What Is a Gift Card?
A gift card is a form of payment that can be used to make purchases at specific stores, websites, or across a network of merchants. It functions as a type of prepaid card, carrying a monetary balance that is pre-loaded by the purchaser. Often given as presents, gift cards are a popular financial product within the realm of consumer finance, offering convenience to both the giver and the recipient. Unlike credit cards, gift cards do not allow for spending beyond their loaded value.
History and Origin
The concept of gift certificates, the precursor to modern gift cards, emerged in the late 19th and early 20th centuries, with companies like Marquette Trading Co. in Michigan reportedly offering them as early as 1888. These early versions were typically paper vouchers with a specified value. The significant shift to the plastic, multi-purpose gift card as it is known today occurred in the 1990s. In 1994, Blockbuster Entertainment Corp. introduced the first widely available plastic gift card, which allowed various denominations to be loaded onto it, enhancing its versatility and durability compared to paper certificates. This innovation paved the way for widespread adoption by other major retailers, transforming the gift-giving landscape.11
Key Takeaways
- A gift card is a prepaid payment instrument with a set monetary value, redeemable for goods or services.
- Federal regulations, such as those from the Federal Reserve Board and the Consumer Financial Protection Bureau, govern expiration dates and fees on gift cards.
- Unused gift card balances, known as "breakage," can sometimes be claimed by the issuing company as revenue or, in certain jurisdictions, transferred to state unclaimed property programs.
- Gift cards can be convenient for givers and offer flexibility for recipients, but they are also susceptible to fraud and can be lost or forgotten.
- The evolution of gift cards includes physical plastic cards and increasingly popular digital formats, which can be stored in a digital wallet.
Interpreting the Gift Card
A gift card is typically interpreted as a promise from the issuer to provide goods or services up to the value loaded onto the card. For consumers, a gift card represents stored value that can be exchanged for items they desire, often at a specific merchant. From an issuer's perspective, the sale of a gift card initially creates a liability on their books, as they owe the cardholder a future product or service. This liability is only recognized as revenue when the card is redeemed. The practical application of a gift card depends on whether it is a "closed-loop" card (usable only at a specific merchant) or an "open-loop" card (usable wherever a specific payment network, like Visa or Mastercard, is accepted).
Hypothetical Example
Consider a hypothetical scenario where Sarah receives a $50 gift card for a popular online electronics store. The gift card is activated upon purchase and delivered via email to her digital wallet. Sarah browses the store's website and finds a pair of headphones priced at $45. She proceeds to checkout, enters the gift card number and PIN, and the $45 is deducted from the card's $50 balance. After the transaction, a $5 balance remains on her gift card, which she can use for a future purchase at the same store. This example illustrates the direct application of a gift card to cover the cost of an item, with any remaining funds held for subsequent use.
Practical Applications
Gift cards are widely used in various financial and retail contexts. They serve as a flexible gifting option, allowing recipients to choose their desired items. Many businesses utilize gift cards for promotional campaigns or as part of loyalty programs. For retailers, gift card sales provide an upfront injection of capital, and the unredeemed portion, known as breakage, can contribute to their bottom line. For instance, companies like Starbucks have reported significant breakage revenue from unused gift cards.10 However, the treatment of unused gift card balances is subject to financial regulation, with states having different laws regarding escheatment of unclaimed funds. The Federal Reserve Board announced final rules in 2010 under Regulation E, implementing provisions of the Credit Card Accountability Responsibility and Disclosure Act of 2009 (CARD Act) that restrict fees and expiration dates on gift cards, generally requiring funds to be valid for at least five years from issuance or last load.9
Limitations and Criticisms
Despite their convenience, gift cards have certain limitations and face criticism. A significant concern is the potential for unredeemed balances. Billions of dollars in gift card funds go unused annually, often due to cards being lost, forgotten, or expiring before use.8 This phenomenon, sometimes referred to as "deadweight loss" in economic value, can occur when the recipient does not value the gift card as highly as the cash equivalent.7 While federal laws provide a minimum expiration period, some consumers may still incur inactivity or dormancy fees after a year of non-use, eroding the card's value.6 Furthermore, gift cards, particularly physical ones, are vulnerable to fraud, such as skimming or balance theft, which can leave consumers with worthless cards.5 States also have differing unclaimed property laws, which can complicate the process of recovering funds from forgotten or expired gift cards. The Consumer Financial Protection Bureau (CFPB) provides guidance on consumer protection related to gift card terms.4
Gift Card vs. Prepaid Card
While a gift card is a type of prepaid card, the two terms are not interchangeable. A gift card is typically designed for gifting purposes, pre-loaded with a specific amount, and often non-reloadable. They are primarily used for consumer purchases and fall under specific consumer protection laws regarding expiration and fees. In contrast, the broader category of prepaid cards includes gift cards but also encompasses reloadable cards used for everyday spending, payroll cards, and government benefit cards. These may have different fee structures, reload options, and regulatory frameworks than gift cards. The primary distinction often lies in their intended use and reloadability, with prepaid cards generally offering more functionality akin to a debit card.
FAQs
Can a gift card expire?
Under federal law in the United States, funds on most gift cards cannot expire for at least five years from the date of issuance or the last date funds were added to the card.3 However, some states may offer additional protections with longer expiration periods.
What happens if I lose my gift card?
Losing a gift card is often similar to losing cash. If the card is unregistered, it may be difficult or impossible to replace. Some issuers, especially for open-loop cards, may offer replacement if you have the card details and proof of purchase, and if you registered the card. It's advisable to treat gift cards like cash and keep a record of the card number and customer service information.
Are there fees associated with gift cards?
Federal law prohibits dormancy, inactivity, or service fees on gift cards unless there has been at least one year of inactivity, no more than one fee is charged per month, and clear disclosures about the fees are provided.2 Initial purchase fees may apply, especially for open-loop gift cards. These fees are part of the overall cost of goods sold for the issuer.
Can I get cash back for an unused gift card?
While some states have laws requiring cash redemption for small balances, generally, gift cards are intended for merchandise or service redemption. There are online marketplaces where you can sell unwanted gift cards, though typically not for their full face value. The concept of "breakage," or unspent gift card balances, is a significant consideration in accounting for retailers.1
What is the difference between an open-loop and closed-loop gift card?
A closed-loop gift card is issued by a specific merchant or group of affiliated merchants and can only be redeemed at those locations (e.g., a Starbucks gift card). An open-loop gift card is issued by a payment network (like Visa, Mastercard, American Express) and can be used wherever that network's cards are accepted, providing greater flexibility for the recipient.