envision one of those cognitively disengaged blueshirts over at Best Buy taking down your social security number, address, and driver license number the next time you want to buy a gift card for your nephew’s graduation. But if, like Starbucks, a retailer’s cards may be used abroad, it must abide by the reporting provisions of the proposed rule. So, on second thought, go ahead and envision that pimply teenager writing down your personal information before he screws up your latte order.

That companies like Starbucks would rather discontinue their violative card programs rather than submit to the potential new regulations is beside the point. FinCEN has moved forward with enacting regulations that fit squarely into that group of government interference that really lathers up the Tea Party folks. What good does this serve and at what cost?

I wrote this article because I like the Credit CARD Act as an example of both good and bad government interference. It used to be, that a stored value card program would issue a gift card for, say, $200; under it’s abstruse fee schedule, the card automatically would lose three dollars here, five dollars there, every month for various fees (inactivity fees, maintenance fees, service fees), none of which were printed on the card, until the owner goes to use the card only to discover a zero balance. The Credit CARD Act cut through all that and prohibited the sneakiest practices, while not entirely eliminating a company’s ability to raise revenue through fees. I call that a win. Another good provision allows credit cardholders to set their own credit limits, which the bank may not raise or exceed. And who among us hasn’t sent a credit card payment after the due date, but within the grace period? Well, before the Act, card issuers would often charge a fee even if payment was received within the grace period, and then use double-cycle billing to squeeze extra interest out of the customer. But no more!

But on the other hand, there’s this silly attempt to prevent Michael Corleone from laundering all his racket money through Starbucks gift cards. The end result of which will be a large number of retailers forced to either abandon or revamp their gift card programs. While I feel that most of the Act is more than worth the price of admission, it seems our government can’t implement even a relatively small law without including some provision that confounds common sense. So when the writers here at the Moose next rail against each other regarding governmental overreach vs. the moral imperatives of an enlightened society, this example serves ammunition to both sides. In that sense, it makes the world a delightfully more interesting place.