Gift card

An assortment of gift cards, many from U.S. national retailers such as Best Buy, Target and Home Depot.

A gift card is a restricted monetary equivalent or scrip that is issued by retailers or banks to be used as an alternative to a non-monetary gift. Highly popular, they rank as the second-most given gift by consumers in the United States (2006) and the most-wanted gift by women, and the third-most wanted by males.^[1] Gift cards have become increasingly popular as they relieve the donor of selecting a specific gift.^[2] In 2012, nearly 50% of all US consumers claimed to have purchased a gift card as a present during the holiday season.^[3] In Canada, $1.8 billion were spent on gift cards and in the UK, it is estimated to reach 3 billion (GBP) for 2009 whereas in the United States, about $80 billion were paid for gift cards in 2006.^[4][5] The recipient of the gift card can use it at his or her discretion within the restrictions set by the issuing agency.

History

The first giftcard using a payments infrastructure was introduced by Blockbuster Entertainment in the fall of 1994 in Ft. Lauderdale, Florida.^[6] In the beginning, the Blockbuster giftcard was to replace gift certificates that were being counterfeited with recently introduced color copiers and color printers. It was this over redemption of giftcards that launched the search for an alternative. The first giftcard transactions were processed by what was then, Nabanco of Sunrise, Florida. Nabanco was the developer of the first platform for the processing of giftcards using existing payment infrastructure. Blockbuster was later followed by a card by Neiman Marcus, and the Mobil gas card which initially offered prepaid phone value provided by MCI. Kmart was the next introduction of the Kmart Cash Card which in the early generations provided prepaid phone time with AT&T. Later this feature was dropped as it was not profitable for both Kmart and Mobil. The Kmart Mags Pangilinan Cash Card was the first replacement for cash returns when a shopper did not have a receipt for a gift. This practice of giving a cash card in place of cash for non-receipted returns is common place today with most merchants. From these early introductions, numerous retailers began to adapt a giftcard program to replace their gift certificate programs.

Function and types

A gift card may resemble a credit card or display a specific theme on a plastic card the size of a credit card. The card is identified by a specific number or code, not usually with an individual name, and thus could be used by anybody. They are backed by an on-line electronic system for authorization. Some gift cards can be reloaded by payment and can be used thus multiple times.

Cards may have a barcode or magnetic strip, which is read by an electronic credit card machine. Many cards have no value until they are sold, at which time the cashier enters the amount which the customer wishes to put on the card. This amount is rarely stored on the card but is instead noted in the store's database, which is crosslinked to the card ID. Gift cards thus are generally not stored-value cards as used in many public transport systems or library photocopiers, where a simplified system (with no network) stores the value only on the card itself. To thwart counterfeiting, the data is encrypted. The magnetic strip is also often placed differently than on credit cards, so they cannot be read or written with standard equipment. Other gift cards may have a set value and need to be activated by calling a specific number.

Gift cards can also be custom tailored to meet specific needs. By adding a custom message or name on the front of the card, it can make for an individualized gift or incentive to an employee to show how greatly they are appreciated.

Gift cards are divided into "open loop" or "network" cards and "closed loop" cards. The former are issued by banks or credit card companies and can be redeemed by different establishments, the latter by a specific store or restaurant and can be only redeemed by the issuing provider. The latter, however, tend to have fewer problems with card value decay and fees.^[1] In either case the giver would buy the gift card (and may have to pay an additional purchase fee), and the recipient of the card would use the value of the card at a later transaction. A third form is the "hybrid closed loop" card where the issuer has bundled a number of closed loop cards; an example is free gift cards for a specific mall.

Gift cards differ from gift certificates, in that the latter are usually sold as a paper document with an authorized signature by a restaurant, store, or other individual establishment as a voucher for a future service; there is no electronic authorization. A gift certificate may or may not have an expiration date and generally has no administrative fees.

Bank-issued gift cards may be used in lieu of checks as a way to disburse rebate funds. Some retailers use the gift card system for refunds in lieu of cash thereby assuring that the customer will spend the funds at their store.

A Charity Gift Card allows the gift giver to make a charitable donation, and the gift recipient to choose a charity that will receive the donation.

Mobile and virtual gift cards

Mobile gift cards are delivered to mobiles phones via SMS messages and phone applications allowing users to carry only their cell phones. Benefits include tying them to a particular phone number and ease of distribution through email.

Virtual gift cards are delivered via e-mail to their recipient, the benefits being that they cannot be lost and that the consumer does not have to drive to the bricks and mortar location to purchase a gift card.

Other companies such as GiftRocket and Giftly have introduced virtual gift cards that users redeem on their smartphones.^[7][8] Both GiftRocket and Giftly allow users to transfer money from one account to another. The merchant is not involved in the loop, therefore it's not a traditional gift card. It's more of a cash transfer.

Pitfalls

It has been argued that holiday giving destroys value due to mismatching gifts.^[9] The most efficient way to keep value in gifting would be to give cash, however this is socially acceptable only within limits. Gift cards, to a degree, may overcome this problem but have certain pitfalls. Some feel that the absence of the thought of selecting a specific gift makes a gift card a worse choice than a poorly executed but individual gift.^[10] New products in the gift card industry are evolving to tackle this "impersonal" pitfall of gift cards. New services launched by some service providers allows for customization and personalization of gift cards.^[11]

Gift cards have been criticized for the ability of the issuing authority to set rules that are detrimental to the consumer. Thus the recipient may have to face expiration dates, administrative fees, restrictions in use, and absence of adequate protection in case of fraud or loss.^[2] Over time the value of a gift card may become zero. However, these issues have diminished significantly in recent years. Many states have enacted laws limiting or prohibiting all fees or expiration dates for gift cards. Further, because of the negative impact on sales that such policies can have, most merchants have adopted and even advertise a "no fee, no expiration" policy for their gift cards, whether or not state laws require it.^[12] In 2011, an estimated 2.5% of gift cards imposed an expiration date and 2.7% imposed post sale fees.^[13]

A quarter of gift card recipients still haven't spent gift cards a year after receiving them, according to a Consumer Reports survey. And a majority of people say they end up spending more than the value of the card once they get to the store.^[14]

Gift cards are considered unsecured debt by bankruptcy courts, and as such can become valueless when a company files for Chapter 11 reorganization,^[15] although companies work hard to avoid such cases if they expect to remain in business. Unless the company intends to liquidate, the value of gift cards is often preserved in bankruptcy.

Redemption rate

Not all gift cards are redeemed. The card may be lost; there may be time decay (expiration and fees) or complex rules of redemption; the recipient may not be interested in the store that accepts the card or be under the false assumption that not using it will save money for the giver. It has been estimated that perhaps 10% of cards are not redeemed, amounting to a gain for retailers of about $8 billion in the US in 2006.^[5]

In 2012, over $100 Billion in gift cards will be purchased in the US, where over 20% of those gift cards will go unredeemed or unused. This has amassed a large opportunity in the secondary market, similar to the secondary ticket market in the early 2000s. Some companies have created a business in the secondary gift card market that allow consumers to sell their unused gift cards or buy discounted gift cards to their favorite brands. This has helped their users recoup their share of some $55 million per day that goes unredeemed in the US every year, by turning their unused gift cards into cash.

Regulations

Canada

All Canadian provinces have legislations passed to ban expiry dates and fees collected on gift cards.^[16] However, provincial gift card legislations do not apply to sectors that are regulated under federal laws. For example, gift cards that resemble credit cards (i.e. with Visa, MasterCard or American Express branding) and phone cards are regulated by the federal government. Under the federal Prepaid Payment Products Regulations, effective May 1, 2014, federally regulated gift cards may only charge maintenance fees under certain conditions, and may not set an expiry date for funds on those cards.^[17]

United States

In the past, uniform standards concerning gift cards did not exist. This was set to change as an addendum to the Credit CARD Act of 2009 directs the federal government to create consumer-friendly standards pertaining to gift cards.^[18] Most notably, the new regulations prohibit retailers from setting expiration dates unless they are at least 5 years after the card’s date of issue or the date on which funds were last added to the card. In addition, retailers are no longer able to assess dormancy, inactivity, or service fees unless the card has been inactive for at least 12 months, and if fees are added after that period, the details of such fees must be clearly disclosed on the card. Additionally, retailers are unable to levy more than one fee per month. The new provisions took effect on August 22, 2010.^[19]

Open loop cards are governed by rules of the Comptroller of the Currency, however oversight has been criticized.^[2] Closed loop gift cards are subject to rules set by different state regulations, and issuing authorities vary widely in the rules they set for the consumer.^[2] Rules can be changed by the issuer without notifying the consumer.^[1][5]

See also

• Rebate card

References