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Where Time Magazine and Sen. Blumenthal Get It Wrong on Gift Cards

December 11, 2012
Prepaid
Ben Jackson
Mercator Advisory Group
Note: This blog was originally intended to be published in the comments section at Time Magazine’s blog here: Time.com’s comments section had not posted it as of this writing. The blog argues that Senator Blumenthal’s bill, which would further restrict gift card and promotional card expiration dates and fees, needs to be passed. Information on Blumenthal’s bill can be found here.

Senator Blumenthal and Adam Cohen make several incorrect assumptions about gift cards which could lead to a law that will have the presumable unintended result of hurting the gift card industry.

The biggest mistake both make is assuming that retailers do not want gift cards to be redeemed. This is wrong for three reasons.

First, retailers like happy customers. When a gift card goes unredeemed and a gift card holder feels jilted the retailer has annoyed not one, but two potential customers: the givers, who trusted the retailer with the money for their mom or their children, and the recipient, who can’t spend the card. They want to avoid this, which is connected with point two.

Second, retailers don’t get to keep all the money from unredeemed gift cards. Well over half the states in the United States have laws requiring retailers to turn over unused gift cards to them. This means that much of the money that is recognized as breakage goes to the states. And what happens if someone brings in one of those old cards to a store? Well, go back to point one, retailers don’t like unhappy customers, so they honor them. But they do not always reclaim the supposedly lost funds from the states.

Third, retailers are in business to have people come into their stores and buy things. When shoppers bring in gift cards, they typically feel as though they have free money, and they want to splurge. Most gift card users spend more than the face value of the card. What this means is that any breakage kept from unredeemed gift cards becomes a consolation prize from lost sales.

Every gift card manager that I have spoken with in the course of my work with Mercator Advisory Group says they want to increase redemption, not breakage.
Also, note that promotional cards are not paid for by the shopper. The issuer of the card, the store pays for those cards, and real dollars go to fund those cards. They are a marketing tool like a rebate. No one would argue that someone who doesn’t send in for a rebate should have forever to claim the funds, and the same should hold true with promotional cards. Saying that promotional cards should never expire is like saying that a sale should never end. Retailers will be forced to stop issuing these cards because they will be too expensive and won’t help promote a specific sale or item if they never expire.

One final note, the National Retail Federation did not say that shoppers would spend $156 per card. Its survey found “that 81.1 percent of shoppers will purchase at least one gift card and will spend an average of $156.86 on gift cards, the highest amount in the survey’s 10-year history.”

Given consumer desire for and spending on gift cards, it makes you wonder whether Sen. Blumenthal and Mr. Cohen think that American shoppers are just a bunch of suckers or if the problem is perhaps overstated.

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