Disappearing-Card Trick

After Arlene Vinson's favorite boutique in her hometown of Brea, Calif., went out of business a few years ago, her husband Norman — perplexed about what to give her for Christmas — decided that about 20 of the $50 bank-issued gift cards sold at their neighborhood mall would be the ideal gift; she could redeem them at any store in the shopping center. But nearly six months later, when Arlene tried to buy a $20.50 blouse with $2.50 in cash plus a gift card with $18 of unspent credit, the sales clerk said it couldn't be done, citing a fine-print rule on the back of the card prohibiting purchases for more than the available balance. Norman eventually had to pay cash for the blouse.

The Vinsons got another jolt shortly thereafter when they discovered that if they didn't spend all the money remaining on the cards within six months, the issuing bank would begin subtracting a monthly $2.50 dormancy fee from each one and the cards' value would expire altogether by 2005. "I thought I was buying something that would be worth $50 and would be good forever, just like a gift certificate," says Norman. "It was very irritating because nobody told me anything [about all the conditions] up front." The joy that millions will feel when they find prepaid cards in their Christmas stockings --retailers estimate that consumers will spend some $17 billion on them this season — could turn into misery if they don't understand the myriad rules, fees and conditions attached.

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The proliferation of gift cards has already sparked an outcry from consumer groups concerned about their lack of regulation. In the mid-1990s a few big specialty retailers and major department stores began issuing cards with magnetic strips and a preset or unlimited value as cheaper, more secure alternatives to paper gift certificates, which are easy to counterfeit. Card sales grew between 15% and 35% annually from 1997 to 2004, and while the issuing stores waited for the redemptions, they locked in enormous future revenues and racked up hefty interest income. Until now, regulators have trod lightly because they recognized the benefits to consumers, according to Deborah Thoren-Peden, a partner at the Pillsbury Winthrop LLP law firm and head of its consumer-and-retail-practice group. "They were concerned that if they said a lot of laws applied to them, it would crush the industry," she says.

All sorts of businesses quickly realized that the cards were cash cows. Now banks, credit-card companies, various financial-services providers and such chains as Starbucks sell branded prepaid cardsnot only at their own outlets but also through grocery stores and shopping malls as well as over the Internet. The newly reopened toy store F.A.O. Schwarz is even offering a $100,000 gift card. Some of the cards include ATM access. Some let holders reload them; others permit transfer of funds to other cards or individuals. In one of the latest incarnations, at last count about 1,000 companies give their workers electronic-payroll cards to access accounts holding their wages, bonuses and commissions. Last year prepaid-card sales were $45 billion, and in 2006 sales are expected to hit $90 billion.

Now that the market is robust, the government is considering requiring issuers of payroll cards and certain other prepaid cards to insure the underlying accounts, and the Federal Reserve is proposing that they also reimburse holders of payroll cards for unauthorized uses under the same terms as those for bank debit cards. Many card issuers are building consumer protections into their products on their own. Safeway stores, for example, don't sell cards with expiration dates or dormancy fees.