Gift card

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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 dollars were spent on gift cards 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.

[edit] 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 are 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 are divided into "open loop" 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 lesser 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.

Gift card does not include fuel cards.

Bank-issued gift cards may be used in lieu of checks as a way to disburse rebate funds.

[edit] Pitfalls

It has been argued that holiday giving destroys value due to mismatching gifts.^[5] 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. In addition, it has been suggested 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.^[6] 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..^[7]

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 be 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.^[8]

Gift cards are considered unsecured debt by bankruptcy courts, and as such can become valueless when a company files for Chapter 11 reorganization.^[9]

[edit] Redemption rate

Not all gift cards are redeemed, which can be for a multitude of reasons. Some common reasons may include loss of the card, time decay (expiration and fees), personal disinterest in the store that the card is accepted, complex rules of redemption, and the attempt of the recipient to 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]

[edit] Regulations

[edit] Canada

In the Province of Manitoba, Ontario and British Columbia, legislation has been passed to ban expiry dates and fees collected on gift cards. ^[10]

[edit] United States

In the United States uniform standards about gift cards do not exist. 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]

[edit] References