What Happens to the Money on Gift Cards? The Inside Scoop

The money on gift cards can take several paths, depending on factors like state laws, the issuer’s policies, and, frankly, the recipient’s diligence. In short, when a gift card goes unused, underused, or expires, the issuer (typically the retailer or company) often benefits financially. Some states have escheatment laws, allowing the state to claim the funds as unclaimed property. However, the vast majority of unredeemed gift card value ultimately lands in the issuer’s coffers as unearned revenue, a pure profit windfall.

Gift cards have become ubiquitous, convenient gifts. Yet, behind the seemingly simple transaction lies a complex financial ecosystem where billions of dollars remain untapped. Understanding where this money goes is essential for both consumers and businesses.

The Journey of Unused Gift Card Funds

Initial Sale and Accounting

When a gift card is sold, the retailer receives immediate income. However, this isn’t immediately recognized as revenue on the company’s books. Instead, it’s recorded as deferred revenue, a liability. The retailer essentially owes the recipient goods or services equal to the card’s value.

Redemption and Revenue Recognition

When the gift card is used, the retailer recognizes the revenue. The deferred revenue liability is reduced, and the corresponding sales revenue is recorded. This is the ideal scenario for the retailer, as it generates a sale, potentially leading to additional purchases. Studies show that consumers often spend more than the gift card’s value when redeeming it, boosting the retailer’s profits further.

The Case of Unused Cards: The Real Profit Center

This is where the real intrigue—and potential profit—begins. If a gift card is never redeemed, or only partially redeemed, the unspent balance eventually becomes a significant profit for the issuer. Here’s how:

• Expiration and Fees: While federal law prevents gift cards from expiring within five years of activation and limits certain fees, these still exist. Inactivity fees can slowly erode the card’s value if not used within a specific timeframe (usually after a year). Once expired, the full remaining balance can be forfeited.

• Escheatment Laws: Some states have escheatment laws, also known as unclaimed property laws. These laws mandate that companies turn over unclaimed property, including unused gift card balances, to the state after a certain period (often several years). The state then holds these funds, attempting to reunite them with the rightful owners. While this protects consumers to some degree, many people are unaware of these laws, and the funds often remain unclaimed by the state. Delaware and New York are prime examples of states with these types of laws.

• Pure Profit for the Issuer: In most cases, unredeemed balances simply become profit for the company that issued the card. Since the company has already received the money from the initial sale and never had to provide goods or services in return, it’s a 100% profit margin. This is a significant incentive for retailers to promote gift card sales. Some studies estimate that between 10% to 19% of gift card balances remain unredeemed, resulting in billions of dollars in profit for retailers each year.

The Retailer’s Perspective

Retailers generally prefer that gift cards be redeemed. They recognize that gift card recipients often spend more than the card’s value and that gift cards drive traffic to their stores. They view gift cards as a marketing tool and customer acquisition strategy, which can be understood using concepts explored at Games Learning Society, where engagement and incentive mechanisms are studied extensively. Furthermore, redeeming gift cards creates opportunities for repeat business and brand loyalty.

The Impact of Different Types of Gift Cards

Not all gift cards are created equal. The type of card significantly influences what happens to the unspent funds.

• Closed-Loop Gift Cards: These cards are specific to a particular retailer or brand (e.g., a Starbucks card, a Target card). The retailer benefits directly from the unredeemed balance.

• Open-Loop Gift Cards: These cards, often branded with Visa, Mastercard, or American Express, can be used at any location that accepts those cards. The financial institution issuing the card profits from fees associated with the card (purchase fees, activation fees, inactivity fees) and a percentage of the interchange fees from each transaction. Any unspent balances ultimately benefit the financial institution.

The Role of Federal Law

The Credit Card Accountability Responsibility and Disclosure Act of 2009 (CARD Act) provides some protection for consumers by setting minimum standards for gift cards. It prevents expiration dates within five years of activation, requires clear disclosure of fees, and limits inactivity fees. However, it does not eliminate expiration dates or fees entirely, leaving room for companies to profit from unredeemed balances.

The Ethical Implications

The practice of profiting from unredeemed gift card balances raises ethical questions. Is it fair for companies to keep money for goods or services they never provided? While legal, some argue it’s unethical, especially when companies actively promote gift card sales while knowing a significant percentage will go unused.

Frequently Asked Questions (FAQs) about Gift Cards

1. Where does the money go when a gift card expires?

Generally, the company that issued the gift card keeps the remaining balance if it expires, unless state escheatment laws apply.

2. What happens to the money on unused gift cards?

The money typically goes to the company who sold the gift card, leading to a 100% profit for them. Some states have unclaimed property laws that may entitle the state to the unspent balance.

3. How much money is estimated to be lost on unused gift cards annually?

Estimates vary, but reports indicate that billions of dollars are tied up in unused and lost gift cards each year, sometimes upwards of $21 billion.

4. What happens if I don’t use all the money on a gift card?

The issuer’s policy dictates what happens to the remaining balance. Some may charge service fees over time, some cards expire, and the remaining value can be lost. Other cards might remain active indefinitely.

5. What are the disadvantages of using gift cards?

Disadvantages include small remaining balances that often go unspent, potential purchase or reload fees, and limited purchasing power with closed-loop cards.

6. How long does the money stay on a gift card?

Federal law mandates that gift cards cannot expire until at least five years from the date of activation. However, some cards may have fees that can reduce the balance over time.

7. Do companies lose money from gift cards?

No, companies generally do not lose money from gift cards. They receive an interest-free loan and potential profit from unredeemed balances.

8. Why do gift cards often go unused?

Gift cards go unused for various reasons, including forgetfulness, loss, store closures, and the hassle of redeeming small balances.

9. Why do Visa gift cards sometimes lose money?

Visa gift cards might lose money due to inactivity fees if not used within a certain period.

10. Why do companies like gift cards?

Companies like gift cards because they attract new customers, generate immediate income, and often lead to additional spending beyond the card’s value.

11. Are gift cards refundable if unused?

Generally, companies do not allow returns of unused gift cards, except where required by state law or as a matter of goodwill.

12. What happens if I overpay on a Visa gift card?

If the purchase amount exceeds the Visa gift card’s balance, the transaction will be declined because a one-time use gift card cannot be overdrawn.

13. How can I get my money back from an expired gift card?

Contact the retailer and politely request an extension or refund. While not obligated, some may grant it as a goodwill gesture.

14. How can I avoid wasting money on gift cards?

Make a plan to spend the gift card promptly, track the balance, and combine multiple cards for a single purchase.

15. What percentage of gift cards never get redeemed?

At any given time, 10% to 19% of gift card balances remain unredeemed, with approximately 6% of gift cards never used at all.

Conclusion

Gift cards present a complex financial landscape, offering convenience and flexibility while potentially leading to lost value and unearned profit. Understanding the nuances of gift card policies, state laws, and personal spending habits is essential for both consumers and businesses. By being informed and proactive, individuals can maximize the value of their gift cards, while businesses can ethically manage their gift card programs and ensure transparency.