More Americans than ever before will use pre-paid gift cards to avoid the annual headache of finding just the right gift for hard-to-shop-for relatives and friends this holiday season.
But while gift cards may be a convenient way to spread some holiday cheer, many of this year’s gift card givers could find their presents turn out to be a bigger boon for America’s retailers.
The problem is, issuers are heaping on fees and other charges on to their gift cards and millions of gift recipients are failing to use the full value of their cards, effectively handing back billions of dollars to retailers, interest free, and alternatively, card recipients typically spend more than the gift card total, notes analyst Brian Riley at research and consulting firm Tower Group.
“A typical situation is I go into a store with a $50 gift card and buy something for $70, giving the retailer more money, or buy something for $32 and never return — under both scenarios, the merchant wins,” Riley said. “They will oversell, or undersell you, and the irony is they might actually make more money by underselling you.”
The two main types of gift cards — “use anywhere” cards from major credit card issuers and those issued by big retailers or restaurants — will account for $80 billion in holiday purchases in 2006, up more than 20 percent from last year, according to Tower Group.
Gift cards from credit card companies often come with a price.
In its annual Holiday Gift Card Study, Bankrate.com found that “use anywhere” gift cards from the top four credit card companies — American Express, Discover Card, MasterCard and Visa — all carry fees, including a monthly “maintenance” fee if the gift card isn’t used within a certain period of time, ranging from $2 to $3 per month.
Card companies also charge you an average of $3.60 to deliver their cards. Discover Card, while it had no shipping fees last year, charges $3.95 for each gift card this year or $6.95 for a premium gift card package, according to Bankrate.com.
Fees are much rarer for gift cards sold by retailers, as they profit directly from the merchandise purchased using their cards.
But retailers’ cards have their own drawbacks. Millions of dollars in unused money is left on retailers’ gift cards each year.
Tower Group estimates that about 10 percent of the value of all of the gift cards given this year will not be used, leaving about $8 billion unspent this year, while about half the adults surveyed about their holiday shopping patterns by Consumer Reports said they received gift cards last year, but 19 percent — about 23.3 million Americans — said they had not yet used them.
“All that unspent money really adds up,” said Riley.
“If I go to the junk drawer in my kitchen I have something like 10 unused Home Depot cards. They end up having just $2 left on them, and even if I do use them for a bag of nails or something, I will still have leftovers,” he continued. “When you start to multiply all those unused cars with $2 on them by millions and millions of customers, you end up having a lot of money.”
The unspent money helps retailers, who generate profits without having to make any sales. But some regulators have complained that unredeemed merchandise leads to inconsistent bookkeeping practices.
Retailers have been paid up-front for goods they have not delivered, which count as liabilities on the balance sheet. Retailers cannot book the sale until a customer uses the card to buy merchandise.
Retailers have resorted to imposing fee penalties over time, or have tried to set expiration dates to encourage consumers to use their gift cards in a timely fashion. But a dozen states prohibit cards from expiring, or set limits on fees and expiration dates. California, for example, prohibits gift cards from ever expiring.
Other states have similar legislation pending. Some states have passed laws ensuring that customers can redeem their gift cards for cash.
Only bank-issued gift cards are regulated by the federal Office of the Comptroller of the Currency, which also regulates banks. It has said that any expiration date must be clearly posted on the front of a card, as well as any maintenance or usage fees. Requirements for handling unused card value vary by state, and retailer-issued cards have much lower disclosure requirements and are typically governed by state law.
“The lack of regulatory oversight is real hot button here,” Riley said. “This is a wonderfully convenient way to shop gifts, but all of the rights are on the side of the issuer of the card and not the consumer. What if all of a sudden your balance drops to zero? You can’t get a statement that lets you reconcile it. I am at the mercy of their accounting process to make sure it works well.”