Office of Consumer Protection: 240-777-3636

Gift Cards 2004 Retail Card Improve,
But Beware of the Bank Cards 

Background

     Gift cards have become even more popular since we issued our 2003 gift card report.¹  The National Retail Federation’s (NRF) 2004 Gift Card Survey found that 74.3 percent of consumers plan to buy gift cards this holiday season.²  On average, those purchasers plan to spend $108.28 for 3.38 gift cards.³  That adds up to gift card sales of $17.34 billion, nearly 8 percent of the NRF’s projected holiday sales of $219.9 billion.⁴    

     Besides the familiar retail gift cards, bank gift cards are becoming very prominent.  These cards carry the logo of credit, debit, or charge card companies such as American Express, Discover, MasterCard, and Visa.  They may be issued directly by the card company, or they may be issued by and also carry the logo of banks, shopping malls, and other institutions, in a manner similar to credit cards.  These cards offer the attraction and advantage of being accepted everywhere that type of credit, debit, or charge card is accepted; mall cards, however, may be accepted only within the named mall or mall chain.

     Our 2003 gift card report and various press accounts have highlighted the varying policies of different gift card issuers.  Our report found, for example, that some gift card issuers offer replacement cards if the original is lost or stolen, while others do not.  The report also highlighted that, while gift card expiration dates are becoming fairly rare, “inactivity” or “dormancy” fees, such as $2.00 per month after a card has not been used for 18 months, have become very common.  Despite all of the publicity over such policies, Synergistics Research Corporation recently reported that 63 percent of gift card purchasers and likely purchasers were not aware of dormancy fees.⁵ Sixty (60) percent indicated they would make an effort to buy only gift cards that do not have dormancy fees, while another 20 percent indicated they would stop buying gift cards because of dormancy fees.⁶  Those statistics provide ample reason to issue this new gift card study.  

Methodology

     We reviewed the gift cards, packaging and inserts, websites, and policies of thirty major retailers and restaurant chains, and four bankcard issuers.  The list of retailers and restaurants (contained in Table A) includes department stores, discount stores, wholesale clubs, toy stores, clothing stores, home improvement stores, video rental stores, grocery stores, sporting goods stores, computer stores, coffee shops, and restaurants.  It is nearly identical to the list in last year’s report because we wanted to see if there have been changes in policies within this group, which includes some of the nation’s largest retailers.  The bank cards, new to this year’s report, are listed in Table B.  The information was gathered in September, 2004.

We continue to believe that the three retail gift card policies most important to consumers are:

1. Whether replacement cards may be obtained if the gift card is lost or stolen and its value has not been used up,
2. Whether the cards have an expiration date, and
3. Whether fees might be assessed to the card’s balance.

     Results for these policies are presented in the first three columns in Table A.

     The National Retail Federation recommends that consumers should understand a gift card’s policies before they buy. ⁷  We agree; therefore, we also looked at how well these thirty companies disclosed their gift card policies before the card is bought.  Specifically, for those companies whose cards have an expiration date or a potential fee, we looked at whether the cards’ packaging (if any) in stores and the company’s website (if cards are sold on the website) disclose the expiration date or potential fee.  The results of those companies’ disclosures are shown in the fourth column of Table A.  It should be noted that a company was credited with a “Yes” for disclosure only if the expiration date or fee is disclosed in the stores and on the website, if cards are sold both places.  At the same time, we were generous in giving credit for disclosure.  Even if the disclosure is multiple clicks away from most of the gift card information on the website or a consumer has to almost rip the card off the packaging to see the disclosures in stores, we counted that as a disclosure in that sales mode.  

Bank Cards      

     When we reviewed bank gift cards, it became apparent that we would need a more comprehensive table because they impose a variety of fees and offer features that retail gift cards do not.  In fact, there are so many fees and features that many are disclosed in somewhat lengthy paperwork accompanying the cards rather than on the cards themselves.  This can make it difficult to know the terms pre-purchase when shopping in person, but some bank branches or other issuers might allow prospective purchasers to look over the paperwork before finalizing the purchase.  The disclosures also appear on the cards’ websites, where many of them are bought.  Though some cards have additional features or fees, we reviewed the following policies in our study:

1. Whether the cards have a processing/purchase fee,
2. Whether a lost or stolen card can be replaced and at what charge,
3. Whether the card can be used to obtain cash from an ATM and what the fee is,
4. Whether there is a fee for a telephone balance inquiry,
5. Whether there is a monthly maintenance fee,
6. Whether the card has an expiration date, and
7. Whether the card is reloadable and at what charge.

Findings

• Twenty-one (21) of the thirty (30) cards, 70 percent (compared to 60 percent in the 2003 study), offer the potential to obtain a replacement card, with the remaining balance, if the original is lost or stolen.  Getting a replacement may require the original receipt and the card number.  Some companies may accept other proof of purchase.  Starbucks requires the card to have been registered with them.
• Only one (1) of the thirty (30) cards, Blockbuster, has an absolute expiration date. This compares to three (3) of thirty (30) cards in the 2003 study.  Expiration dates do not apply in a few states that have prohibited them.
• By contrast, nine (9) of the thirty (30) cards, 30 percent, (compared to 50 percent in the 2003 study) may impose fees if the card is not used much.  They are CompUSA, Giant Food, Hollywood Video, KB Toys, Kmart, Kohl’s, Macaroni Grill, Red Lobster, and Toys “R” Us.  Most of these are “inactivity” fees of $1.00 - $2.10 per month that kick in if the card has not been used from 12-24 months.  Red Lobster stops imposing this fee once the card is used.  KB Toys has a monthly maintenance fee that kicks in if the card’s total value has not been spent in 24 months, regardless of whether it has ever been used.  Representatives of two of these nine companies, CompUSA and Hollywood Video, say they do not charge a fee, though their websites and cards say they do.  Fees do not apply in a few states that have prohibited them.
• Ten (10) of the thirty (30) cards, 33 percent, impose either an expiration date or a potential fee (compared to 60 percent in the 2003 study).  No card imposes both.
• Eighteen (18) of the thirty (30) cards, 60 percent, (compared to 33 percent in the 2003 study) stand out by offering the potential for a replacement and not imposing an expiration date or fee.  They are: Best Buy, Borders Books, Circuit City, Costco, Gap, Hecht’s, Home Depot, JC Penney, Lowe’s, Nordstom’s, Old Navy, PETsMART, Sam’s Club, Sears, Sports Authority, Starbucks, Target and WalMart.  A caveat should be noted for Home Depot: it reserves the right to change the applicable terms and conditions of its cards, so the current terms are not guaranteed for the life of the card.
• Of the ten (10) cards that impose an expiration date or potential fee, five (5), 50 percent, do not disclose those restrictions pre-purchase in both their stores and websites.  They are Blockbuster, Hollywood Video, Kmart, Red Lobster, and Toys “R” Us, though, as noted above, Hollywood says it does not impose fees regardless of what its cards and website say.

• All four of the bank cards impose a processing/purchase charge of $3.95 - $11.95.
• All four offer replacement cards, but they charge $5.95 - $10.00 for that service.
• Two of the four bank cards can be used in ATMs at a charge of $1.50 - $2.50 per transaction.
• Two of the four cards impose a telephone balance inquiry fee of $.50 - $2.00.
• All four cards have a monthly maintenance fee of $1.25 - $4.95 per month.  The two Visa cards defer this fee for six months and the American Express card defers it for 12 months.  It should be noted that, unlike most retail card fees, these fees will automatically kick in whether the card has been used or not.  These fees may not apply in a few states that have prohibited them.  
• All four cards have an expiration date, although the Visa and American Express cards prefer not to call it that because they offer the opportunity – for a fee of $5.95 to $15.00 – to have the remaining balance at expiration returned via a reissued card or a check. 
• Only the SureOne Prepaid MasterCard is reloadable, for a fee of $2.95 - $5.95.
• All four bank cards reserve the right to change the terms and conditions of the card.

Highlights

Retail Cards

     This year’s study shows that major retailers and restaurants have improved their gift cards in the past year.  We can now recommend eighteen (18) of the thirty (30) cards we studied because they offer replacements and have no fees or expiration dates.  Expiration dates seem to have almost disappeared:  Blockbuster’s is the only card in the study that has one.  (Blockbuster’s cards had a dormancy fee last year, but switched to an expiration date.)   Fees, while not as prevalent as last year, still appear on 30 percent of the cards studied.  Finally, there is still inadequate pre-purchase disclosure with five (5) of the ten (10) cards carrying fees or expiration dates.  Thus, while the National Retail Federation encourages consumers to understand retailers’ card policies before buying, these retailers’ disclosure policies are preventing that from happening.

Bank Cards

     The seemingly attractive features of bank cards come at the price of all sorts of fees that tend to make them less attractive than retail cards.  Those fees could get even worse since all the bank cards we studied reserved the right to change terms.  The worst we studied, the SureOne Prepaid MasterCard from Columbus Bank and Trust, charges an exorbitant processing fee of $9.95 above the value of the card, a $4.95 per month maintenance fee imposed from day one, and potentially a variety of other fees depending on how the card is used.  Finally, the company’s representatives push additional items with added costs when one attempts to activate the card by phone.  

Recommendations For Card Buyers/Givers

• Choose one of the eighteen (18) standout retail cards highlighted in this study, bearing in mind our caveat on Home Depot.  While the features highlighted in this study may not be critical to all recipients, we believe they will appreciate receiving a card with all these features.  In addition, our experience is that expiration dates, fees, or losing a card become a factor much more often than one would expect.
• If the widespread acceptance of a bank card is of primary importance, the American Express gift card appears to be the mediocre standout of the lot.  Its $3.95 processing fee is the lowest and, if the card’s value is spent in less than a year, there should be no additional fees.
• Send the original receipt along with the card to the recipient or the recipient’s parent.  Advise them to keep it in a safe place so they can seek a replacement if the card is lost or stolen.
• When buying a gift card, look carefully at the pre-purchase disclosures of terms and conditions on the website and the packaging or inserts in the store or bank.  If terms are not given or appear too cryptic to be complete, do not buy.

• Look at the terms and conditions on the back of a gift card and any paper insert as soon as you receive one.  If the card has an expiration or fee commencement date, spend it promptly.  Avoid the bank card uses that incur additional fees.
• Set up a family gift card file to retain the original receipts, card numbers, any expiration/fee commencement dates, any inserts with terms and conditions, and toll free customer service numbers.
• Call the toll free number as soon as possible if the card is missing because you should not expect a replacement if someone else has spent the balance on your missing card.  Even if the card says that replacements are not provided, contact the company anyway if it is lost or stolen.  It does not hurt to ask, and we suspect more companies will adopt replacement policies.

²  “More Consumers Reach for Gift Cards This Holiday Season,” National Retail Federation Press Release, November 18, 2004 .

³  ibid

⁴  ibid

⁵ “Prepaid Card Dormancy Fees – A Sleeping Issue That May Awaken Consumers,” Synergistics Research Corporation Press Release, August 26, 2004 .

⁶  ibid

⁷ “More Consumers Reach for Gift Cards This Holiday Season,” National Retail Federation Press Release, November 18, 2004

⁸ Company representative states that they are currently not charging dormancy fees.

⁹ Also can be used at Stop & Shop, Bi-Lo, Super G, Martin’s, & Tops

¹⁰ Also can be used at Lord & Taylor, Strawbridge’s, Robinsons-May, Kaufmann’s, L.S. Ayres, Meier & Frank, Foley’s, Filene’s, Famous-Barr, & The Jones Store

¹¹ Company reserves right to alter terms and conditions of its cards.

¹² Also can be used at Chili’s, On the Border, Corner Bakery, Big Bowl, & Maggiano’s

¹³ Some Nordstrom’s cards sold at other retailers do not offer replacements.

¹⁴ Also can be used at Olive Garden, Bahama Breeze, & Smokey Bones

¹⁵ Company reserves right to amend terms and conditions.

¹⁶ Cardholder agreement must be accepted online before activation by phone.  Company representative attempted to sell additional items during activation call.