When gift-card promises go unfulfilled
Shoppers should consider a retailer's financial health before buying its plastic.
As the holiday gift-giving season nears, sensitive types claim nothing says, "I made no effort" like the ubiquitous gift card.Skip to next paragraph
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It's an assertion most Americans ignore: 79 percent of us have given a gift card for Christmas within the past five years, says Britt Beemer, chairman of America's Research Group, a consumer-behavior research company.
But this holiday season, industry experts say gift cards should be very thoughtfully selected. With more companies shuttering their doors, consumers holding gift cards issued by a retailer that has filed for bankruptcy could find their balances suddenly reduced to zero.
And they'll have little recourse to fight the drain. When Sharper Image filed for bankruptcy in February, some $20 million in unredeemed funds remained from patron's prepaid gift cards.
But that's no reason to stop purchasing gift cards, these same experts say. With a little savvy, consumers can give the cards and spare loved ones the shock of finally finding the perfect gift, only to be rejected at the counter with an empty gift card.
Most Americans are unaware how little oversight regulates gift cards, Mr. Beemer says. According to a survey he conducted around the time of Sharper Image's bankruptcy filing, 14 percent of consumers said they never thought gift cards could lose value.
But gift cards can lose value, either through monthly maintenance fees, expiration dates, or when a company files for bankruptcy.
A lot of money is at stake, says Brian Riley, director of bank-card research for TowerGroup, a global financial services research firm in Needham, Mass. Mr. Riley estimates the 2008 prepaid gift card market is about $94 billion. And since 10 percent of gift cards are never redeemed in their entirety, some $9 billion in unused funds remain in retailers' coffers, TowerGroup reports.
The current economic crisis should also spur buyers to be more conscientious, says Jennifer Mathe, cofounder of Leverage, an online company which sells and trades gift cards.
"If the holiday season doesn't pan out [for retailers] … you're likely to see a higher increase in bankruptcy in the New Year," she says. "And I'm not familiar with any retailers who stopped gift-card sales before filing for bankruptcy."
Retailers face little regulation about what they must do with money they receive from selling gift cards. "When funds go in, they're booked to the general funds of the store," Riley says.