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The evolution of gift cards in secondary markets and money The evolution of gift cards in secondary markets and money
services services
Scott Denning
Ralph E. McKinney Jr.
Follow this and additional works at: https://mds.marshall.edu/mis_faculty
Part of the Business Administration, Management, and Operations Commons, and the Marketing
Commons
JIFS,
Volume
16,
Number
2,
2016
ISSN:
1945-2950
THE EVOLUTION
OF
GIFT CARDS
IN
SECONDARY MARKETS AND MONEY SERVICES
ABSTRACT
Scott Denning, Marshall University, Huntington, WV, U.S.A.
Ralph
E.
McKinney, Jr., Marshall University, Huntington, WV, U.S.A.
Lawrence
P.
Shao, Slippery Rock University, Slippery Rock,
PA,
U.S.A.
dx.doi.org/10.18374/JIFS-16-2.4
This paper reviews gift cards and
the
regulations associated with these instruments
in
financial
transactions.
One
important consideration
of
gift cards involves secondary markets and money services
business. While
the
accounting
of
gift cards
by
retailers
is
easy when they are redeemed, gift cards
become problematic
when
breakage (non-redemption) occurs.
In
addition
to
large organized exchanges
for gift cards, many prospective sellers and buyers have turned
to
non-mainstream dealers
to
handle
situations relating
to
the
non-redemption
of
the
gift card. This has caused gift cards
to
become
an
increasingly important player
in
the
secondary market. Another important observation with these
instruments involves
the
true cost
to
buyers. Most consumers fail
to
consider opportunity costs and
alternatives. Since gift cards are perceived differently
than
cash, opportunity cost consideration should
be
viewed differently
to
determine
the
effective price value.
Keywords: Gift Card, Store Value Instrument, Secondary Markets, Money Services, Money Transmitters
1. INTRODUCTION
•
~
Materia I Gift /
Figure 1 - Traditional Gift Pool
On
special occasions, such
as
birthdays, weddings, and baby showers, it
is
customary to present a gift
to
the celebrator(s).
In
some cases, a financial (i.e. money or store-value card) gift
is
substituted for a
material gift. A store-value card, commonly called a gift card,
is
more socially acceptable than a cash gift
as
cash may
be
viewed as cold or thoughtless. Gift cards may also
be
preferred when compared to the
extensive investment
in
time to find
an
appropriate gift or
in
situations where the person receiving
the
gift
is
"hard to shop for." Researchers have found that general differences
in
cognitive valuations
of
gift cards
and cash exist (Tuten
& Kiecker, 2009; White, 2008). Differences
in
these instrument valuations trigger
various consumer behaviors and are subject to financial regulations.
This paper presents
an
overview of the U.S. financial regulations associated with gift cards. Gift cards are
subject to regulation
as
instruments of stored valued
as
the issuer and merchant for products and
services may redeem cards. According to Eveleth (2013), gift cards were first issued by Blockbuster
Video
in
1994
as
a countermeasure
to
increased counterfeiting of gift certificates. As counterfeiting
can
significantly erode profits and consumer confidence, merchants must protect their assets including
company issued scrip (i.e. gift card) from fraudsters (McKinney et al., 2015). Blockbuster, like many other
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JIFS,
Volume
16,
Number
2,
2016
ISSN:
1945-2950
retailers, used printed gift certificates without security features and legal protections of legal tender
making counterfeiting certificates easy and enticing (Eveleth, 2013; McKinney et al., 2015) .
•
Figure 2 - Evolving Gift Pool
Since the initial introduction of the gift card
as
a countermeasure to counterfeiting, most large retailers
have established gift card programs (Eveleth, 2013; McKinney et al., 2015). Moreover, Starbucks
introduced reloadable gift cards
in
2001
to help stimulate sales (Eveleth, 2013). Today, the preference for
giving and receiving gift cards extends beyond the financial transactions to include the strengthening of
social connections (Tuten
& Kiecker, 2009).
In
fact, a general perception of gift cards
is
that the recipient
can indulge
in
consumer purchazses,
as
cash requires greater consideration about consumption from the
user. Tuten and Kiecker (2013) note that gift cards purchased during the Christmas and Hanukkah
holiday season actually delay consumption resulting
in
the redemption of gift cards over subsequent
months resulting
in
consistent product demand throughout the year. Another benefit resulting from this
redemption delay
is,
during the time the gift cards are not redeemed, the company issuing the gift card
is
receiving interest from the cash that remains
on
the gift card while the person holding card makes their
purchasing decision.
+
'
Financial Crime
Money
Bank Secrecy Act
/
1---1
--I
Enforcement Network
Transmitter
of1970
,.
*Figure 3
-Money
Transmitter Accountability
*Gift Cards are not considered Money Transmitters at this point.
28
""'
,.
Suspicious Activity
Reports
Currency Transaction
Reports
JIFS,
Volume
16,
Number
2,
2016
ISSN:
1945-2950
Gift cards sales
in
1999 was
$19
billion,
in
2014 sales were $124 billion,
and
2016 sales are estimated to
be
$140 billion (Arnold, 2016). With significant sales of gift cards
and
the
inability to exchange unwanted
gift cards
with
merchants for cash, some gift cards, estimated at about 19%, go unredeemed (Kile, 2007).
This has created secondary markets for gift cards whereby unwanted cards could
be
sold
and
desired
cards purchased. With secondary market operators, the original terms of the cards must be followed
(FinCEN, 2013). Another important consideration of gift cards involves secondary markets
and
money
services business.
2.
MONEY SERVICES BUSINESS
Regulators determine whether a secondary marketer is a money transmitter or other form of money
services business (MSB)
is
to determine whether the Bank Secrecy Act
of
1970 (BSA) applies to
transactions that would require Suspicious Activity Reports (SARs) and Currency Transaction Reports
(CTRs)
to
be
generated. MSBs are required to register the financial instrument through The Financial
Crime Enforcement Network ("FinCEN") division of the
U.S.
Treasury Department
as
many MSBs operate
as
money transmitters
(31
CFR
103.41
).
Money transmitters are conduits whereby money moves from
one person at one location to another person
and
location. Although gift cards provide similar operations,
they do not operate
as
money transmitters.
Gift cards operate
in
a closed loop program
in
which a store value
card
can
be
used at one or a limited
number of locations and
is
not considered a money transmitter (FinCEN, 2013). Other prepaid cards,
such
as
those issued by credit card companies, are open loop cards that may
be
used nearly anywhere.
The term Money Transmitter was further clarified by FinCEN
by
removing prepaid access systems that
have a maximum daily amount of $2,000. Gift cards are not considered to
be
money transmitters since
they are considered low risk (FinCEN, 2013). Other prepaid access instruments issued at denominations
exceeding $2,000 are deemed money transmission. The overall intent of
MSB
regulation is
to
prevent
money laundering, funding terrorism
and
fraud. Being of such small denominations, FinCEN views closed
loop gift cards as unlikely vehicles for achieving those types
of
illegal activities.
In
the next section,
we
consider the property status of gift cards.
3.
ACCOUNTING
OF
GIFT CARDS AND SECONDARY MARKET OPERATIONS
The accounting of gift cards
by
retailers is easy when those gift cards
are
redeemed but very problematic
when breakage (non-redemption) occurs
in
gift cards (Kile, 2007). Researchers notes that some retailers
have made significant adjustments
to
earnings
as
a result of adjustments of breakages. Consequently,
not all breakage
can
be
reported
as
income due to the escheat laws (Feinson, 2008;
Kile
& Wall, 2008).
Many states' escheat laws treat gift cards
as
personal property with breakage being escheated to the
state
as
abandoned or unclaimed property (Feinson, 2008). However, gift cards
are
not treated
as
personal property when issued since sales tax
is
not collected and the card
is
a liability to
the
company
until redemption. This treats the card
as
a medium of exchange with sales tax collected at redemption. To
increase profits, some companies use a separate legal entity located
in
a state without escheat
requirements to handle gift card programs. If gift cards are treated
as
personal property, they
can
be
transferred
in
the secondary markets.
In
reviewing online secondary market firms,
we
found that most firms follow similar policies. Secondary
marketers
pay
between
75%
to
90%
of gift card face value contingent
on
the issuer
and
the broadness
in
product line (Cipriani, 2014).
In
selling gift cards, secondary marketers
add
at least
5%
of a gift card's
face value to their purchase price. For example a secondary marketer
pays
$85
for a gift card with
$100
face value and subsequently sells it for $90. While this
is
a good deal for the purchaser,
the
original
transaction of $100 for a card could
be
worth only
$85
to the recipient
if
sold to a third party instead of
redeemed.
In
addition to large organized exchanges (e.g., CardCash, CardHub, GameStop, GiftCardGranny,
and
Plastic Jungle) for gift cards, many prospective sellers
and
buyers have turned to non-mainstream
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Volume
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2,
2016
ISSN:
1945-2950
dealers such as Craigslist and eBay (Cipriani, 2014). When trading with non-mainstream dealers, sellers
risk that a good card is exchanged for a bad check or a credit card payment
is
disputed and reversed.
Buyers have several risks including the card could
be
stolen or it could have little or no remaining
balance. Also, there
is
no guaranty that the balance will
be
there immediately after purchase. Many card
transfers are simply exchanges of access codes that allow sellers to use codes after the card is sold. It
should
be
noted, there are limited regulations that deal with this situation, with prices being determined
by
market supply and demand. Some factors influencing pricing are issuer bankruptcy risk, card expiration
date, card balance, and issuer terms and conditions.
4.
OPPORTUNITY COSTS OF GIFT CARDS
Most consumers fail
to
consider opportunity costs and alternatives (Spiller,
2011
).
Since gift cards are
perceived differently than cash, opportunity cost consideration would also
be
viewed differently (Tuten, &
Kiecker, 2009). There are differences
in
purchases of gift cards from on-site locations and purchases
online, since online purchases may include up to
$7
in
fees and shipping costs: the $100 gift card,
in
this
case, would end up costing $107. Moreover, additional fees (see table below) may
be
associated with
using
or
not using a gift card. Prior to the passage
of
the Credit Card Accountability Responsibility and
Disclosure Act
of
2009, a gift card could lose a large part of its value through fees and charges that a
cardholder may have been unaware of at the time of purchase.
Dormancy Fees
Transaction
Fee
Ex iration Gift cards cannot ex ire for at least five ears
12
CFR 1005.20
Before these increased disclosure requirements were
in
place, many purchasers failed
to
realize the total
amount of fees that would rapidly deplete gift card balances. Spiller (2011) notes that consumers fail to
fully consider opportunity costs associated with purchases. The Credit CARD Act dramatically changed
the rules as to fees issuers could charge. While most fees remain, the disclosure of fees must
be
'clear
and conspicuous" and made prior to purchase (12 CFR 1005.20). Furthermore, gift cards must
be
dormant for twelve consecutive months before dormancy fees can
be
charged, and those dormancy fees
cannot effectively surrender gift cards prior
to
an
expiration
of
less than five years.
5. CONCLUSIONS
This paper discussed the increasing and evolving use of gift cards
in
place of traditional gifts
or
cash.
They have become a very popular form of gift to give and to receive. Non-redemption of card value can
result
in
problems for issuers.
In
addition, there are risks associated with using non-mainstream dealers.
Another consideration is that most consumers fail to consider opportunity costs, such as the loss
of
card
value,
and
alternatives to giving and using gift cards
in
place of tradition gifts or
cash.
Research indicates
a significant number
of
gift cards are not redeemed for their full value.
Given that recipients of gift cards
can
receive far less than the purchase price value, why are gift cards
popular? According to Tuten and Kiecker (2009), gift cards are more socially acceptable than giving cash
and are easier than buying personalized gifts. The result is it
is
unlikely a replacement for this increasing
important form of gift giving will
be
replaced
in
the near future. It
is
also likely, this form
of
gift giving will
continue to grow
in
its importance and should
be
watched
as
it continues to evolve.
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Number
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2016
ISSN:
1945-2950
REFERENCES:
Arnold,
L.
(2016) Gift Card Market Size. Accessed from http://www.cardhub.com/edu/gift-card-market-
size/
on
May 21, 2016.
Cipriani,
J.
(2014, December 17). How
to
sell your unwanted gift cards. C-Net [online]. Accessed from
http://www.cnet.com/how-to/how-to-sell-your-unwanted-gift-cards/
on
May
24,
2016.
Eveleth,
R.
(2013, December 23). The gift card was invented by Blockbuster
in
1994. Smithsonian
[online]. Accessed from http://www.smithsonianmag.com/smart-news/the-gift-card-was-invented-
by-blockbuster-in-1994-180948191/
on
May 24, 2016.
Feinson,
C.
(2008). The steep rise
of
gift card purchases by the consumer
is
changing the method
of
accounting and reporting
of
gift card income
by
corporate retailers. Journal
of
Business &
Economics Research, 6(4), 7-12.
Financial Crimes Enforcement Network (FinCEN). (2013, November 13). Application
of
the prepaid
access rule to closed loop to prepaid access sold or exchange
in
a secondary market. [FIN-2013-
R003]. Washington, DC: U.S. Department
of
the Treasury.
Kile, C.O., Jr. (2007). Accounting for gift cards:
an
emerging issue for retailers and auditors. Journal
of
Accounting, 204(5), 38.
Kile, C.O., Jr.
& Wall, P.S. (2008). States bite into broken gift cards. Journal
of
Accounting, 206(6), 76.
McKinney, R.E., Jr., Shao, L.P., Shao, D.H.,
& Rosenlieb, D.C., Jr. (2015). The evolution
of
financial
Instruments and the legal protection against counterfeiting: A look at coin, paper, and virtual
currencies. Journal
of
Law, Technology & Policy, 2015(2), 101-141.
Meaning
of
Terms,
31
CFR 103.11 (2010, July 1).
Registration
of
Money Services Businesses,
31
CFR 103.41 (1999, September 20).
Requirements for Gift Cards and Gift Certificates, 12 CFR 1005.20 (2012, January 1
).
Spiller, S.A. (2012). Opportunity cost consideration. Journal
of
Consumer Research, 38(4), 595-610.
Tuten, T.P.,
& Kiecker,
P.
(2009). The perfect gift card:
An
exploration
of
teenagers' gift card
associations. Psychology
& Marketing,
26(1
),
67-90.
White,
R.
(2008). The mental accounting
of
gift card versus cash gift funds. Advances
in
Consumer
Research, 35, 722-723.
AUTHOR PROFILES:
Scott Denning
is
an
instructor
of
Finance and Economics at the Lewis College
of
Business at Marshall
University. Prior to joining Marshall, he spent thirteen years
in
the banking industry. Denning holds two
degrees from Marshall University (MBA and BBA).
Ralph E. McKinney,
Jr.
is
an
Assistant Professor
of
Management at the Lewis College
of
Business at
Marshall University. McKinney has authored a number
of
publications concerning cryptocurrency,
economics, forensic business practices, human resource management, indigent criminal defense, and
poverty.
In
2010, McKinney was recognized as one
of
11
instructors for the Pearson NEIS Economics
Insider Contest Instructor Award.
He holds degrees from Aston Business School at Aston University
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JIFS,
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Number
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2016
ISSN:
1945-2950
(OBA), Marshall University (MBA) and West Virginia State University (RBA). Additionally, he
is
a licensed
Private Investigator.
Lawrence
P.
Shao is Professor
of
Finance and Dean of College of Business at Slippery Rock University.
He
has travelled extensively abroad and has lectured
in
Canada, England, India, Mexico, Taiwan and the
Czech Republic.
Dr.
Shao has authored numerous refereed journal articles and books dealing with
international business and finance. He holds degrees from the University of Tennessee (PhD) and Old
Dominion University (MBA and BSBA).
32
