Gift Certificate

What It Means

A gift certificate is a paper voucher worth a certain amount of money that can be redeemed by the recipient for an equal value of merchandise at the commercial establishment that issued the certificate. Gift certificates are sold by an endless variety of businesses, including bookstores, music stores, toy stores, clothing stores, and restaurants. A person typically purchases a gift certificate when he or she wishes to give someone a gift but is unsure what specifically that person would like. Gift certificates have the dual benefit of seeming like a more personal and more tasteful gesture than a gift of cash or a check, while averting the awkwardness of purchasing a gift that the recipient does not like, which will either go unused or need to be exchanged.

In financial terms, a gift certificate is a form of scrip. Scrip is any substitute for money or currency; it carries a monetary value without being legal tender. Other forms of scrip include subway tokens and carnival or arcade tickets. One significant restriction associated with scrip (and this applies to gift certificates) is that, while scrip is purchased with currency and carries the value of that currency, it can almost never be converted back into real money; for example, the recipient of a gift certificate cannot take it to the store where the certificate was purchased and redeem it for cash.

When Did It Begin

The use of scrip in the United States may be traced to the mining and logging camps of the early 1800s. Stationed in remote places far from regular towns, the camps functioned in many ways as self-contained economies. The mining and logging companies that ran the camps often paid their workers wholly or partially in “company scrip,” which could be spent on food, supplies, and miscellaneous items at the company store.

The use of paper gift certificates in the United States dates back at least to the 1930s, as evidenced by references to them in various magazine advertisements.

More Detailed Information

Both the giver and the receiver of a gift certificate benefit from this choice of gift in a number of ways. For the giver, purchasing a gift certificate takes much of the guesswork out of giving a present. It is convenient to purchase, easy to mail (if necessary), and carries a high probability that the recipient will be able to use it to buy something he or she really wants or needs. Also, a gift certificate conveys some sense that the giver has put thought into the gift. Say, for example, that Uncle George wants to buy gifts for his niece Penny and his nephew Bernard, whom he sees only once a year. He knows that Penny loves to paint and Bernard loves geology, so he buys Penny a gift certificate for O’Shea’s Fine Art Supplies and Bernard a gift certificate for Lou’s Rock Shop. The gift certificates show that Uncle George remembers something about the kids. Meanwhile Penny and Bernard can use their certificates to buy something they have been wanting.

In economic terms, a gift certificate might be described as a highly efficient gift, because little or no value is lost in the transaction (whereas the gift of a tie that is never worn, or a birdfeeder that is never used, is highly inefficient because the value of the gift to the recipient is much lower than its cost for the giver). By this measure, the most efficient present a person can give is cash; but under many circumstances, cash gifts are considered crass or socially unacceptable.

For the consumer one of the drawbacks of a gift certificate is that it can be lost, stolen, or destroyed. This is also a potential for lost economic efficiency. Although paper gift certificates usually carry a serial number, which enables the merchant to keep track of gift-certificate sales, often the merchant stipulates that it takes no responsibility for and will not replace lost, stolen, or destroyed gift certificates. Furthermore, some gift certificates carry expiration dates, after which their value is void. A gift certificate that sits in a sock drawer until it expires is an economically inefficient gift.

Gift certificates also carry a number of benefits for the merchants that sell them. When a store sells a gift certificate, it receives money up front for a certain value of merchandise that may or may not be claimed in the future. In 2006 the financial-services research firm TowerGroup estimated that roughly 10 percent of the value of gift certificates is never redeemed. This value amounts to something like free money for the merchant. Gift certificates are also beneficial to the merchant because they bring new customers into the store, and often the recipient of a gift certificate spends more than the value of the certificate during that shopping trip.

Recent Trends

Gift certificates have been around for decades, but they were never a booming industry unto themselves. This changed in the mid-1990s with the introduction of the electronic gift card, a plastic card the size of a credit card. It contains a microchip that records the value ascribed to the card when it is purchased. With their sleek, high- tech design and attractive packaging, gift cards became a runaway hit with the American public, achieving exponential growth over the course of a decade. Gift cards were introduced in 1995, and over the course of that first year they accounted for $1 billion in sales in the United States. In 2006 gift-card sales were $70 billion.