*VMBB Senior Chief Of Staff*
Join Date: Jan 2001
Location: Marty Robbins old hometown, Glendale Arizona--a suburb of Phoenix.
Re: FAULT W/GIFT CARDS/GIFT CERTIFICATES...
December 12, 2009
Your MoneyRedeem All of Gift Card, or Give Store a Present
By RON LIEBER
Like it or not, gift cards are now a fixture of the holiday season. And this year, some of the changes in the card world seem favorable at first glance.
Last month, the Federal Reserve proposed new guidelines for the industry, rules that legislators had outlined in the sweeping credit card legislation that passed earlier this year. They prohibit fees for cards that have been inactive for less than a year, outlaw expiration of funds within five years of when someone has loaded the cards with money, and call for clear and conspicuous disclosures.
That is fine as far as it goes, though most major retailers already follow these rules. American Express, which issues cards that are good at any retailer that accepts its plastic, went even further. It did away with all consumer fees, other than the ones you pay to purchase and load the gift card in the first place.
But a big problem remains, and it’s awfully hard to legislate away. This year, nearly $5 billion of the money that well-meaning givers have put onto gift cards will go unspent, according to TowerGroup, a financial services consulting firm. The money then reverts back mostly to the retailers and banks that loaded the plastic initially.
In the industry, this is known as breakage, and here’s what it means: If you buy a gift card for a family member or friend, there’s a good chance you’ll give a little gift to the retailer or bank that issued it as well.
How does breakage happen? People lose their cards. Or they abandon them in a drawer and assume they’re expired when they’re unearthed years later. Fees can still eat away at some of them. And people may use $46 of a $50 card and then throw it out rather than make another trip back to the store.
The most obvious question here is whether retailers and banks like it when this happens. On one hand, enlightened companies may see the cards as akin to frequent-flier miles. Customers are unhappy when any miles expire, and if they are able to redeem them easily, they’re more likely to patronize the airline and collect more miles in the future. That’s how loyalty works, and one would assume that gift card issuers want to create the same seamless experience.
Some third-party providers that set up gift card systems see it a bit differently, however. Head over to the Gift Card USA home page, and you’ll see the company behind the site announcing: “Experience shows that 5-15% of gift card values are never redeemed. This fact can pay for your program by itself.”
It isn’t just a break-even proposition either, according to the people behind Acceptvisamastercards.com. If you count 10 to 12 percent breakage in your calculations, the site contends, the gift card display can become the “most profitable square foot of space in the place.”
This is how some of the people in the industry talk about gift cards when they think consumers aren’t listening. And for big companies, breakage can add up to real money. Not every big retailer or bank discloses it, but Best Buy was kind enough to note that it kept $38 million in breakage in its most recent fiscal year. Home Depot cleared $37 million. Breakage can be total when a retailer goes out of business.
Retailers will generally still let you redeem your gift card many years after you received it. But they still record the revenue once they’re certain, based on historical redemption patterns, that most of the unspent money from years ago will stay that way. And yes, most of them do tend to keep it, though some states may try to seize the money as unclaimed property (which leads many companies to place subsidiaries in friendly states to try to avoid this).
Even as gift cards exploded in popularity over the last decade, it was reasonably easy to avoid getting them, as long as you put together a specific enough holiday wish list for friends and family. But recently, companies have started sending rebates in the form of gift cards, instead of old-fashioned paper checks. So you may end up with the cards whether you want them or not.
Why is this happening? Because you wanted it to happen, of course. “It’s the convenience,” said Cletis Hoffer, treasurer at Young America, a marketing company that specializes in rebates and has studied the issue in focus groups. “Consumers are more interested in getting a card than a check. You have to take a check to the bank. But with a card, you can spend it immediately.”
This makes little sense to me. I can drop a check in the mail to my bank in about two minutes. But with the gift card like the Citi Visa that I recently received from Verizon, I have to remember to put it in my wallet and take it out at a store. Then, I need to find a retailer where the people at the register won’t look at me cross-eyed when I request that they split the transaction between the gift card and another form of payment. It holds up the line, too.
At least that Citi card gives you the right to take its gift card to any Visa member bank and extract the cash. I took it to archrival Chase. The transaction was seamless and it took just 10 minutes, five times as long as it would have for me to send a rebate check to my bank. I was that lucky, though, only because I work across the street from a bank.
Perhaps I’m in the minority in finding all of this a bit too complicated. “We have seen incredible increased utilization, in terms of people getting the cards down to zero, than we were two years ago,” Mr. Hoffer said. “Particularly the Visa and other cards.”
Brian Riley, the research director at TowerGroup, confirms that overall breakage numbers have fallen in the last year or two, as consumers have gotten wise to the disappearing funds. “People realize they can lose it,” he said. “And the fact that we’re in a bad economy gives the $3 a bit more meaning now.”
If you do end up with an unwanted card, there are a few ways to get rid of it. You could sell or swap it at Web sites like Plastic Jungle, GiftCardRescue and Swapagift, though you’ll lose some of the card’s value in the process. A charity might take it off your hands, too.
If you’re going to use the card, try buying something that costs a bit more than the loaded amount, so you’re not faced with a tiny leftover balance that you’ll be tempted to abandon. If you have a Visa or similar card, calling a catalog merchant with an order may make you feel less sheepish than holding up lines with an in-person split transaction.
As a giver, it’s easy to tune all of this out when buying a card is so much easier than redeeming it. And recipients often treat it like found money; what’s a loss of $4 when the $96 you did get to use was money you didn’t have before?
But we could put an end to all of this waste if the givers got wise to the billions in annual giveaways to retailers and banks and just handed over cash. You’re kidding yourself if you think that loading money onto a plastic card is somehow more polite than slipping money into a paper envelope.
Nobody neglects to spend cash. The reason they came up with the word breakage is that the gift card system was more than a little bit broken.