Gift card survey shows it pays to comparison shop
Compare cards to save
By Jeremy M. Simon | Published: November 20, 2007
It pays to comparison shop for gift cards, and if you like the freedom of a "use-anywhere" gift card, expect to pay for the convenience, a new survey from CreditCards.com shows.
CreditCards.com surveyed gift cards offered through the four giant card payment networks -- Visa, MasterCard, Discover and American Express -- and those offered by the top 30 retail stores in the United States.
One of the primary findings? Unlike store-issued cards, "Typically, issuers of network branded cards charge fees," says Duncan Douglass, an attorney at Alston & Bird, LLP in Atlanta who specializes in gift cards and the state laws that apply to them.
Other survey highlights include:
- Cards issued by banks are more likely to include expiration dates than retailer-issued gift cards.
- Consumers can load a lot of money onto gift cards -- as much as $5,500 in some cases.
- Not all businesses allow consumers to reclaim funds on gift cards that go missing.
Gift cards have exploded in popularity in recent years, but experts say that consumers haven't yet learned to comparison shop for them the way they do for other holiday items.
"People aren't as savvy consumers when it comes to gift cards as they are when it comes to other items," says Anthony L. Liuzzo, professor of business and economics at Wilkes University in Wilkes-Barre, Pa.
"Consumers could comparison shop for gift cards, but most don't. I don't think many do, nor would they for the amount that they are generally spending," says Catherine Fox-Simpson, a partner in the retail and consumer product practice of consulting firm BDO Seidman, LLP.
Closed loop, open loop
The most important distinction is between gift cards issued by retailers and those issued by banks. In the industry, the retailers' cards are called "closed-loop" cards -- they can be used only in a single store or group of stores. "Open-loop" cards carry the logo American Express, Discover, MasterCard or Visa and can be used wherever those cards are accepted.
Closed-loop cards from retailers rarely carry fees or expiration dates. The retailers can make a profit from the merchandise purchased. Open-loop cards from the banks or payment networks can't profit from merchandise, so they have more fees and conditions.
"The point of comparison for closed-loop cards is, 'Where do you want to spend your money?' For network-branded cards you should shop," says Douglass. "Your differentiator isn't so much where are you going to use your card, it's what it's going to cost to use your card."
Visa and MasterCard do not issue their own gift cards. They just process transactions. If you have a gift card with the Visa or MasterCard brand, it has been issued by a financial institution, and that's who has set the card's fee and other policies.
Wells Fargo, for example, charges a $2.50 monthly fee after the first 12 months of Visa gift card activation, U.S. Bank charges $2.50 per month after six months following issuance of the card and Wachovia charges $2.50 monthly after six or 12 months of issuance, depending on the individual gift card.
Gift cards' popularity
Regardless of the source, consumers clamor for gift cards. In recent years their use has increased 15 percent annually. In 2006, gift cards accounted for more than $25 billion in sales.
"Consumers like gift cards because it is a way to give people something that they want versus buying a gift that they may not want. Retailers prefer gift cards because it is basically a guaranteed sale," BDO's Fox-Simpson says.
Professor Liuzzo boils down the rise of gift cards to two factors. "We're all so busy and it's becoming increasingly difficult to shop for people," he says.
Retailers have their own reasons for appreciating gift cards. "It's always nice to have someone prepay for something. Time value of money plays a factor," says Douglass. For issuers, gift cards represent another source of income: fees.
These fees generally include costs for maintenance or dormancy when the card has remained inactive for a set length of time. Such charges more often apply to open-loop gift cards bearing the Visa, MasterCard, American Express or Discover logos.
For the 2007 holiday season, experts predict gift card sales should weather any sales weakness that retailers encounter. "It is hard to say what the outlook is for this holiday season," writes Fox-Simpson. "With spending expected to be down, I think gift card sales will be down too. But I don't expect gift cards to be down more than other purchases. In other words, I think people will continue to buy gift cards."
People will have more options, too. "In terms of card-based payments, the gift card space is where the bulk of the innovation is taking place," says Douglass.
Gift card developments include:
- Gift cards with loyalty rewards and rebates.
- Personalized gift cards.
- Reloadable health plan gift cards from insurers.
- Gift cards by employers to reward workers.
- Reloadable gift cards that let parents control how much children spend.
Despite their extra-fee baggage, the open-loop gift cards category is the one to watch, experts in the field say. "As the availability of network-branded gift cards increases, so too does their popularity," Douglass says. "It's sort of an extension of why people like gift cards in the first place." In other words, he says, freedom often trumps price: Gift card buyers want to hand recipients the freedom to choose gifts they really want.
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