September 24, 2003

Gift Cards and Considerations

Gift cards, depending on how they are done, can be a good and a bad thing for consumers.

Guarding against gift card traps
By Lisa Munoz

So much for hassle-free gift-giving.

That's what Norman Vinson thinks.

Last Christmas, Vinson, 67, a retired insurance broker from Brea, bought his wife, Arlene, several $50 gift cards at the Brea Mall.

The cards seemed easy enough to use, but when she tried to pay for $109 worth of lingerie at a mall department store with two of the cards and $9 in cash, her cards were declined because they weren't worth enough.

"I was totally embarrassed," she said.

The couple called the toll-free number on the back of the cards to check the balances. They learned they were being charged a $2.50 monthly service fee for not using the entire value of the cards within six months.

And the phone calls, it turned out, cut the cards' value further by 50 cents each.

"Here's the whole thing about the whole shootin' match: You go in and buy a $50 gift card, and you assume you're buying someone a certificate that they can use for $50," said Vinson.

That's not necessarily true, he has learned.

Gift cards have steadily grown in popularity with both retailers and consumers since the late 1990s.

But the Vinsons, and an increasing number of other consumers, have learned that gift cards can come with many strings attached.

Consumers like gift cards mostly for their convenience. Retailers like them for many reasons. The cards save sales that otherwise would be lost if a shopper cannot find an appropriate gift, they give retailers access to consumers' dollars until recipients use the cards, and, if a recipient never redeems the card, the retailer has made pure profit.

In addition, about two-thirds of gift-card recipients spend 15 percent to 20 percent more than the face value of the card, just as Arlene Vinson was trying to do.

The cards have also cut down significantly on fraud because, unlike gift certificates, they cannot easily be forged, said Rob Markey, a director of Boston consulting firm Bain & Co.

Since 1997, sales of gift cards have grown 15 percent to 35 percent annually, with 2003 sales estimated at $42 billion to $45 billion, according to a Bain & Co. study.

The success of The Gap's gift-card program in 1998 inspired other retailers to follow suit, Markey said. Gift cards now constitute 5 percent of retail sales at stores like J.C. Penney and Wal-Mart, according to investment bank Salomon Smith Barney.

Technologically, pre-paid calling cards were the predecessor of current gift cards. In recent years, advances in technology made gift cards more efficient, which increased their appeal among merchants.

"The gift-card industry has been dominated by larger retailers, but over the course of the last several years, the technology for offering gift cards has evolved so that it's enabled smaller and smaller retailers to offer them economically," Markey said. "Now you can be a medium-sized regional retailer and actually afford a gift-card program."

From clothing stores to home-improvement centers to restaurants, retailers of all types now offer gift cards.

The Bank of America-issued cards resemble a credit card and can be used anywhere Visa is accepted. Customers purchase them in values ranging from $20 to $500, but unlike many retailer-issued gift cards, the card is not reloadable. Customers can buy a Bank of America Visa gift card directly from one of the bank's branches.

The cards that Vinson bought his wife were Visa gift cards sold by Minneapolis-based Simon Property Group, which owns the Brea Mall.

"We sell a lot of them. We sell millions of them," said Darren Thomas, the Brea Mall marketing director for Simon Property Group. The mall is currently promoting the cards with parents as a way of letting their teenagers do their own back-to-school shopping, while imposing a spending limit.

The growing popularity of the gift cards has led to the gradual replacement of paper gift certificates, except for at mostly smaller, non-chain, local retailers.

As large national retailers such as The Gap, Pacific Sunwear, Target and Macy's phase out paper gift certificates, a legal issue has arisen: -- Are gift cards covered by the state laws that regulate gift certificates? In California, for example, state law prohibits any gift certificates issued in the state from having an expiration date.

In April, Los Angeles consumer attorneys filed a class-action lawsuit over gift-card policies against Simon Property Group, Brea Mall, Visa U.S.A. Inc., Bank of America and other malls that Simon owns.

The suit, filed in Orange County Superior Court by the law offices of Kevin T. Barnes, alleges that, by charging monthly service fees, the cards defraud consumers and violate the state's gift-certificate law. The suit seeks repayment of money lost in expired cards, attorney's fees, and punitive damages.

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Posted by Craig at September 24, 2003 08:38 PM