As American Express cuts gift card fees, will other firms follow?

In what could become a trend-setting move, American Express (AXP) announced Wednesday that it will eliminate all monthly fees on its gift cards. Prior to this decision, gift card holders were charged $2 per month after the first 12 months of use. American Express gift card users will still have to pay purchase charges of between $2.95 and $6.95, as well as transaction fees each time their cards are swiped.

Other gift card issuers may follow American Express's lead, but even if they don't do so voluntarily, by of August 2010, they won't have a choice. The Credit Card Act of 2009 limits banks and retailers from charging inactivity or service fees unless a card has been dormant for at least 12 months. The law also mandates that cards can't expire until five years after their purchase date. Congress is thinking of moving the full implementation of the law to December 1. So American Express is just moving to make the changes in time for the holiday shopping season. I expect others will quickly follow suit.
Gift cards actually cost consumers $6 billion in losses last year due to fees, expiration dates or unredeemed cards, according to the Tower Group, which is owned by MasterCard (MA). Consumers were not happy about these losses, but they were lower than in previous years. In fact, because of these losses, fewer consumers turned to gift cards in 2008. The National Retail Federation forecast a 6 percent reduction in gift card sales in 2008.

American Express sells more than $1 billion worth of gift cards each year, and it will be the primary provider of gift cards for Simon Property Group's (SPG) malls and outlet centers. American Express says its move away from monthly fees and inactivity fees was driven by customer feedback, not pending regulation. The company says it has found ways to make the cards more cheaply. Even without the $2 per month fee after the first 12 months, American Express will likely make a significant profit on those cards with its up-front fees and transaction fees.

Gift cards started as an alternative to choosing a gift and wrapping it up. In most cases, the gift-giver would purchase the card for a specific retail outlet. Then American Express, Visa (V) and MasterCard got into the game and made gift cards available that could be used at any retailer that accepted their credit cards. The gift card issuers make most of their profits on these cards through transaction fees that actually eat up the value of the gift. Some issuers, like American Express, made even more money by charging monthly fees on the unused balances of their cards.

If you do decide to buy gift cards, be sure you understand all the fees involved. The only thing I can guarantee you is that fees will eat into the value of your gift. The amount lost will depend on the provisions of the card you select.

Lita Epstein has written more than 25 books, including The Complete Idiot's Guide to Improving Your Credit Score.

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