Reading 2021-12-27


  • Ref:: Bits about Money
  • Title:: More than you want to know about gift cards
  • Author:: Patrick McKenzie (patio11)
  • Year of publication:: 2021
  • Category:: Blog
  • Topic::

Notes from reading

The industry taxonomy for gift cards (and gift certificates, and pre-paid cards, and similar instruments) primarily splits them into open-loop and closed-loop systems.

Closed-loop gift cards are the classic retailer gift card, where someone buys a known value of future goods/services, typically paying 1:1 in cash, and those goods/services only come from the business which issued the card.

Open-loop gift cards are issued under the aegis of a payments network, like Visa or American Express, and are approximately as widely accepted as other cards carrying the same brand, not just with the company which directly sold them to the customer

Why businesses love gift cards
They’re good at achieving the only three goals of marketing:

  • they bring in new users,
  • they bring users back,
  • and they increase basket sizes

When a company sells a gift card, they book a liability to the user (they’ve made a promise to provide something of value in the future) and an asset (cash). This is revenue neutral. When a transaction happens in the future, the liability goes down (the promise having been fulfilled) and revenue is recognized.

In between the present and the future, the company has cash. In insurance, by regulation and practice this would be invested in a portfolio of largely low-risk highly-liquid assets, and the insurer would keep the returns generated by that portfolio, allowing it to be profitable potentially even if it had eventual claims higher than the premiums it took in. This is the core engine of (part of!) the insurance industry.

What happens if gift cards aren’t redeemed, or are only partially redeemed? The remainder is deemed as “breakage” after a few years. The business gets to recognize it as revenue and keep it.

Most gift cards worldwide are issued in the United States, and many American states consider an unused gift card a special case of unused property. They require the card issuer to escheat (remit to the state) funds which have been deemed abandoned, so that the state can hold them in safekeeping for the original owner or their heirs.