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Learn about gift card breakage, its financial impact on retailers and consumers, and strategies to minimize unused gift card balances.
Gift cards are a popular present, but what happens when they go unused? This unredeemed value is known as gift card breakage, and it's a significant factor in the retail world. For businesses, it can be a source of unexpected revenue, while for consumers, it represents lost purchasing power. This article explores the multifaceted world of gift card breakage, examining its impact on both retailers and consumers. We'll uncover the reasons why gift cards often go unredeemed, from simple forgetfulness to more complex issues like retailer bankruptcies and the intricacies of escheatment laws. We'll also discuss how businesses calculate and account for gift card breakage, the legal and regulatory considerations, and the challenges involved in managing this unique financial element. Finally, we'll offer practical strategies for both businesses and consumers to minimize gift card breakage, ensuring that those plastic presents translate into actual purchases.
Gift card breakage is the unredeemed value left on gift cards. Think of it as the money retailers earn when a
There are several misunderstandings surrounding gift cards, particularly when a retailer faces financial difficulties. Some consumers worry their gift card becomes worthless if a store goes bankrupt, but that's not always true. The Federal Trade Commission offers guidance on consumer rights related to gift cards, especially in situations like bankruptcy. Another common issue involves activation problems. A card might appear active at checkout but isn't, leading to lost value for the consumer. Resources like Legal Clarity offer advice on resolving such gift card problems and protecting consumer rights. Finally, the sheer scale of gift card breakage is often underestimated. Billions of dollars in gift card value goes unredeemed annually, a significant loss for consumers and a windfall for retailers, according to reporting from Fox Business. Understanding these misconceptions helps consumers protect their money and make informed decisions about purchasing and using gift cards.
Let's explore why those well-intentioned plastic presents sometimes gather dust. It's a mix of our own habits and factors beyond our control.
It's easy to forget about a gift card tucked away in a wallet or drawer. Life gets busy, and sometimes those gift cards slip our minds. A surprising 37% of consumers admit to letting a gift card expire before they can use it. With an estimated $21 billion in unused gift cards, averaging $175 per person, according to Hubifi data, it's clear this is a widespread issue. Sometimes, the card is for a store we don't frequent, or maybe we're saving it for a "someday" purchase that never happens. This "breakage," as the industry calls it, results in about $5 billion in unused value annually.
External factors also contribute to gift card breakage. A retailer might go out of business, rendering the gift card worthless. State escheatment laws could require companies to turn over unredeemed funds to the state after a certain period. Technical glitches, like a malfunctioning magnetic strip or problems with the card's activation, can also create roadblocks for consumers. These external issues add another layer of complexity to gift card redemption.
Gift card breakage can significantly impact a retailer's financial performance. Understanding how to calculate and account for it is crucial for accurate reporting and smart decisions. This involves estimating unredeemed gift cards, understanding how this affects your financial statements, and following the relevant revenue recognition standards.
Calculating breakage means estimating the percentage of gift cards that will likely go unused. There’s no perfect formula, but a reasonable estimate is essential. Analyzing your historical sales data is a good starting point. Look at past gift card redemption rates to project future breakage. For example, if your data consistently shows a 10% non-redemption rate, you might use that percentage for your current estimations. Remember that things like economic shifts or changes in consumer behavior can influence these rates, so regular review and adjustments are important. For more on these practices, check out these gift card accounting tips.
Gift card transactions have a particular flow on your financial statements. When a customer buys a gift card, you don't immediately record it as revenue. Instead, it's deferred revenue, a liability on your balance sheet. It's essentially an IOU to the customer. When they redeem the gift card, the deferred revenue becomes sales revenue. But what about unredeemed gift cards? This is where breakage comes in. The portion of deferred revenue attributed to estimated breakage can eventually become income, affecting your profitability. Learn more about accounting for gift cards to get a clearer picture.
Understanding revenue recognition standards is key for correctly accounting for gift card breakage. The rules around recognizing breakage revenue have changed over time. It used to be tied to when redemption was considered "remote." However, newer accounting standards offer more specific guidance. For example, the Accounting Standards Update (ASU) No. 2014-09 provides a framework for this. Staying on top of these standards and making sure your accounting practices are aligned is crucial for compliance and accurate financial reporting.
This section explores the two sides of gift card breakage: how it benefits retailers and how it impacts consumers.
For retailers, gift card breakage is a significant revenue stream. Investopedia defines "breakage" as the revenue gained from unused gift cards or prepaid services. For example, if a customer buys a $50 gift card and only spends $40, the remaining $10 becomes breakage revenue for the retailer. Retailers typically estimate breakage by analyzing past sales data to project the percentage of gift cards that will go unused, a practice discussed in this article. Furthermore, accounting rules now provide more specific guidance on when this revenue can be recognized, moving beyond simply recording it when redemption is unlikely, as explained by the Journal of Accountancy.
While breakage adds to retailer profits, it represents a loss for consumers. Investopedia reported substantial consumer losses from unredeemed gift cards, reaching billions of dollars. More recent statistics from Marketing Scoop show that a sizable percentage of consumers—37%—admit to letting gift cards expire before using all the funds. Fox Business highlights that this lost value adds up to billions of dollars annually across the industry, impacting individual wallets while padding retailer bottom lines. This underscores the importance of understanding gift card terms and conditions and making an effort to use gift cards before they lose their value.
This section covers the legal and regulatory landscape surrounding gift card breakage, focusing on escheatment laws and consumer protection.
Gift card breakage is significantly affected by escheatment laws, which vary by state. These laws govern how unclaimed property, including unredeemed gift card balances, is handled. Often, businesses are required to remit a portion of these balances to the state after a specified period of inactivity. This can create a complex situation for companies operating across multiple jurisdictions, as they must comply with potentially differing regulations. Understanding these nuances is crucial for accurate financial reporting and avoiding penalties. For more information on how escheatment affects breakage income, you can explore resources from the Journal of Accountancy, which explains how state laws can dictate how much of this revenue a company can retain (Escheatment and Breakage Income). For practical guidance on navigating these complexities, Baker Tilly offers a helpful analysis of gift card accounting (Gift Card Accounting).
Consumer protection is another key consideration related to gift card breakage. Regulations aim to safeguard consumer interests, especially given the prevalence of gift cards and the potential for financial loss if a retailer goes out of business or experiences disruptions. The Federal Trade Commission provides resources outlining consumer rights and protections related to gift cards, addressing concerns about retailer bankruptcies and closures (Consumer Rights and Gift Cards). Beyond these broader protections, regulations also address specific issues like card malfunctions and disputes. For more details on resolving such issues, resources like Legal Clarity offer helpful information on protecting consumer rights (Resolving Gift Card Issues). Given the significant value of unused gift cards each year, as reported by Fox Business (Unused Gift Card Value), ensuring robust consumer protection measures is essential for maintaining consumer trust and a healthy marketplace.
Gift card breakage might seem straightforward, but accurately estimating and accounting for it presents key challenges.
One of the biggest hurdles is accurately estimating breakage rates. While it’s tempting to view unused gift card balances as pure profit, it's more complex. Breakage is calculated based on the expected percentage of gift cards that won’t be fully redeemed. This often involves analyzing past sales data to identify trends and predict future unredeemed amounts. However, consumer behavior is unpredictable, making it difficult to pinpoint a precise breakage percentage. The longer a gift card sits unused, the less likely it is to be redeemed, further complicating the estimation process. Finding the right balance between optimistic and conservative estimates is crucial for accurate financial reporting.
Another challenge lies in balancing profit recognition with customer satisfaction. While breakage can represent a significant revenue stream, it’s essential to remember that gift cards represent a liability until redeemed. When a customer purchases a gift card, the business receives cash but doesn't immediately record it as revenue. Instead, the business carries a liability until the gift card is used or expires. Accurately accounting for gift cards isn’t just about maximizing profit; it’s about presenting a clear and accurate picture of your company’s financial health. Overestimating breakage can lead to inflated revenue figures, while underestimating it can create an inaccurate picture of liabilities. Finding the sweet spot is essential for both compliance and sound financial management. A satisfied customer is more likely to return and recommend your business, even if a small portion of gift card balances goes unused.
Gift card breakage can be a tricky issue, but several strategies can help you minimize it and keep your customers happy. Let's explore some practical steps:
One effective way to encourage gift card use is to offer incentives for early redemption. Think about a small discount or bonus for using a gift card within a specific timeframe, say, the first three months. This encourages timely redemption and creates a sense of urgency, driving customers to your store. It's a win-win: you reduce breakage and potentially see increased sales with those early redemptions.
Sometimes, gift cards go unused simply because people forget about them. Regular communication with customers about their gift card balances can make a big difference. Sending friendly email or SMS reminders can nudge customers to use their gift cards. Include any promotions or incentives you're offering for early redemption in these reminders to further encourage timely use.
The increasing popularity of digital gift cards offers a significant advantage. Because digital gift cards are often stored in mobile wallets or email inboxes, they're readily accessible and less likely to be forgotten. Many digital gift card platforms also include built-in notifications and balance reminders, further minimizing the chance of breakage. Consider incorporating digital gift card options into your program.
Smart gift card programs require a proactive approach. By implementing these best practices, you can effectively manage breakage, maintain compliance, and foster positive customer relationships.
Accurately tracking and analyzing your gift card breakage rate is crucial for financial planning and reporting. Use historical data to estimate the percentage of unredeemed gift cards. This involves analyzing past sales data and identifying trends related to gift card redemption patterns. As you gather more data, refine your estimation methods for greater accuracy. Regularly reviewing your breakage rates helps you understand how much revenue you can recognize and make informed business decisions.
While gift cards generally can't expire for five years (or five years from the last reload for reloadable cards), it's essential to establish clear and compliant expiration policies. Clearly disclose any fees associated with your gift cards to your customers. Remember, these fees typically can't be imposed until after a year of inactivity. Staying informed about current regulations surrounding gift card expiration and fees is vital for maintaining compliance. Additionally, be aware of your state's escheatment laws, which might require you to turn over the value of unredeemed gift cards to the state after a certain period. For more information on gift card accounting, review these accounting practices.
Educating your customers about gift card policies and best practices is key to minimizing breakage and building trust. Many consumers are unaware of the potential for gift card funds to go unused. Openly communicate your gift card terms and conditions, including expiration dates and any applicable fees. Encourage early redemption through gentle reminders and promotions. By addressing common misconceptions about gift card safety and usage, you can empower your customers to make the most of their gift cards. Learn more about how breakage impacts both businesses and consumers. You can also find practical tips on avoiding gift card value loss from this Fox Business article.
The future of gift cards is bright, driven by exciting technological advancements and shifting consumer expectations. Let's explore what lies ahead.
The digital gift card market is booming, projected to reach $932.11 billion by 2028, with a 17.1% growth rate (Meetanshi). This growth fuels innovation, leading to more secure, flexible, and personalized gift card experiences. We're seeing a rise in mobile wallets, integrated purchasing platforms, and personalized gift card designs. However, this digital expansion also presents challenges. Retailers and consumers need to prioritize security to combat gift card fraud. Businesses must also address issues like breakage and spillage, where gift card balances remain unredeemed (Marketing Scoop).
Consumer behavior around gift cards is also evolving. A significant 43% of American adults hold unused gift cards, totaling approximately $23 billion (Capital One Shopping). This underscores the need for user-friendly redemption processes and transparent communication about gift card terms. Understanding gift card redemption rates is crucial for both businesses and consumers. For businesses, this data informs strategic decisions about their gift card programs. For consumers, awareness empowers them to use their gift cards promptly and maximize their value.
What exactly is gift card breakage?
Gift card breakage refers to the value remaining on gift cards that ultimately goes unredeemed. It's essentially the difference between the total value of gift cards sold and the amount actually spent by consumers. This "leftover" money becomes profit for the retailer.
Why should I care about gift card breakage?
Whether you're a business owner or a consumer, understanding gift card breakage is important. For businesses, it represents a potential revenue stream. For consumers, it's about making sure you're getting the full value of your gift cards and not losing money to forgotten plastic.
How can businesses accurately estimate gift card breakage?
Estimating gift card breakage involves analyzing historical data to project future trends. Look at past redemption rates to get a sense of how much value typically goes unused. Keep in mind that consumer behavior can change, so regularly review and adjust your estimations.
What are the legal implications of gift card breakage for businesses?
Escheatment laws, which vary by state, are a key legal consideration. These laws dictate how and when businesses must turn over unclaimed property, including unredeemed gift card balances, to the state. Staying informed about these laws is crucial for compliance.
How can I avoid contributing to gift card breakage as a consumer?
Treat gift cards like cash. Store them securely, but make a plan to use them promptly. Set reminders on your phone or add the gift card information to your digital wallet. The sooner you use them, the less likely they are to be forgotten.
Former Root, EVP of Finance/Data at multiple FinTech startups
Jason Kyle Berwanger: An accomplished two-time entrepreneur, polyglot in finance, data & tech with 15 years of expertise. Builder, practitioner, leader—pioneering multiple ERP implementations and data solutions. Catalyst behind a 6% gross margin improvement with a sub-90-day IPO at Root insurance, powered by his vision & platform. Having held virtually every role from accountant to finance systems to finance exec, he brings a rare and noteworthy perspective in rethinking the finance tooling landscape.
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