Gift card industry 'shocked' by Federal Reserve guidance

Earlier this month, the Federal Reserve released new, narrow interpretations of financial reform regulations that will become effective on Monday. In order to comply, prepaid card companies might have to completely change the packaging on cards that have already been shipped to retailers.

The regulation in question comes from an amendment in the Dodd-Frank law that was intended to increase competition between the middlemen who contract with retailers for the cards. But the prepaid card industry said the guidance from the Fed — which was released on March 13 — goes further than the law intended.

The Fed’s guidance requires consumers to have a PIN number to use a Visa or MasterCard-branded gift card, when it was previously optional.

“Quite honestly, the prepaid industry was shocked when the staff of the Federal Reserve Board issued [the informal guidance] less than three weeks before the effective date,” said Brad Fauss, the executive vice president and general counsel of Brightwell Payments, a payroll card company.

Fauss, who has been in the payment industry for a decade, said prepaid card companies have spent more than a year to create packaging and technology they thought would comply with the regulations before the Fed “changed the rules of the game for industry participants by going well beyond the requirements” set by the formal rules.

Prepaid giftcard producers have been involved in talks with the Fed in an effort to persuade them to change the language or acknowledge their current practices as acceptable within the rules.

Gift cards with a credit symbol are typically activated when purchased, and consumers can decide if they would like to set up a PIN later. The Fed now says that, in order to comply with Dodd-Frank, companies must issue PIN numbers, or have consumers choose one, before a card is activated.

The central bank’s interpretation of the rule does not hold legal weight, but industries typically treat the guidance as if it does.

“Even though the guidance may not be ratified by the [Federal Reserve leadership], it can give you a pretty good idea how the regulators might likely respond to particular situations — which is critical if you’re in the regulated community,” said Joshua Rosenstein, an expert in corporate compliance and counsel at Sandler, Reiff, Young & Lamb. “One of the fundamental purposes of informal guidance is to let the industry know how the agency intends to enforce its mandate.”

Although talks with regulators are ongoing, it remains unclear what will happen on Monday, the official date the companies are due to comply. The Federal Reserve could not comment on the discussions or whether it would broaden its interpretation.