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Understand Gift Card Conditions

LEAD STORY

Tread softly if you're considering offering members prepaid gift cards. These electronic payment accounts, like PayPal of eBay fame, are becoming popular, but they have risks.

TowerGroup, a Needham, Mass., financial services research group, projects gift card sales will double to more than $90 billion by 2007 from $45 billion in 2003. Most people use these cards, which are relatives of debit and credit cards, to satisfy their morning coffee fix or budget Junior's weekly allowance. Cards usually can be replenished when their value expires.

Not all gift cards, however, are alike. They come in two types-one that retailers offer and a second that financial institutions offer.

Introduced by Blockbuster in 1996, retail-issued cards are designed to be used only for the issuing merchant's goods and services. In general, these "stored-value" cards come in denominations ranging from $25 to several hundred dollars. They expire when their value has been used. But the cards also can come with conditions such as poorly marked expiration dates and fees to reactivate expired cards.

Financial institution-issued cards, however, function like credit cards. Spending is limited to the amount of money the purchaser places on the card. Purchases are deducted from the card balance after each use. These cards offer the same rights and protection afforded debit cards, including security controls, dispute management, and zero-liability protection if the card is lost or stolen.

Many people believe they lose cash if they lose a Visa or MasterCard gift card, but that isn't necessarily true. Card association rules apply to financial institution-issued prepaid cards, such as those available through Visa, MasterCard, and others. Because gift cards fall under debit card rules, the issuer may be liable for fraud losses when cards are lost or stolen.

Even so, financial institution-issued cards have versatility and convenience in their favor, and credit unions are starting to offer them.1 To minimize the risk when offering gift cards, credit unions should:

* Limit employees' authorized access to card inventory.

* Implement employee accountability controls for card stock.

* Implement procedures for securing stored cards and tracking inventory.

* Perform routine audits of card stock.

* Implement notification procedures for missing cards.

Credit unions should educate members to:

* Keep their cards safe. Treat them like any credit or debit card.

* Check the card's balance. Visa and MasterCard offer online card tracking. (A card may be declined if a purchase exceeds the card balance.)

* Report stolen cards as soon as possible. Cardholders may be liable for losses for failing to report unauthorized transactions in a timely manner.

Contact your card associations for best practices, rules, and regulations. Gift cards can be a valuable source of incremental revenue so long as you manage the risks involved.

1 The Credit Union National Association offers gift cards through a strategic alliance with Travelex. Visit alliances. cuna.org/csa_visatcs.html; enter "Gift Card" in the search box.

ANN DAVIDSON is a product expert in CUNA Mutual Group's credit union protection solutions group. Contact her at 800-937-2644, ext. 7117, or at ann.davidson@cunamutual.com.