Holiday Gift Card: A Gift With Strings Attached

Thoughtful people spend hours thinking about what to buy their loved ones for Christmas.

While some take the traditional route of cruising the mall searching for that perfect gift, many others take a less-stressful, more-convenient route and simply purchase the increasingly popular gift card. Figures for 2005 show that 66 percent of consumers will use gift cards as their primary choice this holiday season.

Gift cards have grown increasingly popular in the last three years, with Christmas gift card purchases accounting for more than $17 billion in sales in 2004. That number is expected to be $18.48 billion for the 2005 holiday season.

However, it’s important that both gift givers and receivers take a close look at the strings, such as surcharges, attached to gift cards. Be careful or your $50 dollar gift card may not be worth $50 for very long.

For the second straight year, Bankrate.com has surveyed the top 20 leading retailers, several representing more than one store chain, and top four credit-card issuers to examine the fees, expiration dates and dormancy policies associated with gift-card purchases.

Among the findings of this year’s survey:

Although cold, hard cash does not expire, five out of the 34 gift cards listed in our survey assess fees if you don’t activate within a 12- to 24-month period. Issuers expect you to use the card or you will lose a percentage of your money every month. Four out of 30 retailers’ cards in our survey have expiration dates that range from six months to five years. All four of the cards issued by credit-card brands carry expiration dates. You may have to order your gift card earlier this year, as many of the retailers have indicated longer delivery times. Monetary units continue to grow for many retailers. Some companies also give you specific denomination amounts if you order by phone as opposed to the Internet.

It’s all in the cards

“The popularity and convenience of gift cards are here to stay,” says Karen Larsen, vice president of marketing and product marketing for ValueLink, a leading provider of information processing and related services.

Larsen says that, among other positives, gift cards provide a wonderful branding opportunity for retailers.

“Gift cards also offer increased in-store sales, because consumers tend to view gift cards as free money and will spend more than the denomination on the card. It’s also a win-win situation for consumers because of their flexibility and choice.”

But with the positives also come the negatives — especially when gift cards are fattened with fees that either require the user to spend the amount on the card in an allotted time or when companies demand surcharges for buying the card.

Larsen says that although expiration dates and fees still remain, the trend in the past two years has been away from them.

“Retailers recognize the benefit of a positive customer experience. So, we are pleased to see that many retailers have done away with the fees and expiration dates.”

In fact, comparing Bankrate’s 2004 holiday gift card survey to this year’s survey, fees are up only slightly, with one credit card issuer adding a purchasing fee.

Expiration dates continue to be a major pitfall when using gift cards. The number of cards with expiration dates went unchanged from 2004 to 2005.

Four of the 20 retailers and all of the credit card issuers surveyed by Bankrate continue to place expiration dates on their gift cards. The expiration dates range from six months to two years.

Dan Horne, associate professor at Providence College and an expert on gift cards, says that fees and expiration dates are the result of accounting rules covering the way the retailer moves income from the balance sheet.

“Basically, gift card and certificates sales are not booked as revenue until redeemed,” he says. “If they are never redeemed, then you never realize the income, even though you have the money sitting in the bank. The fees let you transfer some of that money to income every month.”

Horne says that open-system cards like American Express and Visa can be used in more than one retail location, so many of them charge fees in order to make a profit.

“If you purchase an American Express card and the recipient uses it to buy a pair of jeans at Macy’s, $96 will go to the retailer, where only $4 will go to American Express. I don’t see how an open-system gift card supplier can make money without the fees.

“In comparison, closed-system cards are used specifically in that store, and, therefore, the total amount of the gift card is completely returned to that merchant, thus oftentimes eliminating the necessity for fees and, in most cases, expiration dates.”

Choosing the right card wisely

Despite some of the snags that come with gift cards, six out of 10 Americans will purchase gift cards this year and spend, on average, $339. Those numbers, calculated from a study by ValueLink, are impressive when you consider that just a couple of years ago gift cards were considered the last-minute or lazy man’s gift.

If you want the most boom for your buck, experts agree that closed-system cards are a better choice, because you are providing the receiver with a gift from a particular store you know they like. Closed-system cards are also not that far away from cash.

“You don’t see many of the fees or expiration dates, and it’s overall better for the customer because they are getting to spend the full value of the card,” says Horne.

The sweep of gift cards in the last decade has shown that retailers are listening to consumers who demand the product but don’t want to deal with the fees and expiration dates. That means that retailers have been and will continue to absorb some of the costs that come with keeping the accounts opened longer than a year.

“Gift cards are a fundamental part of doing business now,” says Larsen. Retailers want to accommodate their customers while keeping the money within their store.

Scott Krugman, vice president of industry public relations for the National Retail Federation, says gift card givers and recipients are becoming more aware of expiration dates, fees for nonuse and other hidden fees that will affect the value and usage of the gift cards. Experts encourage recipients to use the cards quickly. According to UnclaimedAssets.com, from 3 percent to 5 percent of gift cards, a total of $2.75 billion worth or more, are never redeemed.

“Every gift card indicates stipulations on the back of most cards, so review it wisely before purchase to assure that you are conveying positive information to the recipient because you want them to get what they want,” says Horne.

Personalizing gift cards

Consumers know what they want, and now the trend is to customize the gift card by personalizing the cards to the recipient’s particular interests and wants. According to an American Express survey, more than half of shoppers, 57 percent, agree that gift cards are a cool gift.

According to Larsen, gift cards are being designed and marketed with more thoughtfulness in mind.

“Americans are speaking with their wallets,” says Larsen. “There have been a number of trends in the gift card arena. We are observing that most people have either given a bad gift or received a bad gift, so these people are turning to gift cards because this allows complete satisfaction for both the giver and receiver.”

The stigmas of gift cards are no longer present.

“I think retailers are doing a great job at marketing gift cards as merchandise. They are no longer impulse buys, and consumers are purchasing gift cards for a variety of people, not just close friends and family,” says Krugman.

Maybe it’s the recognition that a gift card saves time and alleviates the stress of trying to find that perfect gift.

“Our grandparents certainly once thought that gift cards were impersonal, but now older generations are welcoming gift cards with open arms because they realize that they are not up on trends and want to give their children and grandchildren that perfect gift and what better way to satisfy your friends and family,” says Horne.

Surveys conducted by numerous card-issuing companies show that on a 10-point scale, gift cards have a satisfaction rate of 9. Gift cards are designed to allow complete satisfaction when it comes to the amount a person wants to spend. Bankrate’s study shows that denomination ranges are across the board, ranging from $5 to $5,000.

Data for this year show the average person will spend $44 per gift card.

Gift cards also satisfy retailers. The cards bring in more revenue, because most shoppers with gift card in hand spend, on average, 140 percent of the card’s face value.

The trend shift in gift cards will also continue as time goes by. According to the National Retail Association, consumers will see more customized gift cards with personal pictures, music, movies and elaborate gift wrapping for the recipient.

Horne says he is already starting to see a niche in the gift card industry in the form of electronic gift cards. Amazon.com is starting to offer codes in which a string of numbers and characters are used to purchase a gift instantly online.

Horne also says that European countries are starting to develop gift certificates that are able to be sent cell phones.

“The text message has a UPC code that the retailer can scan right from your phone and you receive your gift in just seconds. Gift cards will grow beyond paper and plastic.”

The continual evolution of gift cards means enhanced gift giving ahead and a much lighter bag for Santa to carry.