Gift Card

What It Means

A gift card is a plastic, electronic version of the old paper gift certificate (a paper voucher that can be spent at a specific store). The card contains a computer microchip that stores a set value according to how much the giver spends at the time he or she purchases the card. In industry terms, this kind of card is described as a “prepaid” or “stored-value” payment device. A balance of funds is stored on the card until it is spent by the person who received it as a gift.

Some gift cards are sold by specific retailers (such as Gap, Barnes & Noble, and Target) and can only be redeemed at those retail establishments; these are called “closed-system” cards. Others are sold by credit card companies (such as Visa, MasterCard, and American Express) and can be spent anywhere those cards are accepted; these gift cards are called “open-system” cards.

Since their introduction in the mid-1990s, gift cards have been an increasingly popular solution to the age-old dilemma of what to buy for family and friends on birthdays and holidays, when you have no clue what they would like. As an alternative to giving an envelope of cash (which many people find to be crass or impersonal) or taking a gamble on a sweater that will probably be returned or pushed to the back of the closet, a gift card has become a fashionable way to show you care by allowing someone to pick out something that he or she really likes.

When Did It Begin

Gift cards came into use in the American marketplace in the mid-1990s, but the origin of “prepaid” cards can be traced to the early 1970s, when transit cards were first issued as a convenient way to prepay for a block of subway or bus rides. At about the same time, colleges and universities began offering prepaid cards that students could use to make purchases on campus. Closed-system cards found another application in the late 1980s with the advent of prepaid phone cards.

The video-store chain Blockbuster is credited with introducing, in 1995, the first closed-system prepaid gift card. The idea caught on immediately, and 10 years later just about every major retailer in the United States offered a closed-system gift card for purchases at their locations.

The first open-system cards were made available in the early 1990s, when the federal government began replacing paper-based food stamps (vouchers issued as public assistance to low-income families) with Electronic Benefit Transfer (EBT) cards, which could be used to buy food at grocery stores. In the mid-1990s Visa and a London-based company called Mondex International introduced prepaid open-system cards that could be used anywhere as a form of electronic cash. Although these and other open-system cards were slower to catch on, in 2005 industry analysts stated that prepaid or stored-value cards had great potential for other uses.

More Detailed Information

Advantages and Disadvantages of Gift Cards for the Consumer

In the United States gift cards accounted for $19 billion in sales during the 2005 Christmas holiday season and $25 billion during the same season the following year. Analysts agreed that the tremendous popularity of gift cards was attributable to their convenience (in terms of both purchasing and mailing) and apparent respectability. Gift cards somehow managed to convey a certain amount of thoughtfulness on the part of the giver, unlike a check or an envelope of cash.

Still, however, gift cards carried certain drawbacks for the consumer. In 2006 many cards still carried a range of restrictions, including expiration dates, dormancy charges (for instance, the value of a card might diminish by $2 if it was not used for six months), and the inability to combine the balance on the card with another payment form (say, for example, you have a $30 gift card and want to use it as partial payment for a $50 set of towels; in some cases the card is rejected for “insufficient funds,” so you can only use it for a purchase of $30 or under).

Advantages and Disadvantages for the Retailer

However popular gift cards may be with consumers, retailers love the cards even more. Retailers benefit from selling gift cards in several ways. First, they receive money up front for the purchase; if the gift card is lost, destroyed, or for any reason goes unredeemed, the retailer has effectively received “free money” for the original purchase of the card. Second, the gift card draws new customers (the card recipients) into their stores. Third, the person redeeming the gift card often spends more than the amount of the card. Lastly, it often happens that when the gift card is redeemed, a small balance remains unspent on the card. If this balance is not spent at a later date, the retailer makes an extra profit. In 2006 J.C. Williams Group, a global retail-consulting firm, estimated that about 10 percent of the prepaid value of gift cards is never spent.

The main disadvantage for retailers is that gift cards are relatively expensive to manufacture. Depending on the volume of cards a retailer orders, the cards can cost up to $3 each. The retailer also must pay fees to the outside firm that handles the electronic network used to process the cards.

Recent Trends

Nearly a decade after they were introduced, gift cards were still growing in popularity at a remarkable rate of about 20 percent per year. The gift-card trend experienced a major explosion during the 2005 Christmas holiday season, when a new crop of merchants began to offer the cards. Whereas gift cards had previously been offered mainly by department stores, specialty stores, and other mall-type retailers, suddenly supermarkets, drug stores, fast-food restaurants, convenience stores, and even gas stations were jumping on the bandwagon. Part of the tremendous appeal of these practical gift cards was that they could be purchased on the way home from work, while filling up the gas tank or buying a quart of milk at the supermarket; suddenly there was a new way to accomplish that notoriously stressful holiday shopping without breaking the bank or setting foot in a crowded mall. But department-store gift cards were still the most popular kind of gift card during the 2006 holiday season, accounting for 37.9 percent of all gift cards sold to American consumers.