The Trouble With Gift Cards

The trouble with those gift cards you can purchase at most large retail chains these days is not that they're impersonal; it's not that they might be redeemable only for merchandise that the recipient wouldn't actually want; it's not that they encourage people to spend more money out of their own funds to purchase larger and more extravagant items for themselves; it's not even that if you feed them too much they will start multiplying out of control and completely take over their environment. No, the trouble with gift cards is that if the company that sold them to you goes out of business before you can cash in the card, you're probably not getting your money back...

Let's leave the accounting rules out of it for a moment; from consumer's standpoint it doesn't really matter if the issuing company treats the money from the card purchases as unexpended inventory or interest-free capital or simply as somebody else's money. All that matters is that to the bankruptcy court, unredeemed gift cards are considered to be unsecured loans made to the company, and thus receive a much lower priority than other creditors, such as payroll, taxes, and secured loans. If the company has a lot of cash or liquid assets on the books when it goes under, then there might be enough left to honor your gift card after the other creditors are paid off. But this isn't likely to happen, unless the company made a lot of money on its "Final Sale and Clearance" and wasn't then able to restart operations.

Back in the days before electronic "smart cards" this wasn't as much of a problem; paper gift certificates were never as popular as the gift cards, and thus there were never as many of them in circulation at any given time. With the rise of these electronic gift cards, however, many retailers will now have enough unexpended gift cards on the books to represent a significant amount of money, which in turn has an impact on the company's cash position and liquidity. Good for them, but not really good for the consumer...

So what can we do about it, down here on the front lines of consumer spending? Well, first of all, don't just plunk down large sums of money on gift cards for companies about which you know nothing. You're effectively loaning money to these people, just on their word that they're not going to declare bankruptcy; shouldn't you at least check on them before you do it? Second, don't be sure that just because a company looks like it is doing well it really is; the Sharper Image just filed for Chapter 11 protections. Third, don't purchase cards long in advance of their use; the sooner you use them, the likelier you are to get your money back. This is particularly true around the Holidays, when every retailer looks prosperous, but not all of them will survive until spring...

An interesting alternative to a company's in-house gift cards are the American Express and Visa Gift Cards. From the end user's point of view, these function like electronic gift cards that are good anywhere (anywhere that takes credit cards, at least), so you aren't limited to spending it at the same place they got it. Instead of $100 at Golf World or Some Department Store You Never Shop At, you can take your Amex or Visa gift card to wherever you're shopping today and get $100 worth of something you really want. This is especially useful if the thing you need the most this week happens to be food, since most department stores do not sell groceries...

Even better, though, many of the credit card style gift cards are considered to be bank accounts -- the card is similar to a "check card" in that it just subtracts money from your "account" to pay for your purchases. This means that even if the bank goes under (or American Express does -- which is even more unlikely) there is no issue with getting your money back; it was never considered part of the issuing company's money, simply being "on account" for you in the bank's vault. In some cases these funds may even be protected by FDIC or subject to being redeemed by a "bailout" of the bank by Federal authorities -- ask the issuing institution how they've got things set up.

Or, alternately, I suppose you could always just send fruitcake…