04/08/2007

Fine print takes the fun out of this gift

By Bill O'Brien

bobrien@record-eagle.com

TRAVERSE CITY — Robert Zimmerman figured a local restaurant was the perfect place to use a $50 American Express gift card.

That is, until after dinner, when he learned that almost half its value had been chewed up by monthly service fees.

Zimmerman found out the card, a Christmas gift from his daughter in 2004, dwindled to a mere $26 in value because of a $2 monthly "service fee” that kicked in after a year.

The fee was spelled out in small print on the back of the card, but Zimmerman never saw the disclaimer and assumed the card was as good as gold as long as he used it before the expiration date.

"There's nothing on there other than to indicate it's worth $50 and it runs through (February) '07,” he said. "If it hadn't been so overt and egregious, I probably would have blown it off.”

Consumer advocates contend gift card fees are a rip-off in an exploding segment of consumer sales. Representatives of the card companies, though, counter that the fees are a cost of doing business in exchange for flexibility and convenience offered by the cards.

"I would say it's unjust enrichment to apply these fees, because it bears no relationship to what they're charging the fees for,” said Lance Raphael, an attorney for the Consumer Advocacy Center in Chicago. "What these companies are saying is, we're going to charge you to keep track of money you've already given us.”

American Express director of public affairs Robert Sherman acknowledged the fees generate consumer complaints, but said the company is trying to bring attention to them. The fees are spelled out in jackets in which the cards are sold, and American Express recently put fee rates on the activation stickers affixed to the front of cards.

"We consider ourselves a leader in our efforts to fully disclose how fees affect the balance on the cards,” Sherman said.

Fees vary

Gift card fees vary widely from company to company. Some major retailers like the Home Depot and Lowe's home improvement stores and book store chains like Borders and Barnes & Noble offer gift cards without monthly fees or expiration dates.

Sherman said that's because those companies sell merchandise to make money, while financial institutions like American Express operate by providing financial services to customers. He also said American Express gift cards offer more flexibility to recipients through their wide acceptance when compared to single-store cards.

"As with any financial service, we have to collect a modest fee to cover the cost of our services,” Sherman said.

But several major chains also levy gift card fees. Restaurants like Red Lobster and Ruby Tuesday's charge fees of $1.50 to $2.50 per month on cards that aren't used for one or two years.

Michigan-based Meijer Inc., has a fee that deducts a one-time 3 percent charge for cards not used after two years. Meijer spokesman Michael Zalewski said the company considers it a reasonable fee given the wide variety of products it offers.

"A customer would have to not use their card for two years,” Zalewski said. "It's almost hard to do.”

Sherman said cards that go unused for months or years also create more work for the issuer, as customers who don't use them are more apt to contact the company to check on things like card balances or expiration dates.

"The longer someone holds on to those cards, the more likely it is we will incur some costs for that card,” he said.

But Raphael said there is little if any carrying costs to companies that issue gift cards, and that the fees equate to enormous interest charges as high as 50 percent annually.

"Doesn't it sound a bit greedy when they say how they have to charge us more to keep track of the money we've already given them?” Raphael said.

$80 billion sales in 2006

Gift card-giving has exploded in the U.S., rivaling apparel as the most popular gift item over the holidays. A recent report from the TowerGroup, a financial analysis firm near Boston, estimates that gift card sales in 2006 soared past $80 billion, an increase of more than 20 percent from a year earlier.

An estimated $29 billion were sold by retailers, followed by $23 billion in universally accepted cards from banks and other financial groups, $18 billion in restaurant and fast food cards and $12 billion in miscellaneous cards for things like gasoline.

The cards also represent a significant profits boon for corporate America. Two years ago Home Depot reported $43 million in income from unused gift cards dating back to 1989 in a quarterly filing with the Securities and Exchange Commission. It's a term known as "breakage,” representing the remaining balance on gift cards that expire, are lost or go unredeemed for a long period.

The TowerGroup report estimates that as much as $8 billion a year is left on the table by consumers through unreedemed gift cards, more than twice the amount lost through debit and credit card fraud that's estimated at $3.5 billion per year.

Zimmerman, an accountant at Munson Medical Center's corporate finance department, is doing his best to bring attention to the issue. He's launched a one-man public information campaign to spread the word about gift card fees, and even contacted state lawmakers and the attorney general's office.

"I'll bet I've told this story 50 times,” he said.

State Attorney General Mike Cox's office closed the file on Zimmerman's complaint and other legislators expressed only "lukewarm” interest in the issue, Zimmerman said. Now he's pressing the state to utilize escheat laws to force American Express to turn over the $50 from his unused card after a five-year period, the only way he figures he'll get the $50 back.

But some regulators are starting to take action against gift card fees. The Federal Trade Commission recently investigated Kmart gift cards that were advertised to be as good as cash despite a $2.10 monthly fee that kicked in retroactively if a card was unused for two years — rendering an unused $50 gift card worthless after a 24-month period.

In a still-pending settlement, the company agreed to reimburse cardholders for the fees. The company has also removed fees and expiration dates from its gift cards.

Several states have taken steps to curb or eliminate gift card fees, but American Express doesn't sell cards in those states where it can't collect a fee.