Gift cards and promotional cards are like prepaid cards that come pre-loaded with a specific amount of money. These cards can be either closed-loop or open-loop.
Open Loop vs Closed Loop Cards
- Closed-loop cards are typically affiliated with a specific retailer or brand and can only be redeemed with that brand (like Amazon or Starbucks).
- Open-loop cards are provided in partnership with a card network so they can be redeemed anywhere that accepts payments from that network (like Visa or American Express).
Any fintech founder thinking about leveraging gift cards or promotional cards should understand how they’re regulated. To that end, here’s an explainer on the Gift Card Rule.
If you’re thinking of issuing gift cards:
- Include applicable disclosures, including any phone numbers you’re required to have.
- Make sure the cards comply with the fee and expiration date requirements.
- Talk to a lawyer! Every product has its own considerations. Lithic’s legal team knows many fintech lawyers and we’re happy to point customers to recommendations.
The Gift Card Rule
The Gift Card Rule sets special requirements for gift cards issued to consumers. While most debit cards and prepaid cards are regulated by other parts of the Electronic Fund Transfer Act (EFTA), gift cards are subject to a different and (generally) lighter sub-set of the regulation.
While the Gift Card Rule requirements may seem like a hurdle, many fintech entrepreneurs are able to navigate them. So let’s walk through the main considerations.
What does the Gift Card Rule cover?
Gift cards are what you think of when you buy, say, an Amazon gift card, or when someone gives you a gift card for your favorite restaurant.
A card counts as a “gift card” if it meets these requirements:
- It’s issued on a “prepaid basis” (discussed below),
- It’s issued in exchange for payment,
- It’s marketed to the general public,
- It’s issued for consumer purposes (aka, not for businesses), and
- It’s one of the following:
- One-Time Store Gift Card:
- the card’s funds can’t be increased or reloaded, and
- it can only be redeemed at one business or group of related businesses (like businesses owned by the same person).
- Reusable Store Card:
- the card’s funds can be increased or reloaded and
- it can only be redeemed at one business or group of related businesses
- General-Use Prepaid Card:
- the card’s funds can be increased or reloaded, and
- it’s redeemable at different businesses and/or ATMs, and
- it’s marketed and labeled as a gift card.
Being issued “on a prepaid basis” means that the card itself holds the funds instead of just being a pass-through tool.
For example, a debit card is a pass-through tool for a bank account because the card itself doesn’t hold funds; they’re held elsewhere. A digital wallet is also a pass-through tool for the same reasons. In contrast, if a gift card is issued on a prepaid basis, the funds are held on the card.
A few types of cards are explicitly excluded from counting as gift cards, and may be regulated under the EFTA, potentially under the Prepaid Rule. They include:
- Reloadable cards that aren’t marketed or labeled as gift cards,
- Cards that aren’t marketed to the general public,
- Cards limited to spending at particular events or venues,
- Promo cards (discussed below), or
- Reloadable cards tied to a single retailer.
The first exclusion means if a card meets the requirements above, but is reloadable and not marketed as a gift card, you don’t have to worry about the Gift Card Rule.
The Gift Card Rule sets different requirements for “loyalty, award, or promotional” cards, which we explain below.
Gift card requirements
Disclosures
The Gift Card Rule requires that card issuers provide certain disclosures, like:
- Fees (on or alongside the card), and
- A toll-free number and website (if any) for getting fee information (on the card itself).
Fee limits
Gift cards can’t have dormancy or service fees unless they meet a few conditions:
- There’s been no activity in the prior year,
- The gift card discloses the potential fees and how they may be applied, and
- Dormancy/service fees are limited to one per month.
Expiration dates
Gift cards also have to comply with expiration date requirements. There are two dates to keep in mind here, and they can be different: (1) the date the card itself expires and (2) the date the funds on the card expire. For example, a card can expire while the underlying funds don’t.
The default rule is gift cards can’t expire. However, they can have expiration dates if they meet a few conditions:
- The cards don’t expire until at least 5 years after they were issued,
- The funds don’t expire until at least 5 years from when the cards were issued or loaded (or later, if the card doesn’t expire for more than 5 years after issuance), and
- You disclose:
- The expiration date,
- A toll-free phone number and website (if any) to get a replacement card if it expires while the funds are available,
- That the card expires but the underlying funds don’t,
- That the consumer can contact the issuer for a replacement card, and
- That there’s no fee to get a replacement card or be paid remaining funds in a different manner if the card expires
Loyalty, award, or promotional purposes
Cards used for loyalty, award, or promotional purposes (“promo cards”) are subject to different rules than gift cards.
Promo cards include, for example, cards loaded with funds that you give loyal customers after they make large purchases, or cards used to pay referral bonuses for users who bring in new customers.
What counts as a promo card?
A card constitutes a “promo card” if it:
- Is issued on a prepaid basis,
- Is issued for consumer purposes (aka, not for businesses),
- Can be redeemed at one or more merchants, and
- Comes with specific disclosures (discussed below).
Promo card disclosures
Promo cards need to include a few disclosures:
- The card itself must indicate it’s for loyalty, award, or promotional purposes,
- The front of the card must have the expiration date,
- The card (or packaging it comes with) must disclose any fees that may apply, and
- The card itself must show a toll-free phone number and website (if any) for getting info about card fees.
Difference from gift cards
Importantly, promo cards don’t need to provide the standard gift card disclosures or the fee and expiration date guardrails described above.
State laws for gift cards
States may also have special rules for gift cards that go above and beyond what the Gift Card Rule requires. California, for example, prohibits gift cards from charging any fees except dormancy fees, and it prohibits cards from having an expiration date.
Relation to EFTA and Prepaid Rule
Gift cards seem like they count as “electronic fund transfers,” which are regulated by the Electronic Fund Transfer Act (EFTA). They also seem similar to “prepaid cards,” which are regulated by the Prepaid Rule. However, they’re mainly subject to the unique rules outlined above. The Gift Card Rule is actually a part of the EFTA, but it is distinct from other EFTA requirements you may be familiar with.
Additional Resources
[1] For gift cards, this is based on when the card was issued. For store gift cards and general-use prepaid cards, this is based on when funds were last loaded.
[2] This requirement doesn’t apply to non-reloadable gift cards that expire at least 7 years from the date of manufacture.
[3] CFPB: Electronic Fund Transfers (Regulation E) Amendments
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If you want updates on regulatory fintech news (written for non-lawyers) check out Reggie Young’s FinTech Law TL;DR.
Disclaimer: This post is for information purposes only and is not legal advice. Every situation is unique, so you should consult a lawyer; Lithic’s legal team can recommend fintech attorneys if you need.