Playing Your Cards Right

Abstract

Merchants say that they levy administrative fees and impose expiry dates on these cards because these cards create a liability that must be accounted for on the balance sheet. Typically, prepaid gift cards are recorded as prepaid sales liability. Unless gift cards are redeemed, revenue is not recognized because the prepaid sales liability remains on the books. Managing old cards without expiry dates requires records to be kept indefinitely. Since the value of the card is stored electronically, usually through a third-party provider, the management and storage of card status will entail various costs on the part of the retailer. If a small number of cards go unused, the retailer must manage all cards some of which will have very little stored value. Would the retailer have to manage them forever using archival and retrieval systems? Earlier paper-based gift certificates bore no ongoing management costs after issue.

Many gift cards come with terms and conditions such as invalidity on the date of purchase, change will not be given, and the cards must be redeemed by a certain date. Retailers like selling gift cards because they draw immediate loyalty and cash for services of merchandise that will be delivered in the future or never. Eighty percent of gift cards have expiry dates within 24 months of purchase. Retail industry surveys show that approximately 10% of the money stored on gift cards is never used. This value on prepaid gift cards never used to redeem for merchandise is referred to as breakage. In North America, this amounts to an annual windfall of between $4 and $7 billion.

As a matter of legal policy, this is a product that warrants legislative intervention to protect the consumer interest. The economic stakes of the prepaid gift card industry are significant and growing. At the point of sale, there is a likelihood of mischief in the understatement of fees and the expiry of cards. The cards are knowingly sold to customers who likely will not be using them ultimately, and the wide representation that they are as good as cash is apt to be misleading in the circumstances. Both purchaser and consumer of the cards are not having their reasonable expectations met in these prepaid cards. The inherent third party consumer problem may lead to greater breakage rates as the recipients of these gift cards feel powerless to complain to the merchant or the donor. Any offsetting administrative costs of these cards can be best shifted to the merchants who benefit from the measurable loyalty effects of the cards.