Sunday, January 5, 2020 The economics of unused gift cards Every year, Americans spend billions of dollars on gift cards. But what happens to the money when the cards aren’t redeemed? BY ZACHARY CROCKETT The most desired item on wish lists this past holiday season wasn’t a pair of Airpods, a Nintendo Switch, or aBaby Yodaplush toy. For the13th straight year, the present of choice was the gift card. In 2019, Americans purchased an estimated$171Bworth of these plastic cash substitutes, ranging from $500 prepaid Visa cards to grandma’s annual $25 Cheesecake Factory “nibble.” Gift cards are so popular that they account for55%of the average shopper’s entire annual gift budget. 6 monthsof purchase, according to one survey. But after that first 180 days, the rate of use tends to stagnate. At the one year mark, just under 80% of cards are redeemed — and as time passes, they are less and less likely to see the light of day. At any given time,10% to 19%of gift card balances remain unredeemed — and around6%of gift cards arenevereven used. more than $1trillion in gift cards have been sold. Between 2005 and 2015 alone, unredeemed gift card balances amounted to an estimated$45.7B. That’s a hell of a lot of Cheesecake Factory dinners! The reasons we don’t spend gift card money can vary: We simplyforgetwe had the gift card. We lose the gift card. We don’t like the retailer/restaurant that issued the gift card. Wecan’t accessthe retailer/restaurant due to location or other factors. We buy something of lesser value and leave the leftover amount on the card. The gift card expires and/or comes with restrictions. It should also be noted that, despitefederal protections, gift card issuers can still charge “inactivity fees” in certain states if the consumer doesn’t use his card within 12 months. These fees might range from $2 to $5 per month, making a gift card balance difficult to pin down after a few years of non-use. But what happens on theretailside when gift cards go unused? Are corporations like Starbucks and Walmart just getting money for nothing? Why retailers love gift cards When grandma buys a gift card to The Cheesecake Factory, she exchanges $25 infungiblecash for $25 in-store credit that can be redeemed at a later date. Big companies like The Cheesecake Factory use what is calledaccrual accounting, which means that money is tallied not when it is received, but when it is earned. In other words, grandma’s $25 isn’t counted as revenue until the gift card isredeemed. 2009 federal law, most gift cards can’t expire for 5 years (and in manystates, like California, they can never expire). Companies have to plan for the possibility that gift cards may be redeemed at some point in the distant future — and until then, any unused gift card balances are earmarked asliabilities. The most recent filings of several large corporations show that these unused gift card liabilities often amount to sizeable sums of money: Walmart:$1.9B(2019) Amazon:$2.8B(2018) Starbucks:$1.6B(2018) Target:$727m(2018) But after a certain amount of time (typically, 6-24 months), the law also permits companies to turn these liabilities into what’s calledbreakage income. This is the amount of money from gift cards that the company estimates willneverbe redeemed. Another way to put it: That’s the amount of money the company is essentially getting for free. For instance, let’s say you never spend the $25 gift card to The Cheesecake Factory that grandma gave you. Your grandma paid the chain $25 and the chain didn’t have to give you anything in return. It netted $25 at a 100% profit margin. In 2017, 5 companies banked over $20m in breakage income, according to figures listed in annual reports. lawsthat entitle the state to unclaimed property, including gift card money. But by and large, the corporations who issue the cards still get to keep most unused gift card funds. Despite this, retailers claim they makemoremoney when consumers spend their cards. Here’s why: 75%of people who redeem gift cards end up spendingmorethan the value on their cards (e.g., they’ll use a $50 gift card to make a $100 purchase). On average, shoppers spend$59 morethan the value of their gift cards. Shoppers using gift cards are2.5x more likelyto pay full price for an item than a customer paying with cash/credit card. 34%of shoppers say a gift card prompts them to visit a store they otherwise wouldn’t frequent (good for new customer adoption). Gift cards often aren’t redeemed in one trip, prompting shoppers to return multiple times (good for foot traffic metrics). None of this means that gift cards are an inherently bad gift — especially those that have more general applications (Visa, Amazon, etc.). But in the eyes of many economists, there is a much more enticing alternative… Straight up cash In a Scrooge-worthy 1993 paper titled “The Deadweight Loss of Christmas,” economist Joel Waldfogel (now an economics professor at the University of Minnesota's Carlson School of Management) asked a bunch of Yale students to place a monetary value on the holiday gifts they’d received. His conclusion: Recipients valued their gifts at between 10% and 30% less than what the gift giver paid for them. $730Bconsumers spend on gifts during the holidays (including$17B to $51Bin gift cards) is virtually wasted in the transaction process. The most economical and rational gift, suggests Waldfogel, is cash. Naysayers would argue that cash in an envelope is against the intimate, personal, and symbolic spirit of gift-giving. But then again, so are little plastic cards. The good news is that there is now an entireecosystem of siteswhere gift cards can be exchanged for cash at anywhere from 60% to 90% of the value of the card. In a matter of minutes, a $50 gift card can be converted into $40 of legal tender. These platforms liberate your gift card money from the shackles of coffee, steak, or 900-calorie hunks of cheesecake, and allow you to spend it on your own terms. Though either way, the gift card giver's hard-earned dollars still end up in the pockets of companies that have done very little to earn them.
Never give gift cards unless you know for sure the person will use all the money on the gift card. Otherwise, why would anyone convert cash which can be used anywhere to an asset that is not any more valuable than the cash and can only be used at one place? For that reason, I usually just give cash to relatives. Also more convenient that way too...no need to go to a store.