The Green Sheet Online Edition
April 13, 2009 • Issue 09:04:01
The state of escheatment
The Network Branded Prepaid Card Association unveiled a white paper at the 2009 Prepaid Card Expo that examines the confusing and awkward intersection between state abandoned property laws and prepaid cards. As the prepaid card industry develops, the NBPCA believes the laws that govern escheatment must be clarified for the industry to reach its full potential.
Modern escheatment laws originated from the unclaimed property laws of feudal England. In medieval times, the laws ensured that property did not remain in legal limbo after the owners died, but were "escheated" back to superiors, such as feudal lords or kings.
In the United States of the 19th and 20th centuries, the concept of escheatment developed state by state to include "intangible personal property (such as funds underlying uncashed checks in a checking account)," the NBPCA said. As the economy grew and businesses expanded beyond state lines, conflicting state claims concerning escheatment arose.
In recent decades, federal Uniform Acts have attempted to bring disparate state laws into conformity. According to the NBPCA, the 1981 Uniform Unclaimed Property Act added gift certificates to the definition of intangible property; in 1995, the act was expanded to cover prepaid cards. "This broad expansion meant that a merchant was required to pay the state for unredeemed gift certificates in cash, even though the merchant only was obligated to provide goods or services to the purchaser," the NBPCA said. "At least one court held that these laws constituted an unconstitutional taking of property from a merchant without due process."
Many states agreed with this verdict and refused to include gift cards and similar products under their escheatment laws, the NBPCA noted. While the association does not argue for or against the worthiness of tying prepaid cards to escheatment laws, it has concluded the laws that do exist are inadequate in dealing with the complexities of divergent prepaid card products.
For example, many state laws lump payroll, rewards, travel and teen cards into the gift certificate category, "without regard to their specific makeup, purpose or functionality," the NBPCA said.
The reason for this lack of specificity rests in the relative newness of prepaid cards. The NBPCA called prepaid cards "a poster child for the difficulties of applying existing laws to products or situations that were hardly imaginable when the laws were written."
One law does not fit all
The NBPCA enumerates many areas of the laws that need to be addressed, including:
- Lack of language focused specifically on prepaid cards
- Lack of defined "presumption of abandonment" time frames for prepaid cards (how much time needs to pass before unused funds can be claimed)
- Confusion over how much issuers can extract from cards in dormancy fees
The NBPCA recommends that the laws distinguish between open-loop, network-branded prepaid cards and closed-loop gift cards.
The NBPCA argues that, unlike closed-loop cards, open-loop cards can be used much like debit cards to access cash from ATMs and pay for goods and services from any number of merchants "over a longer period of time." Therefore, open-loop cardholders should be given a larger presumption of abandonment period than users of closed-loop cards.
Another problem area that the NBPCA said needs to be tackled is what funds escheat to what states. Do funds escheat to the state where the card buyer purchased the card or to the state where the card was used?
As the NBPCA pointed out, the individual who uses a gift card, for example, may live in a different state from the person who purchased the card. As for open-loop cards, the NBPCA said most of them are issued by banks. The way banks are constituted complicates which states are escheated funds.
"Consider a bank chartered in Delaware, with a holding company parent incorporated in Virginia, doing business in multiple states but with most of its employees in Utah," the NBPCA said. "Which state receives escheated funds?"
The NBPCA considers that escheatment laws in the United States may hinder U.S. companies in the global prepaid marketplace. The NBPCA claims only in the United States and certain Canadian provinces are prepaid cards subject to escheat laws.
"Nowhere else do retailers lose the breakage [leftover amounts] on their gift certificates or gift cards; nowhere else do businesses forgo the benefits of uncashed checks and certificates and pay the funds to the states as a sort of additional 'tax'," the NBPCA said. "As the industry expands to Europe, Asia and South America, the U.S. industry may face increased competition from institutions that are not subject to comparable laws."
Additionally, escheatment laws imposed on prepaid cards cause issuers to pass on the costs to consumers in the form of higher fees, the NBPCA noted.
No square cards in round holes
In conclusion, the NBPCA recognizes the funds garnered through escheatment laws can be an important revenue stream for cash-strapped states, especially in economic downturns. But, if such laws are to exist, the NBPCA urges state legislatures to take into account the particularities of prepaid cards when enacting legislation, rather than force rules onto the prepaid card industry using the existing legal framework.
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