Recently approved legislation, the first of its kind, requires gift card purchasers to capture information on the buyer of the gift card. Ironically, after legislation was enacted, Title IV of the CARD Act removed many of the expiration dates on Gift Card, eliminating any real revenue from the state’s pending law. The state of New Jersey never rescinded its action to capture unused gift card funds and three of the largest service providers in the industry, American Express, Blackhawk Networks and Incomm, major prepaid card issuers and servicers announced that they would exit the state rather than comply with the new law.
Payment card companies are usually an accommodating lot. Their business models rely on long-term designs to recoup investments and typically adapt their business rather than generate costly litigation. Numerous examples of compliance exist dating back to 1979, when Citi’s national credit card rollout could not adapt to New York State’s usury laws. After operating a retail lending business in New York for more than 100 years, Citi relocated its card business to the state of South Dakota, following opportunities created by the Marquette Decision (Marquette National Bank of Minneapolis v. First of Omaha Service Corp.), which allowed for the export of interest rates beyond state borders. In the same vein, MasterCard Worldwide reached an accord with the European Commission in 2009 regarding cross border interchange, criticized under the Payment Services Directives, while Visa funded their litigation escrow account with $1.6 billion in 2011.
It is ironic that the state of New Jersey caused such a fuss in the card business. Historically, the state accounts for only about 1% of US credit card transactions, but it is attractive to out of state card companies who recognize New Jersey’s household income at $69,811 is 34% higher than the national average. However, as the Garden State’s legislators struggle to balance their $31 billion budget, the attempt to disrupt a card industry that will enable more than $100 billion in consumer transactions finds that the path of least resistance is to leave the state, rather than comply.
The fact is tax collectors missed the trend. Unused gift card funds are on a downswing, particularly after Title IV of the Card Accountability, Responsibility and Disclosure (CARD) of 2009 Act outlined rules for expiration values. When we first looked at the issue of unused card fees in 2006, we identified a major business issue. The industry was growing quickly and more than $8 billion, or 10%, “fell through the cracks” as this new product allowed for expiration dates and junk fees, known in industry parlance as spillage. CEB TowerGroup’s annual review of gift card lost value estimated the industry reacted positively to the CARD Act and in less than 6 years, drove the number down to less than $2 billion (slightly less than 2%). Although concise numbers are not available, under current volumes, New Jersey’s market share would be less than $20 million.
Aside from the fact that these are consumer funds to escheat, not tax dollars, the state has caused itself a larger problem. Will NJ residents now go to New York or Pennsylvania to get their gift cards? Will New Yorkers, who have crossed the border for years to shop at New Jersey’s low tax retailers, now realize that Delaware is only a few more miles away and has no retail sales tax. Would American Express ever think of relocating a prepaid center to the Garden State?
In any case, the attempt to wedge itself between the consumer and their card issuers backfired and missed an important fact: The prepaid card industry will likely surpass $1 trillion in transaction volume by 2021 and gift cards will account for 20% of that.
For more information on gift cards, Retail Banking and Cards members can download the full research: