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New York Proposes Major Changes to Gift Card Law That May Affect Other Forms of Prepaid

On October 2, AB 8652 was introduced in the New York Assembly as a companion to Senate Bill 5771. These bills would substantially amend New York law regulating gift certificates, which includes some open-loop and closed-loop prepaid cards. This legislation would make four major changes to the current statute. It would (1) re-define “gift certificate,” (2) broaden the fee restrictions, (3) prohibit expiration dates, and (4) establish a cash redemption requirement. A chart detailing the proposed changes is included below.

Current New York law broadly defines “gift certificates” to include open-loop and closed-loop prepaid products that are not linked to a deposit account. The new bills would replace this broad definition with an equally broad, but less clear definition. According to the Senate and Assembly committee reports, the intent of the change was to “make clear that the definition of ‘gift certificate’ includes gift cards.” Seeing as the existing law cribs language from Reg E’s definition of “store gift card,” we’re not sure that such a clarification is necessary. Unfortunately the drafters did not address the glaring ambiguities surrounding the phrase “linked to a deposit account,” which is in the existing and proposed definitions. What does linked mean? Does this mean that any card program where the underlying funds are held in a bank account is exempt? What qualifies as a deposit account? Is a sub-account in a pooled account a deposit account? Inquiring minds want to know.

The bills would also broadly prohibit all post-issuance fees and expiration dates. New York would not be the first state to take on post-issuance fees or expiration dates, but eliminating both threatens the viability of some very popular products. Oddly enough, it also maximizes balances that are subject to escheatment.

Finally, the proposed bills would establish a redemption right if the “gift card” has a balance of $20 or less. There are a few troubling aspects to this requirement:

  • “Gift card” is never defined in the bills or the underlying statute. Elsewhere in the statute and bills, restrictions are placed on “gift certificates.” One is left to wonder whether this redemption requirement applies to all gift certificates or if “gift card” is supposed to mean something else. Other states have redemption requirements, but most only apply to closed-loop cards.

  • At $20, this would be twice as high as the next highest cash redemption requirement in the country.

  • It is unclear which party has the redemption obligation. The merchant or the issuer? It’s unclear how a consumer would redeem the balance of a gift card issued by an out-of-state bank.

  • Many gift cards restrict cash access for AML purposes. The redemption requirement would appear to prohibit such restrictions in covered products and could thus create a new avenue for money laundering.

Let’s hope this is just the first draft of New York’s amendments to its gift card statute and that the legislature will refine the bill. The filing of the companion bill in the Assembly, however, does suggest that legislators are ready to move forward and this bill may be in close to final form. Interested parties should act quickly to submit their concerns and suggestions to lawmakers.

New York Gift Card Law

 

Existing Law (N. Y. Gen. Bus. Law § 396-i)

Proposed Bills (AB 8652 / SB 5771)

Definition of “Gift Certificate”

A written promise or electronic payment device that: (i) is usable at a single merchant or an affiliated group of merchants that share the same name, mark, or logo, or is usable at multiple, unaffiliated merchants or service providers; and (ii) is issued in a specified amount; and (iii) may or may not be increased in value or reloaded; and (iv) is purchased and/or loaded on a prepaid basis for the future purchase or delivery of any goods or services; and (v) is honored upon presentation. Gift certificate shall not include an electronic payment device linked to a deposit account, or prepaid telephone calling cards.

A certificate, electronic card, or other pre-funded record that evidences the giving of consideration in exchange for the right to redeem such record for goods, services, credit, or money of at least an equal value to the amount shown on, embedded in, or associated with, such record. Gift certificate shall not include an electronic payment device linked to a deposit account, or prepaid telephone calling cards.

Restrictions on Fees

  • No retroactive fees;

  • No service fees prior to the 25th month of dormancy;

  • Service fees must be refunded if holder presents gift certificate within 3 years of it being issued.

  • The following fees are prohibited:

    • Activation fee;

    • Retroactive fee;

    • Service fee;

    • Latency fee;

    • Administrative fee;

    • Handling fee;

    • Access fee;

    • Periodic fee;

    • Renewal fee;Re-loading fee; and

    • Any other post-purchase fee

  • Gift certificate’s face value or balance may not decline as a result of the passage of time or the dormancy of the certificate.

Restrictions on Expiration

No expiration date earlier than five years after the date on which the gift certificate was issued, or the date on which funds were last loaded on a store gift card.

Expiration dates are prohibited.

Redemption Requirement

None

A gift card with a remaining value of $20 or less may be redeemed for its cash value.

Copyright © 2020 Womble Bond Dickinson (US) LLP All Rights Reserved.National Law Review, Volume IX, Number 297

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About this Author

Stephen Middlebrook Lawyer Womble Bond Dickinson
Of Counsel

Steve advises start-up and established companies on a wide array of legal and business issues arising from the intersection of technological innovation and financial services. He has over more than 20 years of experience helping clients navigate complex regulatory and compliance matters, including licensing, consumer protection, anti-money laundering, data privacy and security. He has helped clients interact with regulators and respond to inquiries at the state and federal level. In addition, he has assisted businesses in negotiating agreements for processing services,...

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Tom Kierner Lawyer Womble Bond Dickinson Atlanta Fintech IP Data Privacy Payment Systems
Associate

Tom Kierner is a transactional attorney with a background in payment systems and financial regulations.  He is a member of the firm’s FinTech and IP Transaction teams in Atlanta.

Tom advises his clients on the dynamic regulatory and legal landscape for FinTech and payments companies. He also assists his clients in negotiating and drafting agreements with banks, processors, and other service providers.

He has experience handling data privacy matters on behalf of clients, including managing data breach responses. He also has experience responding to inquiries and enforcement actions brought by state and federal agencies, including the Consumer Financial Protection Bureau (CFPB), various state attorneys general, and state banking divisions.  

As former in-house counsel at two financial services companies, Tom provided regulatory guidance to his clients to maintain compliance with state and federal requirements, including advising on planned advertising and promotional activities to ensure compliance with consumer and privacy laws.  He also oversaw his clients’ consumer arbitration process, successfully disposing of the majority of arbitration demands outside the costly arbitration process, and managed a portfolio of state money transmitter licenses, including reporting and responses to regulatory inquiries.  

Tom is a Certified Information Privacy Professional (CIPP/US).  

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