Nearly every large retailer in the United States sells gift cards with the thought that one way or another, the card will be spent, and they will eventually collect the money associated with those cards. But they view the money associated with the cards primarily as an accounting liability, rather than as seeds for future sales. What about gift card breakage?
Until those gift cards are redeemed, they are a financial liability for retailers, because the money associated with those cards is money the retailer owes to the cardholders. If the cards remain unredeemed after a period of time, then the retailer treats the funds as found money and moves it to the income side of the balance sheet. This is known as breakage income.
Instead of thinking of this money as a bonus, retailers should view it as a consolation prize for lost sales and lost customers. It is a consolation prize that will be harder and harder to collect based on recent legislative activity. This note will use real world examples to show the potential income lost when cards go unredeemed and discuss some steps a retailer could take to measure the potential for additional revenues that come when gift cards are fully redeemed. Viewed this way, gift card breakage is not an income stream, but the measurement of a problem.
Collecting breakage is not as profitable as having customers come into the store and redeem the card because they typically spend more than the face value of the card. This is known as uplift, and it totals up to millions of dollars in revenue each year.
In addition, state laws around abandoned property, also known as escheatment laws, mean that companies are often forced to turn over unused gift card balances to the state government. These vary from state to state, so retailers are facing 50 different laws when they operate a gift card program.
The best approach for retailers is to develop card programs that allow them to gather information on the gift cardholder and encourage them to redeem the cards quickly.
For more information on the breakage problem and some possible solutions, see the Breakage Note under the Prepaid Advisory Services library at the Mercator Advisory Group web site.(http://www.mercatoradvisorygroup.com)
