It’s always nice when someone shows his or her appreciation by giving you a gift. Over the past few years, more people have been showing their appreciation by giving gift cards, prepaid plastic cards issued by a retailer that can be redeemed for merchandise. The bestselling single item for more than 80% of the top 100 American retailers, says GiftCardUSA.com, is their gift cards.

What could be more simple and useful than allowing the recipient to choose what he or she wants? And isn’t a gift card more personal than cash or a check?

Yet a number of firms are now making a profit from the fact that gift card recipients are often willing to sell their cards at a discount—sometimes at a fairly sizable discount—to turn them into cold, impersonal dollars and cents. Meanwhile, other people are willing to buy those cards, and turn them into goods they want.

Cardcash.com is one such site. At the time of writing, it offers to pay cash to a seller of a Walmart gift card equivalent to 89% of the card’s face value. For example, the seller of a Walmart card with a value of $100 would receive $89. Cardcash.com profits by reselling the card at a premium over what it paid. So it would sell a Walmart gift card for more than 89%

of its face value. The amount of cash offered to sellers of cards will vary by retailer. Cardcash offers cash equal to only 70% of a Gap card’s face value, for example.

Many consumers will sell at a sizable discount to turn gift cards into cash. But retailers promote the use of gift cards over cash because much of the value of gift cards issued never gets used, a phenomenon known as breakage.

How does breakage occur? People lose cards. Or they spend only $47 of a $50 gift card, and never return to the store to spend that last $3. Also, retailers have imposed fees on the use of cards or made them subject to expiration dates, which customers forget about. And if a retailer goes out of business, the value of outstanding gift cards disappears with it.

In addition to breakage, retailers benefit when customers intent on using up the value of their gift card find that it is too difficult to spend exactly the amount of the card. Instead, they end up spending even more than the card’s face value, sometimes even more than they would have without the gift card.

Gift cards are so beneficial to retailers that instead of rewarding customer loyalty with rebate checks (once a common practice), they have switched to dispensing gift cards. As one commentator noted in explaining why retailers prefer gift cards to rebate checks, “Nobody neglects to spend cash.”

Questions:-

1. Why are gift card owners willing to sell their cards for a cash amount less than their face value?
2. Why do gift cards for Walmart sell for a smaller discount than those for the Gap?
3. Use your answer from Question 2 to explain why cash never “sells” at a discount.
4. Explain why retailers prefer to reward loyal customers with gift cards instead of rebate checks.
5. There are now laws restricting retailers’ ability to impose fees and expiration dates on their gift cards and mandate greater disclosure of their terms. Why do you think Congress enacted this legislation?