OPERATIONS

CSA Exclusive: Prepaid gift cards provide unique value proposition

BY Dan Berthiaume

Prepaid gift cards have come a long way since the 1990s, and are still evolving in ways that benefit retailers and consumers.

Chain Store Age recently had a conversation with Ron Goade, president of SSI Technologies, a printer and manufacturers of plastic cards, about the origin and development of prepaid gift cards. In the mid-1990s, SSI Technologies initiated a pioneering pilot to shift home video entertainment retailer Blockbuster from paper gift certificates to plastic gift cards with magnetic stripes.

“At the time, retailers had paper gift certificates,” recalled Goade. “So Blockbuster might have a customer in Indiana buy a gift certificate and then send the piece of paper to their relative in Dallas. The customer in Dallas would then rent a video for $2 and get $98 in change. One store would collect $100 and another store would debit it. It was a nightmare for accounting.”

However, a prepaid plastic gift card with a magnetic stripe would track every aspect of its usage, recording its purchase as a cash transaction and then accurately recording breakage. Recording the purchase of prepaid cards as cash transactions and then being able to track their usage at any store offered Blockbuster other advantages, as well.

“The retailer can record the prepaid gift card as cash and then maintain any unused balance for seven years,” said Goade. “Under escheatment laws, after seven years the balance becomes the property of the state or federal government. The retailer pays tax on the breakage; if they can show all the gradual use it offers better tax advantages.”

In addition, the float, or unredeemed stored value of gift cards, essentially acts like a seven-year, interest-free loan for the retailer.

“Float is a tremendous avenue for retailers,” said Goade. “They can use the money for free. Once a customer buys a card, that money belongs to the retailer. If the customer doesn’t spend the money, the retailer can use it free for seven years before eventually settling with the government. It comes out to billions of dollars in all.”

Considering all these benefits, it is not surprising that Blockbuster moved from an initial pilot of prepaid gift cards in the Salt Lake City market in 1995 to ordering 1 million cards each for its national chain as well as for its Discovery Zone banner. Once Walmart began issuing prepaid gift cards in 1997, they quickly became the industry standard.

In more recent years, online e-cards have emerged as a popular alternative to physical plastic cards. However, e-cards have not emerged as the dominant gift card format.

“E-cards are much easier to purchase,” commented Goade. “However, usage rates seemed to have settled in at about 60% physical to 40% online cards.”

Fraud is a constant problem for retailers across all forms of payment, and gift cards are no exception. According to Goade, criminals can steal a magnetic stripe-enabled gift card and then fraudulently activate it with easily obtained scanning equipment. However, he advises there is an effective means of preventing this type of gift card fraud.

“You can use a PIN number that the retailer has enter into the computer to identify the card and make it live,” said Goade. “You can’t fraudulently scan a card with a PIN number the retailer has to recognize. It’s pretty well impossible.”

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B.Gilpatrick says:
Apr-17-2019 05:15 pm

The escheat requirement in most states currently is in the 3 - 5 year range. Where escheat doesn't apply and retailers can claim breakage as revenue, the new FASB standards require that it be recognized in proportion to the redemption pattern so that changes the picture. While there is some float benefit, it's not like when gift cards first emerged. Furthermore, some legislators are looking at making retailers escrow that money to protect cardholders in the event of bankruptcy.

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