Gift Cards: Tips and Traps from a Small Business Perspective

The holidays are over, the gray days of January are upon us, and for many of us, that means it’s gift card season.

For consumers, this can be fun, going out to spend all that plastic accumulated in December.  But for retailers, it means something entirely different, and though it’s always worth it in the end, gift cards certainly come with their own bag of hidden challenges.

I spoke with my managers and staff this week, and we came up with our own list of “pros and cons” to keep in mind when dealing with gift cards.

Pros:

• Every time you sell a gift card, you potentially get two customers in the door: the one buying the gift card, and the one using it.  Sometimes it even brings into the store a new customer who can blossom into a big spender!
• A certain percentage of gift cards go unused each year, which translates into free money for the retailer.  Barron’s reports that almost $1 billion of cards went unused in the U.S. in 2015 alone. 
•  Gift cards are a great cash flow generator, particularly during the holiday season when so many invoices come due.
• Gift cards bring in shoppers and dollars that you may not otherwise see.  For example, in our equestrian-themed shop, we see more men during Christmas week than almost the entire rest of the year combined, simply because they are buying gift cards for their girlfriends/wives/sisters, and otherwise have no idea what to buy for them.
• Gift card users rarely limit their shopping to the value of the gift card.  Gift Card Granny reports that in 2016, 65% of gift card holders spent an extra 38% beyond the value of the card. 

Cons:

• Those little plastic cards are not free!  Minimum size bundles of fresh gift cards and envelopes can cost hundreds of dollars. 
• Your gift card processor will likely collect a fee each time you run a card through the machine, whether you are activating, loading funds, using funds, or even just checking a balance.  Those $.25 fees can add up quickly.
• State sales tax only comes due when the user actually redeems the gift card, which might be in a slow month like January, so despite the fact that you received no actual money at the time of transaction, you will still need to come up with the state’s cut at the end of the month.
• With the advent of the Credit Card Accountability Responsibility and Disclosure Act of 2009 (the CARD Act) came many new consumer protections around gift cards, and some states impose even stricter rules than the CARD Act.  For example, in Minnesota, gift card issuers are not allowed to impose any expiration date or non-use fee on standard gift cards.  They can never, ever expire.  Never. 
• Gift cards pose issues in the sale of a business any time there are outstanding gift card balances.  The buyer doesn’t want to assume those liabilities but the seller doesn’t want to pay out if there’s a chance the cards are never going to be redeemed.  Lawyers have gotten creative in dealing with this conundrum, but it requires extra paperwork and often an escrow.
• Switching gift card companies is a challenge, particularly when gift cards are not allowed to expire.  You might be stuck hanging on to an old machine and continuing to pay fees with your old processor or else risk redeeming cards with unknown value as they roll in.

This year at our store we hopped on the bandwagon and also offered “bonus bucks” with each gift card purchase of a minimum amount, which turned out to be both a good idea and a headache.  They are a great incentive to get people to buy gift cards and to put more money on a gift card in order to get the bonus.  Since promotional cards like these are one of the few exceptions to the “no expiration” rule in Minnesota, they also allow you to steer return traffic to a particular timeframe, which in our case meant driving early January sales.  Knowing we would be busy, I was able to schedule staff accordingly and merchandise strategically to move tough items.  Bonus bucks can also be structured to disallow coupons and discounts, allowing you to make more sales at full margin.  But we had a few schemers who bought gift cards for themselves just to get bonus bucks, and we’ve had our share of complaints from customers who forgot to use their bonus bucks before they expired.

Gift cards can be a great boost to business, and a big incentive to customers.  At our store (and clearly at most others across the nation), we all agree they are here to stay, despite the handful of challenges they may pose from time to time.