Friday, November 21, 2008
Brian Riley, Research Director, Bank Cards Practice at TowerGroup, said the rise of open loop cards, which can be used anywhere MasterCard Worldwide, Visa Inc., Discover Financial Services or American Express Co. gift card products are accepted, is a silver lining for financial institutions in an otherwise dark gift card cloud.
Riley said that if gift cards are issued by federally insured banks, consumers and merchants have a greater chance to recover monies if banks fail. "A recent policy statement by the FDIC [Federal Deposit Insurance Corporation] ruled that gift card funds will become deposits and be placed at an insured depository institution," Riley said. "Consequently, the funds will be subject to assessments, but they will also be insured."
FDIC insured banks issuing network-branded gift cards now become trusted sources to help prevent card value loss. "With private label cards, you will find that the generally accepted accounting procedures are looser," Riley said. "There is no standard for defining the funds held by a retailer. Essentially, you're asking them to hold the money until the card is tendered. If there is a business failure or locations are closed, your funds are at risk."
In addition to slipping retail sales, a lack of consumer confidence in merchant-sponsored card products and a shift to branded products from financial institutions, consumers have become increasingly mistrustful of private label cards. The collapse of several high-profile businesses, where more than $100 million in gift card value was lost, underscores consumers' fears.
Riley feels the three critical factors affecting private label card sales are poor prior experience, the economy and the retail environment.
"In the early days of gift cards, they were fraught with limited disclosures, fees and a lack of control," he said. "Things have gotten better, but they are still a far cry from the safety and soundness you expect from a bank product scrutinized by the OCC [Office of the Comptroller of the Currency]. Many states have enacted legislation which prohibit poor disclosures or excessive fees, yet many retailers still get to enjoy the benefits of non used cards."
Riley sees a shift to more practical buying through the 2008 holiday season. With unemployment up, consumer confidence down and the amount of business failures accelerating, retail sales are an obvious concern. "Retailer bankruptcies cause havoc to gift card buyers," Riley said. "Closed loop cards are generally considered to be held by unsecured creditors with powerful law firms who are there to represent the interests of their clients.
"The challenge is to balance the right of the creditor to recover their money with the right of the consumer to claim their loss. In either case, someone does not receive full value," Riley added. TowerGroup believes gift cards are more beneficial when consumers transact the full amount and don't hold on to them for extended periods of time.
However, payment professionals are less concerned about the value loss on gift cards than they are about consumers spending more cash and less plastic at the POS. "One of the great things about the payments business is innovative competition," Riley said. "If you look at the strong players, you will find they all succeeded. And as card acceptance grew, so did their portfolios.
"The real competitor to the industry is cash. For the payments industry, making electronic transactions ubiquitous increases economies of scale for the whole network. The products are great, and the limits [of gift cards] are only the limits of your imagination. However, you are talking about a lot of money, and with that, there are prudent controls that should be considered," he added.
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