Navigating closed loop gift card payment processing fees: A legal perspective 

November 27, 2023

In the world of professional gifting, gift cards have become a staple in corporate strategies. They offer businesses an effective way to incentivize customers, motivate employees, and boost sales. However, an often-overlooked aspect of gift cards is the processing fees associated with them. Are card processing fees legal, especially when it comes to closed-loop gift cards? In this comprehensive guide, we’ll explore the intricacies of closed-loop gift card processing fees and examine their legality in the professional landscape. 

Understanding Closed-Loop Processing Fees 

Gift card processing fees are a fundamental aspect of closed-loop programs. To comprehend their legality, it’s essential to first understand how these fees operate. 

Closed-Loop Cards 

Closed-loop gift cards are typically branded with the logo of a specific retailer or group of affiliated businesses. They are designed for use only within that network, making them exclusive to the issuing brand. Closed-loop are not affiliated with major credit card companies like Visa or Mastercard, also known as card schemes. 

The Role of Processors 

Gift card processors are the intermediaries that facilitate the transactions associated with closed-loop gift cards. They can serve several crucial functions: 

– Transaction Authorization: processors validate the authenticity of the card, which requires an integration into the technical systems of a retailer, whether it’s at the POS or on a website. Also, when the gift card processor acts as the Issuer of the brands gift card – handling all the regulatory topics, terms and conditions, settlement and clearing – ensure there are sufficient funds available before authorizing a purchase. 

– Balance Tracking: Continuous tracking of the remaining balance on the gift card to inform the customer of their available funds. 

– Settlement: Facilitating the transfer of funds from the business issuing the gift card to the merchant where the redemption occurs. 

– Reporting: Providing detailed reports on gift card transactions, best performing stores and other details offering valuable insights into the consumer and the programs’ performance. 

– Code creation and storage: creation and safe storage of card activation codes in a secure IT infrastructure. 

Closed-Loop Processing Fees 

Closed-loop processing fees are the charges incurred by businesses when they use a gift card processor to manage their program. These fees can depend on the individual set up: 

1. Activation or Transaction Fees: Charged when a gift card is initially purchased and activated. These fees are often a fixed amount or a percentage of the card’s face value. 

2. Card Production Fees: Charged for producing the cards in a specific form factor and the logistics to deliver these into the stores. 

3. Platform Usage Fee: Levied when using a platform, to outsource all the elements of a gift card program like product & asset management, code creation & management, reporting, issuing and tech integration to distribution networks. 

These fees are typically borne by the issuing business, not the gift card recipient. 

Gift card payment processing on epay conductor

The Legal Implications of Closed-Loop Processing  

Local regulations and industry standards can have an impact on closed-loop processing. Here are some key considerations: 

1. Transparency 

One of the most critical aspects of gift cards is transparency. Businesses are usually required by law to disclose if there are, e.g. fees to consumers. This transparency ensures that consumers are fully informed about any costs associated with use. 

2. Consumer Protection 

Many jurisdictions have regulations in place to protect consumers from unfair or hidden fees. These regulations may include limitations on the amount of fees that can be charged or restrictions on the types of fees that are permissible. 

3. Expiration Dates 

Some regions also have regulations regarding expiration dates. If a gift card has an expiration date that is too short, it may be considered illegal in certain areas. 

4. Unclaimed Property Laws 

In some cases, unused gift card balances may be subject to unclaimed property laws. This means that the unused funds may need to be turned over to the state if certain conditions are met. 

5. Industry Standards 

Industry associations often establish best practices and guidelines for gift card programs. Businesses that adhere to these standards are more likely to be in compliance with the law. 

6. Contractual Agreements 

Businesses entering into agreements with gift card processors should carefully review the terms and conditions. It’s essential to understand the fee structure and any obligations or restrictions related to gift card processing. 

Benefits and Considerations 

Closed-loop gift card processing fees are an essential part of a successful gift card program since gift card processors offer secure and efficient transaction handling, contributing to a positive customer experience. 

However, businesses should also consider the potential downsides, such as the risk of legal issues if fees are not disclosed properly or if they violate local regulations. This shows, once more, that choosing the right gift card processor is crucial in giving guidance on how to run a successful gift card program. 

Compliance is Key 

In the world of professional gifting, closed-loop gift card processing fees are a common practice. The key lies in transparency, adherence to local regulations, and compliance with industry standards. By operating with integrity and providing clear information to consumers, businesses can continue to leverage the power of gift cards while remaining on the right side of the law. 

To navigate the complex landscape of closed-loop processing, it’s advisable for businesses to partner with reputable providers, like epay, that understand the legal aspects of gift card programs and can help ensure compliance while offering a seamless gifting experience for both businesses and consumers.