Gift card

An assortment of gift cards, many from U.S. national retailers such as Best Buy, Target and Home Depot.

A gift card is a restricted monetary equivalent or scrip that is issued by retailers or banks to be used as an alternative to a non-monetary gift. Highly popular, they rank as the second-most given gift by consumers in the United States (2006) and the most-wanted gift by women, and the third-most wanted by males.^[1] Gift cards have become increasingly popular as they relieve the donor of selecting a specific gift.^[2] In Canada, $1.8 billion were spent on gift cards and in the UK, it is estimated to reach 3 billion (GBP) for 2009 whereas in the United States, about $80 billion were paid for gift cards in 2006.^[3][4] The recipient of the gift card can use it at his or her discretion within the restrictions set by the issuing agency.

History

The first giftcard using a payments infrastructure was introduced by Blockbuster Entertainment in the fall of 1994 in Ft. Lauderdale, Florida. In the beginning, the Blockbuster giftcard was to replace gift certificates that were being counterfeited with recently introduced color copiers and color printers. It was this over redemption of giftcards that launched the search for an alternative. The first giftcard transactions were processed by what was then, Nabanco of Sunrise, Florida. Nabanco was the developer of the first platform for the processing of giftcards using existing payment infrastructure. Blockbuster was later followed by a card by Neiman Marcus, and the Mobil Oil gas card which initially offered prepaid phone value provided by MCI. Kmart was the next introduction of the Kmart Cash Card which in the early generations provided prepaid phone time with AT&T. Later this feature was dropped as it was not profitable and both Kmart and Mobil. The Kmart Cash Card was the first replacement for cash returns when a shopper did not have a receipt for a gift. This practice of giving a cash card in place of cash for non-receipted returns is common place today in most merchants. From these early introductions, numerous retailers began to adapt a giftcard program to replace their gift certificate programs.

Function and types

A gift card may resemble a credit card or display a specific theme on a plastic card the size of a credit card. The card is identified by a specific number or code, not usually with an individual name, and thus could be used by anybody. They are backed by an on-line electronic system for authorization. Some gift cards can be reloaded by payment and can be used thus multiple times.

Cards may have a barcode or magnetic strip, which is read by an electronic credit card machine. Many cards have no value until they are sold, at which time the cashier enters the amount which the customer wishes to put on the card. This amount is rarely stored on the card but is instead noted in the store's database, which is crosslinked to the card ID. Gift cards thus are generally not stored-value cards as used in many public transport systems or library photocopiers, where a simplified system (with no network) stores the value only on the card itself. To thwart counterfeiting, the data is encrypted. The magnetic strip is also often placed differently than on credit cards, so they cannot be read or written with standard equipment. Other gift cards may have a set value and need to be activated by calling a specific number.

Gift cards can also be custom tailored to meet specific needs. By adding a custom message or name on the front of the card, it can make for an individualized gift or incentive to an employee to show how greatly they are appreciated. Some companies like American Express^[5] offer custom designs on the cards for businesses wishing to add their logo. Special order cards are available for businesses.

Gift cards are divided into "open loop" or "network" cards and "closed loop" cards. The former are issued by banks or credit card companies and can be redeemed by different establishments, the latter by a specific store or restaurant and can be only redeemed by the issuing provider. The latter, however, tend to have fewer problems with card value decay and fees.^[1] In either case the giver would buy the gift card (and may have to pay an additional purchase fee), and the recipient of the card would use the value of the card at a later transaction. A third form is the "hybrid closed loop" card where the issuer has bundled a number of closed loop cards; an example is a gift card for a specific mall.

Gift cards differ from gift certificates, in that the latter are usually sold as a paper document with an authorized signature by a restaurant, store, or other individual establishment as a voucher for a future service; there is no electronic authorization. A gift certificate may or may not have an expiration date and generally has no administrative fees.

Bank-issued gift cards may be used in lieu of checks as a way to disburse rebate funds. Some retailers use the gift card system for refunds in lieu of cash thereby assuring that the customer will spend the funds at their store.

A Charity Gift Card allows the gift giver to make a charitable donation, and the gift recipient to choose a charity that will receive the donation.

Mobile & Virtual gift cards

Mobile gift cards are delivered to mobiles phones via SMS messages and phone applications including iPhone applications allowing users to carry only their cell phones. Benefits include tying them to a particular phone number and ease of distribution through email.

Virtual gift cards are delivered via e-mail to their recipient, the benefits being that they cannot be lost and that the consumer does not have to drive to the bricks and mortar location to purchase a gift card.

Target,^[6] one of the top sellers of Gift Cards in the US and Starbucks^[7] have launched mobile gift cards. Several companies are expected to follow their lead including gift card vendors like snapgifts.^[8]

Other companies, such as GiftRocket, have introduced virtual gift cards that users redeem on their smartphones.^[9]. GiftRocket only allows users to transfer money from one account to another. The merchant is not involved in the loop, therefore it's not a traditional gift card. It's more of a cash transfer.

Pitfalls

It has been argued that holiday giving destroys value due to mismatching gifts.^[10] The most efficient way to keep value in gifting would be to give cash, however this is socially acceptable only within limits. Gift cards, to a degree, may overcome this problem but have certain pitfalls. Some feel that the absence of the thought of selecting a specific gift makes a gift card a worse choice than a poorly executed but individual gift.^[11] New products in the gift card industry are evolving to tackle this "impersonal" pitfall of gift cards. New services launched by some service providers allows for customization and personalization of gift cards.^[12]

Gift cards have been criticized for the ability of the issuing authority to set rules that are detrimental to the consumer. Thus the recipient may have to face expiration dates, administrative fees, restrictions in use, and absence of adequate protection in case of fraud or loss.^[2] Over time the value of a gift card may become zero. However, these issues have diminished significantly in recent years. Many states have enacted laws limiting or prohibiting all fees or expiration dates for gift cards. Further, because of the negative impact on sales that such policies can have, most merchants have adopted and even advertise a "no fee, no expiration" policy for their gift cards, whether or not state laws require it.^[13]

Gift cards are considered unsecured debt by bankruptcy courts, and as such can become valueless when a company files for Chapter 11 reorganization.^[14]

Redemption rate

Not all gift cards are redeemed, which can be for a multitude of reasons. The card may get lost, there may be time decay (expiration and fees) or complex rules of redemption, the recipient may not be interested in the store that accepts the card or be under the false assumption that not using it will save money for the giver. It has been estimated that perhaps 10% of cards are not redeemed, amounting to a gain for retailers of about $8 billion in the US in 2006.^[4]

Third party brokers

By late 2006, companies such as, CardWoo, Plastic Jungle, Swapagift, GiftCardRescue and CardAvenue, were formed to provide gift card brokering services that allowed customers to buy or sell their pre-owned gift cards. Buyers would typically buy these pre-owned gift cards anywhere from 3-30% off while sellers would sell their pre-owned gift cards for 50-80% of their face value. By 2009 more third party gift card sites emerged like Cardlimbo.com, Cardpool.com, Giftcardrescue.com and many others. ^[15][16][17] Other websites sell a collection of third party gift cards, including GiftCardLab.com Giftah.com, GiftCardMall.com GiftCertificates.com and GiftCards.com in the US, TheGiftCardCentre.co.uk in the UK. Soon after the emergence of primary coupon reseller like Plastic Jungle, price comparison websites like Gift Card Granny and Cardnap began to allow shoppers to compare how much each of the coupon resellers were buying and selling cards for, thus adding further competition and choice to the discount gift card market. {http://www.givvgiftcards.com.au}

Incentive of Choice

Companies like National Gift Card Corp. and Incentive CardLab are able to offer the incentive community hundreds of gift cards from retailers and restaurants nationwide in bulk, and oftentimes, with discounts.^[18][19]

Regulations

Canada

In the provinces of Manitoba, Ontario, Alberta, British Columbia, Saskatchewan^[20] and Quebec, legislation has been passed to ban expiry dates and fees collected on gift cards.^[21] It does not apply to cards where there is a direct agreement between the user and the bank that issues the card. It refers to the Open Loop gift card program.

United States

In the past, uniform standards concerning gift cards did not exist. This was set to change as an addendum to the Credit CARD Act of 2009 directs the federal government to create consumer-friendly standards pertaining to gift cards.^[22] Most notably, the new regulations prohibit retailers from setting expiration dates unless they are at least 6 years after the date that the card was loaded. In addition, retailers are no longer able to assess dormancy, inactivity, or service fees unless the card has been inactive for at least 12 months, and if fees are added after that period, the details of such fees must be clearly disclosed on the card. Additionally, retailers are unable to levy more than one fee per month. The new provisions took effect on August 22, 2010.^[23]

Open loop cards are governed by rules of the Comptroller of the Currency, however oversight has been criticized.^[2] Closed loop gift cards are subject to rules set by different state regulations, and issuing authorities vary widely in the rules they set for the consumer.^[2] Rules can be changed by the issuer without notifying the consumer.^[1][4]

See also

• Rebate card
• Entrust Bankcard

References

1. ^ ^{a b c} "Avoid gift card pitfalls". December 2007. http://www.consumerreports.org/cro/money/shopping/shopping-tips/gift-card-pitfalls-12-07/overview/gift-card-pitfalls-ov.htm.  accessed 06-16-2008
2. ^ ^{a b c d} James R. Hood (2006-02-20). "Congress Considers New Gift Card Rules". http://www.consumeraffairs.com/news04/2006/02/gift_cards_congress.html.  accessed 06-16-2008
3. ^ Cash, not gift cards, the best present: consumers' association
4. ^ ^{a b c} Truman Lewis (2006-12-20). "Gift Cards an $8 Billion Gift to Retailers". http://www.consumeraffairs.com/news04/2006/12/gift_card_giveaways.html. accessed 06-16-2008
5. ^ "Gift Cards". American Express. https://www.americanexpress.com/gift-cards/. 
6. ^ "Target Mobile Gift Cards". http://www.target.com/Mobile-GiftCards/b?ie=UTF8&node=2242345011. 
7. ^ "Starbucks Mobile Gift Cards". http://www.starbucks.com/coffeehouse/mobile-apps/starbucks-card-mobile. 
8. ^ "Snapgifts". http://www.snapgifts.com. 
9. ^ "GiftRocket Seeks to Take the Pain and Loss Out of Gift Cards". http://www.xconomy.com/san-francisco/2011/04/07/giftrocket-seeks-to-take-the-pain-and-loss-out-of-gift-cards. 
10. ^ Stephen J. Dubner and Steven D. Levitt (January 7, 2007). "The Gift-Card Economy". The New York Times. http://www.nytimes.com/2007/01/07/magazine/07wwln_freak.t.html?ex=1325826000&en=970d53de24147ae4&ei=5090&partner=rssuserland&emc=rss. 
11. ^ "Bad Gift Better Than Gift Card, Says Philosopher". 2006-12-18. http://www.consumeraffairs.com/news04/2006/12/bad_gift.html. 
12. ^ BusinessWeek (11-05-2007). "Gift Cards with a Personal Touch". http://www.businessweek.com/magazine/content/07_45/b4057049.htm. 
13. ^ author=Greg Grove title=Gift Card Overview url=http://www.ecardsystems.com/eCardWebPages/giftcardoverview.html
14. ^ Tamara Keith (2008-11-17). "Gift Card Warning: Check Retailer's Health". NPR. http://www.npr.org/templates/story/story.php?storyId=97016449. 
15. ^ Montagne, Renee (March 22, 2010). "Forgotten Gift Cards Yield Business Opportunity". NPR. http://www.npr.org/templates/story/story.php?storyId=125005447. 
16. ^ Choi, Candice (June 24, 2010). "Websites allow consumers to purchase and sell their unwanted gift cards". The Boston Globe. http://www.boston.com/business/personalfinance/articles/2010/06/24/websites_allow_consumers_to_purchase_and_sell_their_unwanted_gift_cards/. 
17. ^ Martin, Jabari (November 17, 2010). "PegDown". facebook. http://www.facebook.com/pages/PegDowncom/142110739173001. 
18. ^ "National Gift Card Corp.". http://www.ngc-group.com. 
19. ^ "Incentive CardLab". http://www.incentivecardlab.com. 
20. ^ http://www.justice.gov.sk.ca/gift-card
21. ^ "Gift cards: the lure of plastic". CBC News. December 5, 2008. http://www.cbc.ca/consumer/story/2008/12/01/f-giftcards.html. 
22. ^ http://www.govtrack.us/congress/billtext.xpd?bill=h111-627
23. ^ http://www.wkow.com/Global/story.asp?S=12188430

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