The End of Gift Cards
So gift cards are even more interesting than I first thought. Theft is one problem (more in a minute) and transferablity is another. As readers of newspapers or this blog know, millions of dollars of gift cards go unused. Perhaps $2 million a year for Best Buy alone, and once a card is unused for two years it is, apparently, quite unlikely ever to be used. I had argued that even if we thought of gift cards as generating some deadweight loss (as people bought things they did not much want), and even if we were offended by the wealth transfer to sellers (with discounting through competition unlikely because those who knew they would buy an item would simply buy a discounted gift card just before the intended purchase), we must compare these losses to those infamously created by "regular" gift-giving, where there are all too many unwanted sweaters and chocolates. But when I mentioned this at home, the kids at the table immediately made plans to serve as arbitrageurs, buying up gift cards at a discount and then selling them to people on the verge of making purchases where the gift cards could be used. Simple arbitrage is prevented by the fact that an item bought with a gift card and then returned, generates a gift card credit. Nor can gift cards be used to pay store or credit card bills.
My local middlemen soon realized that the cards may as well be fingerprinted and marked as non-transferable. If one offers a gift card for sale, the buyer is anxious as to the real balance on the card. Even if I meet you outside a Best Buy store and offer you my $100 card for $80, you will be concerned that my card does not really have $100 (or even $80) "on it." The problem doubles with intermediation. I could accompany you to the register, or try to use store insiders as confederates, but these are clumsy solutions. It is as if you return from Kenya with currency that sits in your drawer until I offer to buy it from you on the eve of my trip to that place - except that we also discover that you believe it to be a 100 shilling note, but somehow the number is invisible to the naked eye. I will not know its value until I try to spend it in Nairobi. This makes currency exchanges very difficult, and it is no wonder that there are so many unredeemed gift cards.
One solution to this problem comes from the fact that cards can be redeemed online. I can buy your gift card if we find a way for you to sit with me at a computer while we try to use it online and check its real value. Again, this is difficult to do on large scale, though an intermediary with a reputation at stake might establish itself in this field. We could all take our unused cards to the local Currency shop, where their values could be ascertained online; buyers would come to trust the shop's certification. Still, there are difficulties. A fraudulent shop or buyer of the card (who claimed to have been shortchanged) would be difficult to unmask without significant cooperatiuon from the issuer/redeemer of the card.
Online usage requires, thus far at least, that the card have a code or serial-number like feature on it. In turn, this has brought on ingenious petty theft. The thief goes to the rack on which gift cards are displayed (and the display increases sales), copies down the codes of several cards, waits several days - or perhaps until Christmas - and then uses the number online, figuring that it has been activated by a real buyer, but not yet spent by the intended recipient. Presumably, issuers will soon go to the added expense of hiding the numbers; note meanwhile that these cards are usually displayed near the checkout counter not only because they are good impulse purchases but also to discourage thieves from copying down the long numbers.
My modest suggestion here is that competition or regulation will force issuers to "read" or even redeem cards, perhaps for a fee. If I could go into a Best Buy and show you that my thirteen cards add up to $700 of unused credit, then you will buy them for close to that amount just before buying your new flat-screen television. But once the cards are that easy to transfer inside the store, Best Buy will try to limit transferability in some other way (not easy) or charge for the reading. In the end, I think gift cards will decline in popularity. There will be less in them for the vendors, and/or receiving a gift card (easily redeemed or traded) will be like receiving a gift of Shillings in the U.S. We do not see much of that.
Finally, the decline of gift cards may be accelerated by regulation. There are already state laws limiting fees on cards that sit idle (who should be paying whom in a well-informed market!). I can barely imagine legislation forcing cards to be readable. There is, in the end, something funny about this market. Recipients of gifts care about the rules of return and redemption. But most gift givers do not care as much. As givers we hope to satisfy obligations (homemade baked goods are said to reflect much thought and effort, and yet many are unwanted) and perhaps hit the social jackpot with a really good and much appreciated gift that taps into the recipient's hidden preferences. But we give so many gifts that cannot readily be exchanged or returned, whether from abroad, from our kitchens, or our own gift bags. It is the recipients who wish otherwise, and it is "they" who might influence legislation, I suppose. I suspect that any such cure will be worse than the problem and, in any event, gift cards, at least, are likely to decline.