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Learn what gift card breakage is and how it affects both retailers and consumers. Discover strategies to minimize unredeemed gift card balances.
Gift cards are great, but sometimes they end up unused. This is called gift card breakage, and it has a big impact on retailers and consumers. What is gift card breakage exactly? It's the value of those forgotten cards tucked away in wallets or drawers. We'll explore why gift card breakage happens, how it affects businesses and shoppers, and what you can do about it. We'll also cover gift card breakage accounting and the legal side of things. Let's uncover the secrets of gift card breakage together.
Gift card breakage is the unredeemed value left on gift cards. Think of it as the money retailers earn when a
Understanding the distinction between gift card breakage and escheatment is crucial for both retailers and consumers. Gift card breakage refers to the unredeemed value of gift cards, which can be a significant source of revenue for businesses. As Forbes Advisor notes, breakage is the difference between the total value of gift cards sold and the total value redeemed, allowing businesses to recognize this unredeemed value as revenue.
Escheatment laws, however, require businesses to turn over unclaimed or abandoned property, including unused gift card balances, to the state after a specified period. Baker Tilly points out that state escheatment laws may require restaurants to turn over these unredeemed funds to the government. This means that while breakage can be recognized as revenue, businesses must also be aware of their legal obligations regarding unredeemed gift cards. For businesses dealing with high volumes of transactions and complex revenue streams, staying on top of these regulations can be challenging. Automating your revenue recognition processes can simplify compliance and ensure accuracy. If this is a pain point for your business, consider exploring automated solutions like those offered by HubiFi.
Navigating these complexities is essential for businesses. As GBQ CPAs highlights, understanding escheatment laws is important to avoid legal issues. Failure to comply can lead to significant penalties, making it imperative for retailers to maintain accurate records and stay informed about their responsibilities. Integrating your existing systems with a comprehensive financial management solution can streamline this process and reduce the risk of errors.
There are several misunderstandings surrounding gift cards, particularly when a retailer faces financial difficulties. Some consumers worry their gift card becomes worthless if a store goes bankrupt, but that's not always true. The Federal Trade Commission offers guidance on consumer rights related to gift cards, especially in situations like bankruptcy. Another common issue involves activation problems. A card might appear active at checkout but isn't, leading to lost value for the consumer. Resources like Legal Clarity offer advice on resolving such gift card problems and protecting consumer rights. Finally, the sheer scale of gift card breakage is often underestimated. Billions of dollars in gift card value goes unredeemed annually, a significant loss for consumers and a windfall for retailers, according to reporting from Fox Business. Understanding these misconceptions helps consumers protect their money and make informed decisions about purchasing and using gift cards.
Let's explore why those well-intentioned plastic presents sometimes gather dust. It's a mix of our own habits and factors beyond our control.
It's easy to forget about a gift card tucked away in a wallet or drawer. Life gets busy, and sometimes those gift cards slip our minds. A surprising 37% of consumers admit to letting a gift card expire before they can use it. With an estimated $21 billion in unused gift cards, averaging $175 per person, according to Hubifi data, it's clear this is a widespread issue. Sometimes, the card is for a store we don't frequent, or maybe we're saving it for a "someday" purchase that never happens. This "breakage," as the industry calls it, results in about $5 billion in unused value annually.
External factors also contribute to gift card breakage. A retailer might go out of business, rendering the gift card worthless. State escheatment laws could require companies to turn over unredeemed funds to the state after a certain period. Technical glitches, like a malfunctioning magnetic strip or problems with the card's activation, can also create roadblocks for consumers. These external issues add another layer of complexity to gift card redemption.
The value of a gift card plays a big role in how likely it is to be used. A $5 gift card is often spent quickly on a small item or used to offset a larger purchase. Higher-value gift cards, however, are often treated differently. People tend to hold onto them, perhaps for a bigger purchase or a special occasion. This increases the risk of the card being forgotten, lost, or tucked away and ultimately contributing to breakage. The time since the gift card was issued also matters. The longer a gift card sits unused, the higher the chance it will be forgotten. Retailers often see a spike in gift card redemptions right after the holidays, followed by a gradual decline.
The type of retailer and their marketing efforts also influence gift card breakage. A gift card for a frequently visited store, like a coffee shop or grocery store, is more likely to be redeemed quickly. Gift cards for specialty stores or online retailers might be used less often, leading to a higher chance of breakage. Retailers can use marketing to influence redemption rates. Sending reminders about unused balances, offering bonus rewards for using a gift card within a certain timeframe, or promoting deals exclusively for gift card holders can encourage people to use their gift cards. However, some companies use tactics that contribute to breakage, such as expiration dates, inactivity fees, or restrictions on how and when the card can be used. While these tactics might seem beneficial for the retailer in the short term, they can damage customer relationships and brand reputation.
Gift card breakage can significantly impact a retailer's financial performance. Understanding how to calculate and account for it is crucial for accurate reporting and smart decisions. This involves estimating unredeemed gift cards, understanding how this affects your financial statements, and following the relevant revenue recognition standards.
Calculating breakage means estimating the percentage of gift cards that will likely go unused. There’s no perfect formula, but a reasonable estimate is essential. Analyzing your historical sales data is a good starting point. Look at past gift card redemption rates to project future breakage. For example, if your data consistently shows a 10% non-redemption rate, you might use that percentage for your current estimations. Remember that things like economic shifts or changes in consumer behavior can influence these rates, so regular review and adjustments are important. For more on these practices, check out these gift card accounting tips.
Calculating breakage means estimating the percentage of gift cards that will likely go unused. Analyzing your historical sales data is a good starting point. Look at past gift card redemption rates to project future breakage. This involves tracking how many gift cards are sold versus how many are actually redeemed over a specific period. This historical data provides a foundation for predicting future trends and making informed financial decisions.
For example, if your data consistently shows a 10% non-redemption rate, you might use that percentage for your current estimations. Remember that things like economic shifts or changes in consumer behavior can influence these rates, so regular review and adjustments are important. Keep an eye on industry trends and expert insights to refine your calculations and ensure accuracy in your financial reporting.
Your choice of gift card provider can significantly impact how easily you can track and manage breakage. Choose a provider that gives you robust reporting on sales, location, and redemptions to make breakage calculations easier. Detailed data allows for more accurate estimations and streamlines the accounting process. Look for features like real-time reporting and data export capabilities to simplify your analysis and reporting.
New businesses often lack the historical data needed for accurate breakage estimations. In these cases, using industry averages can be a helpful starting point. Research your specific industry to find typical non-redemption rates. You can also consult with industry experts or financial professionals for guidance. As your business grows and gathers its own sales data, you can refine your estimations for greater accuracy and tailor your approach to your specific circumstances.
Promotional gift cards, like those given away in contests or as "bonus" gifts with purchases, add another layer of complexity to breakage calculations. The promotional value of these cards is considered a deferred expense, meaning it’s recognized as the card is used, not when it’s issued. It’s important to exclude promotional gift cards from your standard breakage calculations to avoid overstating your revenue. Treat these separately and account for them as they are redeemed. For more complex revenue recognition scenarios, consider exploring automated solutions.
Gift card transactions have a particular flow on your financial statements. When a customer buys a gift card, you don't immediately record it as revenue. Instead, it's deferred revenue, a liability on your balance sheet. It's essentially an IOU to the customer. When they redeem the gift card, the deferred revenue becomes sales revenue. But what about unredeemed gift cards? This is where breakage comes in. The portion of deferred revenue attributed to estimated breakage can eventually become income, affecting your profitability. Learn more about accounting for gift cards to get a clearer picture.
Understanding revenue recognition standards is key for correctly accounting for gift card breakage. The rules around recognizing breakage revenue have changed over time. It used to be tied to when redemption was considered "remote." However, newer accounting standards offer more specific guidance. For example, the Accounting Standards Update (ASU) No. 2014-09 provides a framework for this. Staying on top of these standards and making sure your accounting practices are aligned is crucial for compliance and accurate financial reporting.
When a customer buys a gift card, you don’t immediately record it as revenue. Instead, it's deferred revenue, a liability on your balance sheet. Think of it as an IOU to the customer. When they redeem the gift card, that deferred revenue converts to sales revenue. But what happens with unredeemed gift cards? This is where breakage comes into play. The portion of deferred revenue attributed to estimated breakage can eventually become income, which directly affects your profitability. For a more detailed look at managing gift card liabilities, explore our guide on gift card liability accounting.
Calculating breakage involves estimating the percentage of gift cards that will likely go unused. There’s no one-size-fits-all formula, but a reasonable estimate is crucial. Analyzing your historical sales data is a practical starting point. Examine past gift card redemption rates to project future breakage. For instance, if your data consistently reveals a 10% non-redemption rate, you might use that percentage for your current estimations. Remember, fluctuating factors like economic conditions and evolving consumer behavior can influence these rates, so regular review and adjustments are key. HubiFi's automated revenue recognition solutions can help streamline this process, especially for high-volume businesses.
This section explores the two sides of gift card breakage: how it benefits retailers and how it impacts consumers.
For retailers, gift card breakage is a significant revenue stream. Investopedia defines "breakage" as the revenue gained from unused gift cards or prepaid services. For example, if a customer buys a $50 gift card and only spends $40, the remaining $10 becomes breakage revenue for the retailer. Retailers typically estimate breakage by analyzing past sales data to project the percentage of gift cards that will go unused, a practice discussed in this article. Furthermore, accounting rules now provide more specific guidance on when this revenue can be recognized, moving beyond simply recording it when redemption is unlikely, as explained by the Journal of Accountancy.
When you sell gift cards through third-party distributors, the arrangement often involves commissions. These commissions, typically a percentage of the card's face value, are paid to the distributor for facilitating the sale. This impacts the revenue you ultimately receive from gift card sales. For example, if a $100 gift card is sold through a distributor who takes a 5% commission, you only receive $95. This must be factored in when projecting revenue, especially when considering the impact of breakage.
Breakage is the portion of gift card value that goes unredeemed. While it can represent a revenue stream, the actual amount realized is reduced by those distributor commissions. Accurately estimating breakage and factoring in distributor fees is crucial for realistic financial projections. For businesses dealing with high volumes of gift card transactions through multiple distributors, managing these calculations can become complex. Automated revenue recognition solutions, like those offered by HubiFi, can simplify these processes. By integrating data from various sources, these solutions provide a clear and accurate picture of gift card revenue, accounting for both breakage and distributor commissions. This not only streamlines accounting but also enables better financial planning and more informed decision-making.
While breakage adds to retailer profits, it represents a loss for consumers. Investopedia reported substantial consumer losses from unredeemed gift cards, reaching billions of dollars. More recent statistics from Marketing Scoop show that a sizable percentage of consumers—37%—admit to letting gift cards expire before using all the funds. Fox Business highlights that this lost value adds up to billions of dollars annually across the industry, impacting individual wallets while padding retailer bottom lines. This underscores the importance of understanding gift card terms and conditions and making an effort to use gift cards before they lose their value.
The impact of gift card breakage on consumers is substantial. Investopedia points out that billions of dollars are lost each year due to unredeemed gift cards. And it's not just a small group of people letting these cards slip through the cracks. A study by Marketing Scoop, cited by Fox Business, found that 37% of consumers admit to letting gift cards expire before using the full balance. That's a significant amount of money going unspent, essentially a freebie for retailers.
So, how can you avoid becoming a statistic? Forbes Advisor recommends using those gift cards as soon as you can. It's a simple tip, but prioritizing those cards and any associated rewards points can make a real difference. Keep track of everything, especially expiration dates. AwardWallet is a helpful tool for managing these details. Prefer a more hands-on method? A simple spreadsheet listing your gift cards, their balances, and expiration dates gives you a clear overview of what you have and when you need to use it.
Sometimes we receive gift cards for stores we simply don't frequent. Instead of letting those cards sit unused, consider selling them. Forbes Advisor suggests using reputable online marketplaces. It's a practical way to recover some of the value and avoid contributing to the billions of dollars in unredeemed gift card balances each year. Just be sure to research the chosen platform and understand their terms and conditions before selling.
This section covers the legal and regulatory landscape surrounding gift card breakage, focusing on escheatment laws and consumer protection.
Gift card breakage is significantly affected by escheatment laws, which vary by state. These laws govern how unclaimed property, including unredeemed gift card balances, is handled. Often, businesses are required to remit a portion of these balances to the state after a specified period of inactivity. This can create a complex situation for companies operating across multiple jurisdictions, as they must comply with potentially differing regulations. Understanding these nuances is crucial for accurate financial reporting and avoiding penalties. For more information on how escheatment affects breakage income, you can explore resources from the Journal of Accountancy, which explains how state laws can dictate how much of this revenue a company can retain (Escheatment and Breakage Income). For practical guidance on navigating these complexities, Baker Tilly offers a helpful analysis of gift card accounting (Gift Card Accounting).
Consumer protection is another key consideration related to gift card breakage. Regulations aim to safeguard consumer interests, especially given the prevalence of gift cards and the potential for financial loss if a retailer goes out of business or experiences disruptions. The Federal Trade Commission provides resources outlining consumer rights and protections related to gift cards, addressing concerns about retailer bankruptcies and closures (Consumer Rights and Gift Cards). Beyond these broader protections, regulations also address specific issues like card malfunctions and disputes. For more details on resolving such issues, resources like Legal Clarity offer helpful information on protecting consumer rights (Resolving Gift Card Issues). Given the significant value of unused gift cards each year, as reported by Fox Business (Unused Gift Card Value), ensuring robust consumer protection measures is essential for maintaining consumer trust and a healthy marketplace.
Gift card regulations vary significantly depending on whether you’re dealing with state or federal laws. These laws aim to protect consumers while also allowing businesses to benefit from gift card sales. One of the most impactful pieces of legislation in this area is the Credit CARD Act of 2009, which has significantly reshaped the landscape of gift card practices. For businesses dealing with high volumes of gift card transactions, staying compliant with these regulations can be complex. HubiFi's automated solutions can help streamline these processes and ensure accurate revenue recognition. Schedule a demo to learn more.
The Credit CARD Act of 2009 introduced important consumer protections concerning gift cards and gift certificates. For example, the Act makes it illegal to charge inactivity or service fees on gift cards (including store-specific and general-use prepaid cards) unless the card has been unused for at least 12 months. This protects consumers from losing value due to inactivity. The Act also mandates a minimum five-year expiration period from the date of purchase, giving consumers ample time to redeem their cards and reducing the instances of gift card breakage. Nolo's overview of gift card laws provides further details on these regulations. For a deeper dive into the Act’s requirements for gift cards and how these regulations interact with revenue recognition, explore HubiFi's resources on revenue recognition. For specific questions about integrating these regulations with your accounting software, check out our integrations page. For businesses looking for tailored solutions, consider HubiFi's pricing plans.
Gift card breakage might seem straightforward, but accurately estimating and accounting for it presents key challenges.
One of the biggest hurdles is accurately estimating breakage rates. While it’s tempting to view unused gift card balances as pure profit, it's more complex. Breakage is calculated based on the expected percentage of gift cards that won’t be fully redeemed. This often involves analyzing past sales data to identify trends and predict future unredeemed amounts. However, consumer behavior is unpredictable, making it difficult to pinpoint a precise breakage percentage. The longer a gift card sits unused, the less likely it is to be redeemed, further complicating the estimation process. Finding the right balance between optimistic and conservative estimates is crucial for accurate financial reporting.
Another challenge lies in balancing profit recognition with customer satisfaction. While breakage can represent a significant revenue stream, it’s essential to remember that gift cards represent a liability until redeemed. When a customer purchases a gift card, the business receives cash but doesn't immediately record it as revenue. Instead, the business carries a liability until the gift card is used or expires. Accurately accounting for gift cards isn’t just about maximizing profit; it’s about presenting a clear and accurate picture of your company’s financial health. Overestimating breakage can lead to inflated revenue figures, while underestimating it can create an inaccurate picture of liabilities. Finding the sweet spot is essential for both compliance and sound financial management. A satisfied customer is more likely to return and recommend your business, even if a small portion of gift card balances goes unused.
Gift card breakage can be a tricky issue, but several strategies can help you minimize it and keep your customers happy. Let's explore some practical steps:
One effective way to encourage gift card use is to offer incentives for early redemption. Think about a small discount or bonus for using a gift card within a specific timeframe, say, the first three months. This encourages timely redemption and creates a sense of urgency, driving customers to your store. It's a win-win: you reduce breakage and potentially see increased sales with those early redemptions.
Sometimes, gift cards go unused simply because people forget about them. Regular communication with customers about their gift card balances can make a big difference. Sending friendly email or SMS reminders can nudge customers to use their gift cards. Include any promotions or incentives you're offering for early redemption in these reminders to further encourage timely use.
The increasing popularity of digital gift cards offers a significant advantage. Because digital gift cards are often stored in mobile wallets or email inboxes, they're readily accessible and less likely to be forgotten. Many digital gift card platforms also include built-in notifications and balance reminders, further minimizing the chance of breakage. Consider incorporating digital gift card options into your program.
Smart gift card programs require a proactive approach. By implementing these best practices, you can effectively manage breakage, maintain compliance, and foster positive customer relationships.
Accurately tracking and analyzing your gift card breakage rate is crucial for financial planning and reporting. Use historical data to estimate the percentage of unredeemed gift cards. This involves analyzing past sales data and identifying trends related to gift card redemption patterns. As you gather more data, refine your estimation methods for greater accuracy. Regularly reviewing your breakage rates helps you understand how much revenue you can recognize and make informed business decisions.
Breakage reports give businesses key information about unredeemed gift card balances. These reports usually detail the total value of outstanding gift cards, the estimated breakage amount, and the recognized breakage revenue. Analyzing these reports helps businesses understand the financial impact of breakage and make informed decisions about their gift card programs. For example, a high breakage rate might signal a need for clearer communication with customers about their gift card balances. For businesses handling many transactions and complex revenue streams, automated solutions can simplify creating and analyzing these reports. A platform like HubiFi offers automated revenue recognition tools designed for high-volume businesses. Schedule a demo to learn more.
While gift cards generally can't expire for five years (or five years from the last reload for reloadable cards), it's essential to establish clear and compliant expiration policies. Clearly disclose any fees associated with your gift cards to your customers. Remember, these fees typically can't be imposed until after a year of inactivity. Staying informed about current regulations surrounding gift card expiration and fees is vital for maintaining compliance. Additionally, be aware of your state's escheatment laws, which might require you to turn over the value of unredeemed gift cards to the state after a certain period. For more information on gift card accounting, review these accounting practices.
Educating your customers about gift card policies and best practices is key to minimizing breakage and building trust. Many consumers are unaware of the potential for gift card funds to go unused. Openly communicate your gift card terms and conditions, including expiration dates and any applicable fees. Encourage early redemption through gentle reminders and promotions. By addressing common misconceptions about gift card safety and usage, you can empower your customers to make the most of their gift cards. Learn more about how breakage impacts both businesses and consumers. You can also find practical tips on avoiding gift card value loss from this Fox Business article.
The future of gift cards is bright, driven by exciting technological advancements and shifting consumer expectations. Let's explore what lies ahead.
The digital gift card market is booming, projected to reach $932.11 billion by 2028, with a 17.1% growth rate (Meetanshi). This growth fuels innovation, leading to more secure, flexible, and personalized gift card experiences. We're seeing a rise in mobile wallets, integrated purchasing platforms, and personalized gift card designs. However, this digital expansion also presents challenges. Retailers and consumers need to prioritize security to combat gift card fraud. Businesses must also address issues like breakage and spillage, where gift card balances remain unredeemed (Marketing Scoop).
Consumer behavior around gift cards is also evolving. A significant 43% of American adults hold unused gift cards, totaling approximately $23 billion (Capital One Shopping). This underscores the need for user-friendly redemption processes and transparent communication about gift card terms. Understanding gift card redemption rates is crucial for both businesses and consumers. For businesses, this data informs strategic decisions about their gift card programs. For consumers, awareness empowers them to use their gift cards promptly and maximize their value.
The concept of breakage isn’t exclusive to gift cards. It pops up in other reward programs too, impacting both businesses and consumers. Think about those frequent flyer miles you’ve been accumulating or the points you earn with your favorite hotel chain. Just like gift cards, these rewards represent value—value that can be lost if left unused.
Breakage is the money businesses make from services paid for but not used. Unredeemed gift cards are a common example, but breakage also applies to unused frequent flyer miles, hotel points, and other expiring credits. This means that if you don’t use your accumulated miles or points, the company essentially profits from your inactivity.
This isn’t a small issue. Investopedia highlights the financial impact of breakage, reporting substantial consumer losses from unredeemed gift cards. While this statistic focuses on gift cards, it illustrates the scale of potential losses across various reward programs. Imagine the collective value of unredeemed miles and points across all loyalty programs—it’s a substantial figure.
For businesses, breakage in loyalty programs is a significant source of revenue, much like with gift cards. Companies often analyze historical data to project future breakage, similar to how they estimate gift card breakage. Estimating breakage in loyalty programs requires careful analysis and consideration of various factors, including consumer behavior and program terms.
Consumer behavior plays a significant role in breakage within loyalty programs. Hubifi's data shows that a significant percentage of consumers admit to letting gift cards expire. It’s reasonable to assume a similar pattern exists with other reward programs. People forget about their points, miles expire, or the perceived value of the reward diminishes over time. All these factors contribute to breakage, benefiting the business while representing a lost opportunity for consumers.
What exactly is gift card breakage?
Gift card breakage refers to the value remaining on gift cards that ultimately goes unredeemed. It's essentially the difference between the total value of gift cards sold and the amount actually spent by consumers. This "leftover" money becomes profit for the retailer.
Why should I care about gift card breakage?
Whether you're a business owner or a consumer, understanding gift card breakage is important. For businesses, it represents a potential revenue stream. For consumers, it's about making sure you're getting the full value of your gift cards and not losing money to forgotten plastic.
How can businesses accurately estimate gift card breakage?
Estimating gift card breakage involves analyzing historical data to project future trends. Look at past redemption rates to get a sense of how much value typically goes unused. Keep in mind that consumer behavior can change, so regularly review and adjust your estimations.
What are the legal implications of gift card breakage for businesses?
Escheatment laws, which vary by state, are a key legal consideration. These laws dictate how and when businesses must turn over unclaimed property, including unredeemed gift card balances, to the state. Staying informed about these laws is crucial for compliance.
How can I avoid contributing to gift card breakage as a consumer?
Treat gift cards like cash. Store them securely, but make a plan to use them promptly. Set reminders on your phone or add the gift card information to your digital wallet. The sooner you use them, the less likely they are to be forgotten.
Former Root, EVP of Finance/Data at multiple FinTech startups
Jason Kyle Berwanger: An accomplished two-time entrepreneur, polyglot in finance, data & tech with 15 years of expertise. Builder, practitioner, leader—pioneering multiple ERP implementations and data solutions. Catalyst behind a 6% gross margin improvement with a sub-90-day IPO at Root insurance, powered by his vision & platform. Having held virtually every role from accountant to finance systems to finance exec, he brings a rare and noteworthy perspective in rethinking the finance tooling landscape.
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