E-commerce businesses with a large number of unredeemed gift cards could be missing out on important revenue opportunities, which is why it’s important to understand gift card liability and strategies that can help you use it to your advantage.
What Is Gift Card Liability?
Gift card liability refers to the unused value stored on gift cards, which isn’t considered revenue until it’s spent on goods and services from your store. While a customer already paid for the card through your payment gateway and the amount was debited from their bank account, you haven’t provided any goods or services, so you remain “in debt” to the gift card recipient until the stored credit is used.
Where Are the Funds from Gift Card Sales Stored?
When you sell a gift card, the money from the sale should go into a dedicated “gift card account” and remain there until the gift card recipient makes a purchase. If you work with a payment processor that offers integrated merchant services, you can request to have the funds from gift card sales transferred to this account automatically rather than having them settled to your regular business bank account. The balance of this account should be included in your financial statements.
The Gift Card Transaction Process
When a customer makes a purchase using a gift card:
- They enter the gift card number at the checkout instead of their credit card details.
- The payment gateway verifies with the issuer that the balance can cover the cost of the purchase and notifies the customer whether the transaction is approved or declined.
- If the gift card has enough funds to cover the purchase amount, the payment gateway deducts the amount from the gift card balance and transfers it to the merchant’s account. The amount that was spent now officially becomes revenue and will appear on your income statement.
If an item purchased with a gift card is returned, merchants will typically re-credit the purchase amount to the same gift card and add it back to the company’s total gift card liability. For your customers’ peace of mind (and to avoid any confusion), it’s a good idea to clarify the process of returning gift card purchases in your returns policy.
Challenges with Managing Gift Card Liability
The process might seem fairly straightforward, but there are a few things to be aware of when managing gift card liability.
Some countries tax all gift cards sold before they are used. Other countries tax gift card transactions when the cards are eventually used to buy products. If your e-commerce business operates in several countries, you will need to configure your payment gateway to apply the applicable taxes automatically depending on the location of the customer.
Your Legal Obligation to Provide Goods and Services
It’s a fairly common practice to put an expiration date on gift cards. However, your legal obligation to provide goods and services in exchange for the money paid never expires. When a gift card expires, you can’t take the unused funds and count them as revenue. Depending on your local laws on revenue recognition, unused gift card balances usually pass from being a liability to being recognised as “breakage”.
Laws Surrounding Unclaimed Property
Unredeemed balances on gift cards are legally considered to be unclaimed property. In some countries, escheatment laws dictate that unclaimed property passes into the hands of the government. Find out the laws in each country where you do business before writing off any unclaimed amounts.
Tips for Maximising Gains and Minimising Losses with Gift Cards
There are several ways to get full mileage out of gift cards.
1. Configure Your Checkout for Gift Card Sales and Redemption
Before offering gift cards for sale in your online store, make sure that your checkout can:
- Apply the appropriate taxes to gift card sales in each country
- Enable customers to select “gift card” as a payment option at the checkout
- Enable customers to split the full transaction amount between a gift card and another payment method (such as a credit or debit card)
- Earn points on purchases made with gift cards
Additionally, it’s a good idea to provide a “check my gift card balance” function on your website. This will help customers identify which purchases will take them as close to “0.00” as possible.
2. Make It Easy (and Attractive) for Customers to Spend Their Unused Balance
If you can help (or incentivise) customers to spend their unused gift card balances, you’ll reduce your gift card liability and boost your revenue.
- Allow customers to drain their gift card balance completely and pay for the rest of a transaction using a different payment method.
- Allow customers to donate their remaining gift card balance to a charitable cause (provide a few options for them to choose from).
- Give customers the opportunity to earn loyalty points on purchases made with gift cards.
- Send out an email reminder when a gift card is close to its expiry date.
3. Earn Interest on Unused Gift Card Balances
As long as you can still access the funds, you can invest your gift card liability amount and earn interest on it until it’s spent. If you go with this option, it’s important to make sure that you won’t incur penalties for frequent withdrawals as this could jeopardise your cash flow.
4. Prevent and Detect Gift Card Scams
Gift card scams are unfortunately common because gift cards and other kinds of prepaid store cards are easy to find and can be used to purchase a wide range of goods. Some of the most common gift card scams involve “urgent” requests to load money onto a gift card and provide the gift card number and expiry date by email or over the phone.
It’s important to warn your customers against providing gift card information to anyone else, as there probably won’t be any way to get the money back once it’s spent. If they realise they’ve been scammed, they should notify you straight away so that you can place a block on the card.
5. Recognise that Gift Cards Encourage People to Spend More and Market Them at Strategic Times of the Year
Selling gift cards is a great strategy for increasing online sales because many people will spend more on a gift card than they would on a product for themselves. Once the recipient has the gift card in their hands, they will have no qualms about spending the full amount.
Keeping this in mind, market your gift card program ahead of occasions like Mother’s Day, Father’s Day, Christmas and the start of the new school year. The income from purchases made with these gift cards will more than make up for any losses from unspent amounts.
Gift Card Liability – A Great Opportunity for Savvy Merchants
Unused gift cards are technically considered a liability rather than an asset until they’re spent, but with a few simple strategies, you can encourage people to spend their unused balances down to the very last cent.
If you still end up with some breakage—that may end up needing to be relinquished to the government—rest assured that you will have increased your revenue by offering gift cards, so these small losses are more than offset by the gains.