Players in the prepaid industry can breathe a sigh of relief. An amendment to the Credit Card Accountability Responsibility and Disclosure Act of 2009 (The Credit CARD Act) that would have severely reduced, if not entirely eliminated, the availability of open-loop, network-branded prepaid gift cards to consumers was modified by the U.S. Senate before President Obama signed the bill into law.
According to Brad Fauss, Senior Vice President and General Counsel for prepaid program manager and processor Springbok Services Inc., the unmodified version of the bill's amendment - called the Fair Gift Card Act of 2009 - would have prohibited issuers from imposing dormancy or service fees on both closed-loop, private-label gift cards and open-loop, network-branded cards.
In "The Fair Gift Card Act of 2009: Good intentions, disastrous results," written by Fauss and published in the April 29, 2009, edition of SellingPrepaid E-Magazine, Fauss said lumping the two types of cards together under one-size-fits-all rules would have disastrous results for issuers of open-loop, network-branded cards.
Closed-loop gift cards can only be redeemed at the retailer from which they were purchased. In contrast, open-loop, network-branded cards can be redeemed at millions of disparate businesses worldwide since Visa Inc.- and MasterCard Worldwide-branded cards are accepted virtually worldwide.
Fauss said retailers receive the bulk of the funds loaded onto both types of cards. In the case of closed-loop gift cards, the retailers that issue the cards receive all funds loaded onto the cards. For open-loop cards, the businesses where the cards are used receive the amount spent by consumers, while the issuers of the cards make money primarily on fees attached to the cards.
Therefore, "if the primary revenue sources for prepaid cards are eliminated by restricting service fees, these products will no longer be profitable and may no longer be offered," Fauss wrote.
According to others who studied the amendment, the service-fee provision had potentially radical consequences for acquirers and their partners who sell prepaid card services. The Electronic Funds Transfer Association, an interindustry association focused on promoting the adoption of electronic payment systems and commerce, urged Congress to scrap, or at least modify the prepaid card provision. Fauss reported that Sen. Charles Schumer, D-N.Y., who was behind the drafting of the original legislation, introduced a modified version of the amendment that adequately remedied his - and the industry's - concerns.
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