October 16, 2007

Closer Look at California’s Gift Card Cash Redemption

Yesterday, we first reported that California Civil Code Section 1749.5 was amended on October 13, 2007 to allow gift cards with less than $10 in face value to be redeemed for cash. On the surface this sounds great for the consumer and potentially bad for merchants. However, are there deeper ramifications for both the consumers and merchants that we are currently unaware of? How will merchants adapt to this new law?

Merchants are definitely apprehensive about this new gift card cash redemption law because it discourages consumers from spending more than the gift card’s face value and it potentially can siphon off the free cash flow, revenue, and interests that unredeemed gift cards provide. The California Senate conducted a study that found $8.2 billion (yes, that is a B) in unredeemed gift card are accumulated each year. Think of that $8.2 billion as interest free loans provided by consumers to retailers. In some cases its free money for merchants. For example, Home Depot has recognized $43 million in revenue from gift card “breakage”. No wonder merchants are against a cash redemption law for gift cards.

To counter the cash redemption law, merchants will probably start offering incentives so consumers will continue to spend more than the face value of the gift card. Another strategy is to convert gift cards into store credit as quickly as possible. For example, if you purchased something with a gift card and later return it for a refund. The store could offer the refund in the form of a merchandise/store credit card that looks similar to a gift card, but is not. By converting the refund into store credit, the merchants is transferring the value from a gift card to store credit where the gift card cash redemption law does not apply.

One of the potential downsides offered by business associations against gift card redemption law is the potential abuse from criminals in using gift cards to laundered money. Would organize crime or petty criminals go through hundreds or thousands of labor intensive transactions just to score $9.99 or less per transactions? We believe that the smart criminals are more inclined to deploy scams that net larger sums on money as quickly as possible, such as identity theft.

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