While the question may seem trivial, a nuanced answer may contain some important implications.
First of all, we are probably not discussing rectangular pieces of plastic as collectible items (yeah, it is a thing). Nor are we talking about paper gift certificates, usually signed by a business owner or authorized employee, but lacking any serial numbers. The rise of consumer-grade printers — and advances in technology, of course — has made them practically obsolete.
Rather, we are interested in a particular aspect that remains unchanged — merchants’ obligation to provide goods or services in the future. Thus, a gift card — whether physical or electronic — is nothing but a way to access a particular record, modifiable only by the merchant, or at the merchant’s direction — which represents the value that will be applied toward future sales of goods or services.
In fact, relevant federal regulations were updated over a decade ago to refer to gift cards as “Prepaid Access” rather than “Stored Value”. According to the Financial Crimes Enforcement Network (FinCEN), “prepaid access is the ability to access funds or their value that have been paid in advance and can be transferred or retrieved in the future. This can be done through a vehicle or electronic device, such as a card, code, mobile identification number, personal identification number, or electronic serial number.”
In addition, gift cards are typically treated as bearer instruments, as they do not contain any ownership information. Thus, anyone who is in possession of the card — or of the means for accessing the funds electronically — may be entitled to use them. The merchant may not be in a position to determine who the “rightful” owner is, and who is an impostor.
Some merchants offer to re-issue gift cards at the bearer’s request, thereby securing the funds and preventing others from accessing them, but the specific mechanism for accomplishing this — as well as the requirements they may impose — vary significantly. For example, in some cases, people who have purchased gift cards directly from the merchant may receive their assistance, while others may be referred to the third-party retailers and distributors (who, in turn, may or may not be helpful).
To enumerate some of the risks involved, purchasers rely on the merchants (and often on the third-party intermediaries as well) for:
- Maintaining the records of the original value and the remaining balance
- Preserving the access method suitable to buyers, e.g. the ability to add it to a particular type of mobile wallet
- Keeping physical gift cards secure prior to their purchase and activation, at every stage of the process, from manufacturing to distribution and beyond
- Keeping their electronic system of record – and handling any issues related to compromised cards that may arise after the activation in a reasonable fashion
- Continuing to offer goods or services that the purchaser may be interested in
- Continuing to accept previously sold gift cards after corporate mergers and acquisitions
- Staying in business!
Of course, purchase of a closed loop gift card does not lock in the present time pricing on goods and services either, so the buyers are at the merchants’ mercy for not jacking them up. Nor are gift card values adjusted for inflation. In this regard, gift cards may be similar to cash, but unlike cash, gift cards have additional restrictions and limitations, so the list goes on:
- How many gift cards may the merchant permit to use per transaction, both in person and online?
- How does the merchant treat the remaining funds: do they remain a bearer’s instrument (transferable by definition), or are they locked to a particular account?
- Do gift cards expire? (Usually the answer to this is “No”, unless it is a “promotional” gift card; however, the access device itself – the physical card, that is – may expire, in which case it may need to be replaced, sometimes for a fee)
- Are the funds transferred after a certain period of inactivity to an unclaimed property agency set up by the state (this typically applies only to direct purchases from the retailer, if the state law that they operate under requires them to collect purchaser information)
While there are some benefits and convenience that gift cards provide, the above illustrates how risks and inconveniences may overweigh those. In other words, merchants need to provide incentives for people to tie up their money in gift cards. Such incentives will be the focus of this site.