Gift cards need tighter regulation now, expert warns

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By: Wise Marketer Staff |

Posted on January 9, 2007

Gift cards need tighter regulation now, expert warns

Consumer gift cards - arguably the hottest gift item of the 2006 holiday season - are now in the hands of more than half the consumers in the US but, while gift card malls and point of sale activation technology made the cards easy to buy, gift card holders are now subject to risks, and some cards even pose a money laundering risk, according to Tower Group.

TowerGroup believes gift cards need tighter regulation due to the money laundering risk associated with the anonymous nature of the product, and the lack of control associated with the technology.

A serious risk? 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. As a result, Brian Riley, senior analyst in the bank cards practice at Tower Group, has authored a research report on the gift card market.

The report shows how the prepaid product has a role to play in the payments function but, due to a lack of controls, can also bring unwelcome exposure to financial systems and consumers. The report also describes the spectrum of vulnerabilities for fraud, as well as merchant and consumer risks. Riley's report also explains what he considers to be the most likely approach regulators will use to harness prepaid and gift card products.

Growth in the market Gift cards, which have their roots in the traditional prepaid card and voucher, have sustained growth of more than 20% for the past three years in the US. In fact, the industry now includes vertical markets such as gift cards, government benefit cards, employee payroll cards, business travel cards, and customer reward cards, representing a global transaction market with spend potential above US$2 trillion each year.

But consumers and card issuers are particularly vulnerable because the design of many gift card systems assumes that the buyer will not usually be the end user. Also, Riley pointed out, the issuers of unbranded closed-loop cards are not currently under the scrutiny of the US Office of the Comptroller of the Currency.

The report, Gift Cards: How to ensure they don't become Drift Cards, segments the vulnerabilities into three groups: consumer, merchant, and fraud, and clearly illustrates areas in which the product could potentially expose the consumer to receiving less than the full value of their card. The report is available directly from Tower Group.

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