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Grinch Comes to N.Y.: Gift Certificate Law Could Push Some Prepaid Cards from Market

caution-iconA New York State law setting fee and expiration date restrictions on “gift certificates” could spell big trouble for providers of several types of open-loop prepaid products in the state, and may even render certain types of products impossible to offer in New York, according to industry experts.

Signed by Governor Andrew Cuomo in September and set to take effect on Christmas Day, the law amends Section 396-i of the New York’s General Business Law regarding the “Acceptance of Unexpired Gift Certificates” to extend from 12 to 24 months the period during which a gift certificate must be dormant before service fees can be charged. The amendment also requires any fees charged after the 24th month of dormancy be refunded to the gift certificate balance if the consumer presents the gift certificate for use within the following 12 months, or a total of 36 months after issuance. Finally, the law bars gift certificates with an expiration date of more than five years after issuance and installs new disclosure requirements for card replacement procedures.

One major problem is that New York’s General Business Law defines “gift certificate” quite broadly, meaning that even products that don’t meet the generally accepted definition of a gift certificate—such as gift cards, loyalty, awards and promotional (LAP) cards and GPR cards—potentially fall under the scope of the new requirements if they charge a monthly “service fee” (a term that’s undefined in the statute). The extremely broad definition of “gift certificate” generally includes all open-loop prepaid cards except those specifically carved out, including debit cards attached to a deposit account; prepaid telephone calling cards; certain health care cards, such as FSA cards and HSA cards; dependent care reimbursement accounts; prepaid discount cards; and payroll cards.

However, the new amendments make no accommodation for the design and business model underlying covered products. For instance, the business model for LAP cards, such as rebate cards, is often predicated upon shorter expiration dates typically ranging between three and 12 months. In most cases, providers would have to extend the life of a LAP card for up to 36 months, which makes the revenue model unworkable, according to industry observers. As such, many types of LAP cards may cease being offered in New York, forcing promotional incentives to be paid via paper check (with the additional costs both for providers and consumers) or simply be wiped out entirely.

Another issue is the law’s timing. With the new amendments only finalized in late September and taking effect on Dec. 25, many of the prepaid card products currently sitting on New York retailers’ shelves soon will run afoul of state law. Those cards presumably will have to be pulled and replaced from store shelves.

Given the complications the new law presents, critics have expressed disappointment that New York legislators, at a minimum, didn’t include the same carve-outs that appeared under the CARD Act. The landmark federal CARD Act of 2009 included language that exempted LAP cards and GPR cards, among other products, from the fee and expiration date requirements after industry advocates argued the law as originally defined cast too wide of a net and would force products out of the marketplace. After having successfully dodged the bullet at the federal level, providers of such products now face many of the same daunting challenges in New York.

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