(Illustration by Gracia Lam)
With winter holiday gift giving a distant memory, consider the many people worldwide who received a gift card for their favorite retailer—Amazon, Apple, Best Buy, Home Depot, Starbucks—but failed to redeem it. No doubt there is a gift card from previous years’ holidays, birthdays, or other celebrations quietly languishing in that random change drawer or lost somewhere in your house or backpack. What happens to all those unclaimed gift cards? The short answer is: Retailers retain the cash without providing any product or service in exchange.
Urban Logic, the nonprofit I lead and cofounded, researches and deploys financial, technological, and organizational solutions for existing business models to reduce waste and improve community quality of life. Our research into abandoned or dormant gift cards (known as “breakage” or “spillage”) resembles a treasure hunt.
Between 2008 and 2014, approximately $44 billion accrued as unused gift card balances in suspended animation—a legal and accounting somnambulance—awaiting an accountant’s and statistician’s permission to be deemed abandoned, traditionally after just two years of inactivity. While these funds are held in limbo, the company uses them, without paying the gift card holder any interest, for corporate operations.
After the gift card is deemed abandoned, its balance moves from being treated as a contingent revenue item in the liabilities section of the company’s balance sheet to being recognized as a portion of the card issuer’s operating revenues. Legally, the funds might still be redeemable if the cardholder ever finds and uses the gift card. But from a corporate accounting and stock valuation point of view, the gift card’s remaining balance morphs into corporate revenue, as profit (less issuance fee), without being exchanged to buy any product or service. In effect, breakage is free money for the corporation that issued the card.
No one buys a $100 gift card with the intent to donate it all to corporate profits, as if the corporation were a charity. Surely there is a better way for this gift money to be used. Over the past two years, Urban Logic has spoken with some of the largest holders of gift card breakage, with the goal of repurposing breakage through a service called p125. The initiative would address the poverty of those living on less than $1.25 per day, often in regions vulnerable to natural disaster risks and other quality-of-life concerns.
The largest corporations should be publicly challenged before converting another year of breakage from gift-card-holder control to corporate dividend, from funding global or regional poverty or natural disaster response to growing their share price and market cap. With p125, the breakage would be sent to those in need. Hopefully, CEOs of major gift card issuers/breakage escrow agents such as Tim Cook at Apple, Jeff Bezos at Amazon, Stephen Squeri at American Express, Jamie Dimon at Chase, Ajay Banga at Mastercard, Kevin Johnson at Starbucks, and Alfred Kelly at Visa are listening.
The Basics of Gift Card Breakage
Only recently did it even become possible to calculate corporate gift card breakage. In May 2014, the Financial Accounting Standards Board (FASB) issued a new rule that required companies to disclose gift card revenue in the footnotes of their corporate statements. With the phase-in of the new rule, corporations started in 2017 to recognize gift card breakage. They could do so within nine months of the card’s purchase. Yes, under the rules companies could assume that a card unspent in less than a year is lost and will never be found to be spent.
Under the FASB rule, corporations have three paths to disclosing gift card breakage amounts in their financial reporting. The financial footnotes of some corporations—call them “full disclosers”—state clearly the amounts of gift card breakage moved into their revenues. Other corporations—“hybrid disclosers”—include gift card breakage as one of a list of unrecognized or unearned escrow, subscription, or other fund balances held for goods or services to be provided in future calendar years. And then there are the “nondisclosers”—corporations, including many of the world’s largest like Apple and Amazon, who consider gift card breakage relative to their revenues to be a nonmaterial amount and so decline to state the portion of breakage recognized as revenue. The divergent accounting practices permitted under FASB make it difficult to accurately estimate the total amount of gift card breakage available for repurposing. However, the size of the gift card market suggests we are talking very large aggregates annually.
Our research estimated that gift card breakage recognized or likely recognized by selected companies in all groups was $4.22 billion for the 2017 reporting year: $381 million for full disclosers, $755 million for hybrid disclosers, and $3.085 billion for nondisclosers. Numerous major US corporations that issue gift cards and would have recognized breakage revenues were left out of our analysis, such as corporations held by private equity or otherwise privately held—which means their financial statements also remain away from public review. Banks and bank card networks such as American Express, Mastercard, and Visa, and foreign corporations that issue gift cards, were also omitted from this analysis. So the actual total of gift card breakage would add measurably to the $4.22 billion breakage estimated for 2017.
Gift cards are issued by retailers, banks, and other financial institutions and regulated by federal and state law. Through a legal process known as escheat, some states claim gift card breakage as “abandoned property” akin to bank accounts that the depositor forgets exist or checks that the payee never cashes. After a statutory period, the gift card breakage becomes escrowed with the state treasurer, or if it remains unclaimed, is added to the state’s general revenues.
Gift card issuers defend current practices by claiming that they could not afford to issue their cards without retaining breakage. To be sure, marketing and labor are involved in issuing cards and restocking the racks of gift cards near checkout counters at retail outlets. However, the argument that “we couldn’t afford to be in the gift card business unless we keep the breakage” sounds a bit like banks saying that they couldn’t afford to maintain customer accounts without converting depositors’ funds to their own use if the holder of the account does not access it for two years. Bank regulatory and consumer financial protection laws wouldn’t allow banks to do what gift card issuers do.
In our age of digital finance, storing funds in a physical card and sweeping its breakage there are anachronisms that convert individuals’ property to corporate profits, add to corporate market cap valuations, and break the gifting purpose for which the gift card was purchased and given in the first place. For unbanked and under-banked low-income or immigrant individuals and families who use gift cards as a way to save and budget without a bank account, gift card breakage takes hard-earned funds away from buying products and services that they sorely need.
Surely we can create a better, more honorable customer experience to build trust and brand loyalty.
Returning Giving to Gift Cards
Imagine an alternative: When a gift card is purchased, the terms and conditions state that unused balances will be automatically identified to the registered gift card holder, and if unused a month before the two-year date when breakage is typically recognized, will be donated to a good cause chosen by the cardholder at the time of buying the card. Or imagine corporations holding breakage balances decide that, instead of moving what is really their gift cardholders’ funds into general corporate revenues, they will donate such funds via a nonprofit that would let gift card holders and customers registered with the card issuer choose poverty alleviation, disaster response, or other charitable activity to receive the funds. These ideas capture the p125 crowdsourced donation solution that Urban Logic proposes.
With a p125-branded card, the purchaser knows that their funds will go to worthwhile causes if the card is lost or carries an unused balance after a set period of time. The purchaser also knows that the gift card holder, say a young child or needy adult, will be asked to vote on how their funds should be donated to environmental, social, or other causes. In this way, p125 turns such gift card holders into micro-philanthropists, whose power in numbers can move significant corporate funds into donations.
Adding p125 as a new source of donations to charitable giving is especially important today. After the Trump administration’s Tax Cuts and Jobs Act of 2017, more taxpayers filed their federal and state returns using larger federal standard deductions. This meant fewer individuals itemized their deductions and resulted in a 3.4 percent decline (adjusted for inflation) in individual charitable donations for 2018, or roughly $10.3 billion for a single year. Under p125, billions of dollars of gift card breakage would make up a significant portion of the individual donations lost through such tax reform.
On the corporate side, companies would likely receive ample tax deductions by participating in p125. Repurposed gift card breakage amounts would be deductible as marketing and cost-of-goods expenses for operating its gift card program, since p125 is merely a voting system for deploying the portion of corporate revenues derived from gift card breakage—it gives the gift card holder no right to direct such funds to the card holder’s individual use. People tend to spend more than their gift card balances, so retailers need loyalty and new programs like p125 to bring customers into their stores with gift cards in their pockets.
Over the past two years, Urban Logic’s discussions in Silicon Valley with major gift card issuers, corporate and independent, have led to surprisingly creative ways to use traditional physical and emerging digital card mechanisms for social good. The potential of p125 to repurpose gift card breakage represents a powerful funding source to supplement government, corporate, and foundation giving.
Read more stories by Bruce Cahan.