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December 19, 2007

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Timothy Zimmerman

As someone who has bought and sold a number of gift cards as a part of a larger arbitrage scheme, some companies are much better about it than others. One of the best checks on theft and loss are gift cards that have pin numbers on the rear of the card that have to be scratched-off in order to use the card. In this case, the purchaser is protected unless the card arrives with the pin number revealed. In that instance, a chargeback through paypal (in the case of eBay) or directly through a credit card company may be in order.

This obviously eliminates doing business with a number of companies, but it would be an easy fix for businesses to undertake to increase the security of their cards. However, if a businesses' sole intention is to sell as many gift cards as possible and hope that as few as possible are redeemed, they probably don't have a great incentive to change. If on the other hand, goodwill is damaged or the bottom line is impacted every time fraud is committed, companies may be interested in adding this small additional level of safety to their products.

Dan Johnson-Weinberger

Did I understand your last point to suspect that regulatory regimes protecting the value stored on gift cards are generally worse than the problem of unused gift cards expiring in the recipient's hands?

You mentioned state legislation -- the most recent in Illinois is Public Act 95-0525 (it was Representative Jack Franks' HB 369) -- that solve some of the shortcomings in this market. This law requires the gift card to stay 'live' for at least 5 years before it can expire.

I know previous incarnations of Representative Franks' legislation would have abolished the practice of monthly fees for non-activity (which solves another market shortcoming) but faced stiff resistance from the retailers' lobby.

How can these types of cures be considered worse than the problem of a flawed market for gift cards (where flawed refers to such a clear lack of motivation by the purchaser to negotiate a reasonable agreement of 'storage' of value for the card on behalf of the recipient)? That seems to me a rather ideological suspicion of yours, Dean Levmore.

saul levmore

The "staying alive" legislation seems reasonable to me, if one thinks of the flawed market model. Of course many other assets expire, and normally we just ask for disclosure. My intuition, and it is just that, about the magnitudes of problems is focused more on deadweight loss than on wealth transfers, which might ultimately be passed on in discounts (though I have explained in the two blog postings why that is difficult here). My point is only that the more a "cure" pushes people to buy "regular" gifts, like sweaters and fancy foods and alcohol products, the more recipients might actually be worse off to the extent that they do not value these gifts highly. Say my family receives $300 in gift cards, and spends $200 after a few months, when we found ourselves heading anyway to Best Buy. And imagine that $100 is never spent, and we misplace the card. We might get $170 or even $200 of value when we use that $200, in part because we had before us all the choices in the store or catalogue. But when we receive $300 of sweaters or fancy olive oils, we might well value these (nonreturnable) gifts at $150 or less. Even if returnable, we may confront a store we regard as overpriced.

adam

Dean Levmore--a couple reasons why we might not expect gift cards to appreciably decline following a must-read regulation:
1) Non-use profits are only one way vendors make money--what about the free loans and marginal purchases that gift cards cause? Aren't these enough to justify the cost of marketing gift cards? My intuition screams yes--how much can these things possibly cost?
2) On the buy side, isn't it the thought that counts? I don't think the nontransferability of Sharper Image gift cards, as opposed to the transferability of euros, is what makes the card "thoughtful" or otherwise socially acceptable as a gift. I'm no expert on what passes as "thought" but I suspect that it involves the suggestion of a future purchase--distinguishing gift cards from currency.

Dan Johnson-Weinberger

I appreciate the distinction and agree that regulatory regimes ought not try to shift the medium of exchange from gift cards (essentially an exclusive currency to one retailer) to products.

One additional problem with gift cards that overlaps the deadweight loss problem you've discussed is the 'spare change' issue -- that is, when a recipient received a $100 gift card and purchases a $90 product and is left with a choice of either foregoing the $10 of value on the card or purchasing something else in order to spend the $10 of gift card value and thus 'going over' the value of the card. Perhaps that's another reason why retailers like gift cards so much as the ultimate purchase is larger than the value of the gift card (assuming the recipient uses the card). I recall some discussion during one of the iterations of Representative Franks' bill on whether the State should solve the 'spare change' problem of giftcards (which can be thought of as a deadweight loss issue or an induced purchase problem) by requiring retailers who issue gift cards to give cash back upon request at some percentage value of the card (say 10%). That strikes me as another reasonable regulatory solution to a market problem in the interesting gift card market. Perhaps that's both a flawed market and a deadweight loss way of looking at the problem.

I'm not aware of any state requiring such a policy. I also wonder whether retailers who have implemented such a recipient-friendly policy end up with more donors buying their cards there.

(Certainly I suspect retailers with recipient-friendly return policies are more popular with wedding and other gift registries than retailers with strict return policies, as the recipient chooses the retailer).

I'm curious whether the 'expiration of assets' problem in the gift context has a default rule of disclosure as you suggest. Aside from gifts with a biological tendency to expire (perfume if unused, fresh fruit), I'm having trouble thinking of many examples where assets expire and the regulatory regime (or default market rule) is disclosure rather than asset protection.

Anthony Chambers

The problem there, as it seems to be in almost every case where legislation is required to "Fix" problems, is the matter of self governance. Most will do the right things voluntarily, some will not. When laws are contemplated and passed, their first objective should be sufficient punitive weight to ensure compliance.

Anthony

BAC

Bah humbug!

We tolerate all kinds of restrictions that add to the deadweight loss of gifts generally. For example, if Grandma buys you a bad sweater, you can maybe return it to Macy's, with a receipt, for store credit, and the credit will be 50% of the purchase price because you're bad sweater went on sale the day after Christmas. Yet we still tolerate sweaters from Grandma and restrictions on returns.

So in terms of deadweight loss, gift cards are a marginal improvement. And we're likely to happily tolerate the gift card because we know the alternative is an unreturnable sweater (because for some reason Grandma won't give cash).

Unless we move to an all cash Christmas I expect gift cards to have a long and happy life (and thanks for the card rather than the sweater Grandma).

(By the way, you can find a number of gift cards for sale right now on ebay. Strangely, they don't seem to sell at much of a discount, indicating a lack of concern about fraud on ebay gift card purchasers.)

Jupiter

Many newly enacted state laws, most of which are broadly drafted but little enforced, strictly regulate gift certificates and cards (broadly defined). See, for example, Cal. Civ. Code 1749.45 et seq. (prohibiting, among other things, any expiration date for gift cards and certificates). I think this area is growing as a potential source of litigation as the total dollars that are involved increase. How this growing body of law ties into state escheat requirements, money transmission and payment instrument laws, "alternative money" issues, and other federal and state laws remains in large part to be hashed out by the courts and administrative agencies. Congress may need to step in at some point, especially in light of the likely importance of "gift cards" to online commerce and the current breadth of many state statutes.

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