NYPIRG Consumer Protection Project

Don’t Save that Gift Card for a Rainy Day

There are two types of stored value gift cards — store-specific gift cards and general-purpose gift cards. You can use a store-specific gift card to buy merchandise from a particular store or through a store's website. Not all gift cards can be used for online shopping, so be sure to ask. A general-purpose gift card from Visa, MasterCard or American Express may be used almost anywhere those cards are accepted. Important exceptions, including airline tickets, may apply. Be sure to check with your gift-card program for details.

Twice as many American consumers purchased a gift card in 2003 compared to the previous year, according to a study commissioned by ValueLink, the gift and spending card service of First Data Corp. Forty-five percent of the adult population in the United States, an estimated 97 million people, purchased a gift card in the previous twelve months ending in August 2003 versus just 23 percent in a similar survey conducted for twelve months ending in August 2002. ( 39)

Gift cards are most widely purchased during the holiday season. For the holiday shopping season of 2003, an estimated 69.9% of consumers purchased gift cards, totaling an estimated $17.24 billion (8% of all holiday sales). ( 40)

Gift cards, which are modeled after pre-paid calling cards, are based on existing plastic card magnetic stripe technology. This means all credit and debit card acceptance points have the ability to redeem stored value cards ( 41). This is just one of the many reasons retailers prefer gift cards over their paper predecessor, the certificate. Additionally:

Many retailers do not count gift cards as a sale, but instead wait until they are redeemed. This helps prolong the “holiday season” and boost sales in January or February.
Cards have no value and are invalid until activated, so retailers can carry cards at the register.
Gift cards cut down on returns.
About two-thirds of recipients spend more than the value of the cards.
Shoppers using gift cards are less interested in getting a discount, so the cards increase the sale of full-priced items.
Roughly 10% of gift cards go unredeemed. That will translate to nearly $4 billion this year. The unused balance, or “breakage”, becomes free money to the card issuers. ( 42)

Bank-issued gift cards are quickly growing in popularity. They are prepaid cards issued by banks, malls or credit card companies that carry the logo of a major credit card company and can be used anywhere the brand is accepted. Bank-issued gift cards can come with fees that don’t apply to debit cards, and though they look like credit cards, stored value cards are not protected by the laws that apply to credit and debit cards. ( 43)

Since these cards are purchased for the amount stored in the card, the primary source of revenue of bank-issued gift cards is generated from interchange and service fees assessed for card activation, reloading value, ATM transactions and other miscellaneous fees. According to the American Bankers Association Banking Journal, multi-use, reloadable stored value cards provide the greatest opportunity for interchange fee revenue.

According to Bankrate.Com, here are some store-specific and general purpose gift card fees consumers should watch for:

Most gift cards expire within a year or two, although some may expire in six months. If you don't use all of the stored value and ask for a check to close the account, many institutions will charge $15 as a "closure fee."
Many gift cards allow ATM access. Some charge $1.50 per transaction, but First National Bank of Omaha, for example, charges $5 per transaction. Use the card at an ATM not owned by the bank that issues the card and consumers will very likely pay an additional fee.
If the card is lost or stolen you'll be able to get a new card for the remaining balance, but the "reissue fees" we've seen range from $4 to $6.
If consumers do not spend all the stored value within six months, most institutions will tack on a monthly "service fee" of $2.50. ( 44)

The Gift Cards included in this report have fees similar to the ones listed above. Retailers say these fees are fair because they apply only to those who don’t use the cards and they help cover maintenance costs for tracking gift card credits ( 45). The fees assessed for failing to use the card in a timely manner mount quickly and drastically diminish the value of the card. Consumers who save the cards and fail to use them may be surprised to find the card nearly worthless when they do go to make a purchase with it.