FEBRUARY 2004

Gift Cards

Many of our readers either purchased or received a gift card during this past holiday season. According to Bain and Co. (New York), between $42 billion and $45 billion of gift cards were purchased during 2003. These plastic, stored value devices have become ubiquitous at the check-out aisles of major retailers. A survey by Valuelink (a division of First Data Corp.) found that on a scale of 1 to 10, with 10 being the highest satisfaction, recipients of gift cards gave them an average rating of 9. Most cards issued by retailers, in lieu of the traditional gift certificate, do not carry an initial fee but may impose a fee on unused funds after one or two years. For retailers, gift cards are a plus for three reasons: 1) cash is received in advance of merchandise sale, 2) the card often leads to even bigger purchases when the holder visits the store to redeem the card, and 3) some cards are never redeemed.

Even financial institutions have entered the gift card issuance business, although the economics are different. The American Banker reports that Bank of America offers Visa gift cards in denominations of $25 to $300 for a $5.95 fee. Larger denomination cards of $301 to $700 carry a $7.95 fee. A Visa gift card is more versatile than most retailer gift cards because it is accepted by any merchant that accepts the Visa brand. Because the issuing bank does not sell merchandise, the transaction fee for the purchase of the card is the primary source of revenue. Steve Diamond, a vice president at Visa, told the American Banker that consumers bought 200% more Visa gift cards in 2003 than they did in 2002.

Gift cards are sufficiently popular to have attracted the interest of legislators and regulators. Three states have banned the so-called “dormancy” fees on unused cards. However, a Visa spokesman said that these state laws do not apply to gift cards issued by national banks. Senator Charles Schumer (D-NY) has taken an interest in gift card fees as well. His office put out a consumer alert bulletin during the Thanksgiving week last year to warn consumers to stay away from cards that imposed dormancy fees.