TowerGroup Says Gift Cards Need Tighter Regulation

Consumer gift cards, the hottest gift item of the 2006 holiday season, are in the hands of more than half the consumers in the United States. While gift card malls and point of sale activation technology made the cards easy to buy, gift card holders are now subject to serious exposure, not only for dormancy and expiration fees, but faulty process controls which can distort value.

TowerGroup believes gift cards need tighter regulation due to the money laundering risk associated with the anonymous nature of the product and lack of control. A recent joint study on the Threat Assessments of Financial Systems issued by the US Drug Enforcement Administration, FBI and Royal Canadian Mounted Police highlighted the money laundering risk in connection with gift cards.

Brian Riley, senior analyst in the Bank Cards practice at TowerGroup, has authored a research report on the gift card market ... regarding the vulnerabilities in the gift card process and model legislation to ensure consumers receive full value of their card. Mr. Riley can:

• Illustrate how the prepaid product has a role in the payments function, but due to lack of controls carries exposure to financial systems and consumers
• Describe the spectrum of consumer vulnerabilities for fraud, merchant and consumer risks
• Explain the details of the recent joint DEA, FBI, RCMP Threat Assessment and the implications to gift cards and other stored value products as a money laundering device
• Provide insight on the controls necessary to reduce exposure
• Define the most likely approach regulators will use to harness prepaid and gift card products

Gift cards, which find their roots in the prepaid card product, have sustained growth better than 20% for the past three years. Prepaid cards as an industry now includes vertical markets such as gift cards, government benefit cards, employee payroll cards, business travel cards, and customer reward cards - a global transaction market with spend potential above $2 trillion. Consumers and financial issuers are particularly vulnerable relative to gift cards, because their product design assumes that the buyer will not usually be the end user. Also, the issuers of unbranded closed loop cards are not under the scrutiny of the Office of the Comptroller of the Currency.

The new TowerGroup report titled, "Gift Cards: How to Ensure they Don't become Drift Cards," segments the consumer vulnerabilities into three groups: consumer, merchant and fraud. The report illustrates areas in which the product can expose the consumer to receiving less than the full value of their card.