What Happens To Your Unspent Gift Card Money?
The United States is the world’s largest market for gift cards by more than a 2:1 ratio. So popular it is, that it’s the most purchased gift item during the holidays, and has been for the last 13 years according to the National Retail Foundation. The most popular types of gift cards were from Starbucks, Amazon, Walmart and Target and Americans loaded those cards with nearly $100 billion just during the holiday period and another $100 billion throughout the rest of the year. According to the Mercator Advisory Group, roughly $3 billion goes unspent each year, with many cards being lost or forgotten about.
To begin understanding where all that unspent gift card money ends up, it’s important to understand the difference between a closed loop gift card and an open loop gift car.d A close loop gift card can only be used at the retailer where it was purchased and typically has the name and logo of the business on the front. An open loop gift car usually has a generic image on the front along with either the Visa, MasterCard or American Express logo on the front of the card and can be used anywhere Visa, MasterCard or American Express are excepted.
Closed loop gift cards account for the overwhelming amount of unspent gift cards. According to Amazon, it alone has more than $3 billion in unspent gift cards still on its books while Walmart has $1.9 billion and Starbucks has $1.2 billion on their books still waiting for a customer to come in and redeem the card’s value in exchange for merchandise or service. The most common reasons people don’t redeem their gift cards are because either the customer isn’t that interested in the store the gift card was purchased from or they forgot they had it or they lost it. The amount of money left on a gift card beyond five years that goes unspent is called breakage.
How this money is accounted for is governed by the Financial Accounting Standards Board, FASB. Under the FASB guidelines, once breakage has occurred, a company can claim a percentage of the breakage as revenue. In 2019, Starbucks claimed $140 million in breakage revenue. In many states, a company has a legal responsibility to return the money to the customer, however, most gift cards purchases are not tracked with personal information of the buyer so finding the buyer is considered impossible.
Consumer advocacy groups recommend that you buy gift cards online because it then creates a record of the purchaser, and if the gift card goes unused after five years, they will have a record of how to contact you, either by email, phone or address and be able to refund you the money.
A large portion of breakage revenue actually goes to state governments in the state the gift card issuer is incorporated in, and this is a significant revenue stream for states like Delaware, Florida and Nevada, where most companies incorporate in for tax and legal reasons. In 2018, Delaware collected more than $21 million from breakage revenue alone. Texas collected almost $3 million in breakage revenue in 2018 and New York collected about $2 million. Wyoming is an up-and-coming state that has recently made incorporating there favorable for tax reasons and as a result, the state with the smallest population in the country raked in nearly $1 million in breakage revenue in 2018.
Before the Covid-19 pandemic hit, Americans were holding more than $21 billion in unused gift cards. But, while a retailer can immediately bank and use use the money they receive from a gift card purchase, a retailer can not count the money they received from the gift card purchase as revenue, only when the gift card is used can it be counted as revenue according to FASB. Until then, it’s considered a liability.
So, in short, after five years your unspent gift card money will go to state governments and then to the retailer to keep, that is, unless they were able to find the purchaser.