Gift cards remain one of the most popular payment products in retail, generating hundreds of billions of dollars in annual spending. Yet when public companies report large gift card liabilities on their balance sheets, the figures often attract criticism and misunderstanding. Headlines highlighting billions of dollars in outstanding gift card balances can create the impression that companies are benefiting from unused customer funds. In reality, gift card liability is a standard accounting practice and often reflects the strength of a company’s prepaid program rather than a financial concern.
Why Gift Card Liability Is Often Misunderstood
When a consumer purchases a gift card, the retailer does not immediately recognize that purchase as revenue. Instead, the funds are recorded as a liability because the company still owes goods or services to the cardholder.
This accounting treatment frequently creates confusion among investors and consumers alike.
“Take Starbucks, for example. It’s reporting over a billion dollars in liability in their annual report,” said Jordan Hirschfield, Director of Prepaid at Javelin Strategy & Research. “That looks like a massive number, but they have $13 billion in sales. So the liability left over is around 8%.”
In his recent report, Unused Value in Prepaid Cards: Breaking the Misconceptions, Hirschfield delves into gift card liability and why it may be considered a misleading term. The report also examines how businesses can strengthen and maintain their prepaid programs and encourage the spending of unused balances.
Viewed in context, large liability figures are often proportional to the scale of a retailer’s gift card program. For many companies, outstanding gift card balances represent a small percentage of annual sales and indicate strong customer engagement rather than financial manipulation.
The Difference Between Liability and Breakage
One of the biggest misconceptions surrounding gift card programs is the belief that companies immediately profit from unredeemed balances.
Gift card liability and gift card breakage are not the same thing.
Liability represents the portion of gift card funds that companies reasonably expect customers will redeem in the future. Because those funds are still owed to consumers, they cannot be recognized as revenue.
Breakage, on the other hand, refers to gift card balances that are ultimately never redeemed. Companies estimate breakage using historical redemption patterns and accounting guidelines. Only after sufficient time has passed can a portion of these funds be recognized as revenue.
“Javelin estimates breakage averages out across the industry to about 1.5%,” Hirschfield said. “Starbucks, for example, has breakage just slightly above that figure at 1.6%.”
While breakage can represent a meaningful amount of money for large retailers, it typically accounts for only a small fraction of overall gift card sales.
What Happens to Unused Gift Card Funds?
Many consumers assume unused gift card balances sit untouched until redemption. In practice, companies often invest these funds while they remain outstanding, generating interest income or supporting operational liquidity.
However, this does not mean retailers are freely spending customer money. Accounting standards still require companies to maintain the liability until products or services are delivered or until breakage can be appropriately recognized.
State regulations also play a significant role. Some states require certain unused balances to be remitted through escheatment programs, while others allow issuers to retain a portion of unredeemed funds under specific conditions.
As regulations vary by jurisdiction, gift card issuers must carefully manage compliance alongside accounting requirements.
Digital Gift Cards Are Changing Consumer Behavior
The growth of digital commerce has transformed how consumers use prepaid products. Mobile wallets, retailer apps, and digital gift cards have reduced many of the barriers that historically contributed to unused balances.
Consumers can now store gift cards alongside payment cards, receive balance reminders, and redeem funds online or in-store with greater convenience. These innovations have generally improved redemption rates while increasing customer engagement.
At the same time, retailers continue to invest in omnichannel prepaid experiences that make it easier for customers to track and spend remaining balances.
Building Stronger Gift Card Programs
For retailers and prepaid program managers, the goal is not to maximize breakage. Instead, successful programs focus on encouraging redemption and repeat purchasing behavior.
Strategies often include:
- Simplifying balance inquiries
- Integrating gift cards into mobile wallets
- Offering digital gift card delivery
- Sending balance reminders
- Creating loyalty program integrations
- Providing seamless online and in-store redemption options
The strongest prepaid programs drive customer retention, increase spending, and create positive brand experiences.
Looking Beyond the Liability Number
Gift card liability is often portrayed as a warning sign, but in most cases it reflects a healthy prepaid ecosystem and future customer spending. The real story lies in understanding the relationship between liability, breakage, redemption behavior, and customer engagement.
For retailers, gift cards remain one of the most effective tools for acquiring customers, driving repeat visits, and generating future sales. For consumers, they continue to offer flexibility, convenience, and gifting appeal.
Rather than focusing solely on large liability figures, businesses and investors should evaluate how effectively a company manages its prepaid program, encourages redemption, and creates value for customers over time.
Learn more about what happens to balances on unused prepaid cards, the regulatory issues issuers and prepaid managers need to be aware of when they consider unused value, and how consumer behavior is affecting the use of gift cards and stored-value accounts.
Article updated June 2026.
