Don't call them 'gift' cards: How banks can avoid Fed limits (Update)

The Federal Reserve has proposed cracking down on hidden gift-card fees by forcing gift-card issuers to honor the cards for at least five years, and not to seize cash from unused gift-card accounts unless the policy is spelled out on the face of the card.

But Ballard Spahr bank lawyer Alan Kaplinsky is telling clients there's an easy way around the proposed regs: Don't call them "gift" cards!

"Issuers of prepaid cards that can be used to purchase goods or services from multiple unaffiliated merchants can avoid application of the fee limitations and disclosure requirements of the proposed rule by not marketing the cards as Gift Cards," Kaplinsky wrote in a note to clients today.

"Under the proposed rule, the card issuer can take advantage of this exception if it adopts policies and procedures reasonably designed to ensure that no party (including the issuer, card retailers, program managers, and payment networks) promotes the card as a Gift Card.

"We expect most issuers of general-use cards to seek to avoid application of the rule."

UPDATE: Readers asked if it could really be that easy to get around Fed regs. I called the Fed, they haven't called back. But Ballard Spahr attorney Jeremy Rosenblum responded quickly, confirming Kaplinsky was referring to rules for "reloadable cards," like the Visa and MasterCard spending cards sold by banks for use at any merchant.

Rosenblum says the new Fed rule will likely "result in two types of prepaid cards: store gift cards with few fees, maybe just a monthly dormancy fee after one year, (and also) bank cards with payment-network brands and a variety of fees, used by customers in place of traditional bank accounts." The bank lawyers are telling clients "to be vigilant in avoiding any 'gift card' marketing" of Visa and MasterCard, because fees may be limited.

As always, read the fine print!