tored-value cards (including prepaid and gift cards) are inexpensive, easy to use and convenient. Because of their mass appeal, they have permeated a major portion of the financial sector including banks, card companies, credit bureaus and payroll as well as the retail industry. However, the complexities behind this relatively new method of payment are quickly gaining the attention of lawmakers around the country.

In a recent issue of The Green Sheet, we looked at federal regulatory matters concerning prepaid cards (see "Popularity Is a Two-edged Sword for Prepaid Cards," by Patti Murphy, The Green Sheet, March 28, 2005, issue 05:03:02).

States are getting involved in regulation, too. One way is through state escheatment laws. The laws mostly deal with physical property (they require that any unclaimed or abandoned assets of a business, person or other entity be turned over to the state after a specified period of time), but retailers find that lawmakers pay more attention to the laws in regard to the cards.

For example, SB 446, a law proposed in Texas, would eliminate expiration dates on prepaid cards but allow retailers to reduce the cards' values after 12 months of inactivity. And after three years, retailers would have to escheat the remaining values of the cards to the state. The bill, authored by Sen. John Carona (R-Dallas), passed in the Senate and currently resides in the House.

"Only retailers who charge fees would be liable under the new law," said Paul Reyes, Carona's Legislative Aide. "Senator Carona specifically exempts those whose cards are good forever at their original value, in order to reward good retailers. There are issuers that are taking away a person's money and people are not aware of it."

According to Chuck Courtney, President of the Texas Retailers Association, "Most of our members use gift cards fairly regularly and feel that it is a good compromise that Senator Carona made. There are so many types of gift cards that it's no surprise that lawmakers have been taking more notice [and action]."

Reyes said a recent lawsuit in New York prompted Carona to write the bill. His goal is to "prevent and avoid any litigation in the state" related to prepaid cards.

The litigation Reyes referred to: New York State Attorney General Eliot Spitzer filed suit against Simon Property Group Inc. for its unlawful, misleading and expensive fees attached to prepaid gift cards the company issued in conjunction with Visa. Simon Property owns, develops and manages property used predominantly for malls and other retail outlets.

New York primarily filed the suit because Simon Property failed to properly disclose expiration dates as well as non-use and customer service fees. The outcome: Companies must post a disclosure about expiration dates and fees on Web sites and packaging and directly on the card using a sticker.

"Escheatment as a consumer protection is laughable," said Craig Shearman, Vice President of Government Affairs and Public Relations at the National Retail Federation (NRF). "States are looking to plug holes in revenue loss anyway they can."

Shearman said that it is the bank-issued cards that usually expire earlier and have higher dormancy fees, which banks deduct sooner than retailers. However, many state laws don't make distinctions between retail-issued cards and bank-issued cards.

He also said that retailers don't get to claim gift card sales as revenue until consumers redeem the cards. The cards, therefore, should be regulated separately because "banks issue their cards for a profit and actually prefer that they are not redeemed," Shearman said.

Many people don't know that when they purchase bank-issued prepaid cards, banks actually have unstated conditions and restrictions attached to their use. One is a fee assessment if the cardholder does not use the card in a certain amount of time. Another is an expiration date for the card. Once the card expires, the store claims the entire unused portion of funds.

More than 25 states have enacted legislation concerning these types of cards. Maine prohibits expiration dates entirely, while Massachusetts bars them for the first seven years. In Illinois, cards with no service fees avoid escheatment laws. Effective July 1, 2005, Hawaii prohibits fees for the life of the card as well as an expiration date for the first two years. And pending legislation in New York would mandate that gift cards and certificates are usable for at least seven years.

National annual estimates for the value of unused gift cards vary between $2 and $3 billion. And "The Wall Street Journal" estimated that in 2002, businesses sold roughly $36 billion in prepaid retail gift cards (as cited by the Consumers Union). According to the NRF, the sale of prepaid gift cards has become a $55 billion industry. TowerGroup estimates that by 2007, it will be an $85 billion business.