MW People are spending $300 billion a year on this product. Some experts say they should stop.

By Charles Passy

'Gift cards are a good idea for everybody but the person who receives them'

Over the years, gift cards have become a popular option for people seeking an easy solution to their search for the perfect present. But some consumer advocates are starting to voice concern that this form of gifting equates to a lump of coal in a holiday stocking.

"Gift cards are a good idea for everybody but the person who receives them," said John Breyault, a fraud expert with the National Consumers League, a Washington, D.C.-based organization.

It's a subject that's receiving attention in light of the recent news that TGI Friday's, the restaurant chain that recently filed for Chapter 11 bankruptcy protection, is sitting on nearly $50 million in outstanding gift cards. The company is still accepting the cards as it tries to reorganize financially, but the situation nevertheless shows how cards often sit forgotten in desk and sock drawers for years, or even decades, at a time.

Indeed, in a study this year, Bankrate estimated that Americans are in possession of $244 in unused gift cards per person, on average. And that can add up big time: Bankrate puts the total value of unused cards at $27 billion.

And that's to say nothing of other problems with gift cards, including widespread instances of card-related fraud that totaled $217 million in 2023, according to the Federal Trade Commission.

Nevertheless, consumers are buying gift cards like never before. Sales in 2024 are expected to reach $308 billion, according to Javelin Strategy & Research, a company that tracks the industry. That's almost a 45% increase over the past four years.

Many consumers say they do, in fact, like receiving the cards. A National Retail Federation study found that gift cards rank as the most popular item on holiday wish lists in 2024, with 53% of consumers requesting them. That puts cards ahead of clothing and accessories (49%), books and other media (28%), and personal-care and beauty items (25%).

It's no secret why the cards are so popular, according to experts: They represent a simple gift-giving tool that offers recipients flexibility to pick what they want from a specific retailer. (And that's not to mention "open loop" cash cards, tied to such prominent payment platforms as Visa (V) and Mastercard $(MA)$, which offer maximum flexibility in terms of usage.) At the same time, the cards are seen as more personal and thoughtful than a plain-Jane gift of cash.

"If you give me cash, it's going into my bank account," said Shelley Hunter, a gift-card expert and consumer advocate, ultimately being spent on something as mundane as a utility-bill payment.

Plus, cards are no longer purchased only as gifts for others but also, at times, as gifts for ourselves. In that regard, Jordan Hirschfield, a director with Javelin Strategy & Research, said it's better to think of many retailer card programs as "stored-value accounts."

That is, they're just a way to bank money with a specific merchant for later use. And, as Hirschfield notes, some retailers offer bonuses or perks for spending with them in this way.

From the archives (December 2015): No one does gift cards like Starbucks

Also see (July 2024): The 'Bank of Starbucks'? Coffee retailer has $1.77 billion in unredeemed gift cards.

But that brings us back to what's perhaps the biggest negative that critics of gift cards cite: They're only good so long as you remember to spend that money.

Unfortunately, many consumers forget they have them. Naturally, retailers make a profit off these unused cards, even if they have to initially account for them as a debt on their books, according to industry professionals. One study from around a decade ago found that stores were earning between $250 million and $300 million annually from unused cards. The figures today could be much higher.

"Unspent gift cards are a goldmine for retailers," said business analyst Amr Elharony in a LinkedIn post last year.

The Retail Gift Card Association, an industry trade group, counters that idea, noting in a statement that "brands largely prefer when consumers go to their locations or apps and fully-redeem their cards." Industry experts told MarketWatch there's a good reason for that: When consumers use a gift card at a retailer, they often end up spending more than the dollar figure on the card.

Once cards are activated, they remain good for at least five years, under federal law. But that's presuming the retailer or restaurant stays in business. Many consumers have learned the hard way that isn't always a reliable assumption.

Take Jocelyn Brandeis, a New York City resident who held gift cards for a handful of retail chains that eventually declared bankruptcy, such as Bed Bath & Beyond and Payless. Even in instances when the merchants came back under new ownership, the cards were no longer valid. "I've lost out on, like, everything," Brandeis said.

That's indeed the fear that some consumers may have when it comes to TGI Friday's. Again, the restaurant chain is still currently accepting the gift cards - and may continue to do so if it successfully reorganizes. But if this truly becomes the end for the chain, bankruptcy experts told MarketWatch that people who have gift cards would be at the bottom of the list of creditors and could expect no more than pennies on the dollar for their card value.

Which is why bankruptcy attorney Isaac Marcushamer, a partner with the Florida-based firm DGIM Law, said there's no point in taking a chance. "My suggestion to anyone who's holding a TGI Friday's card is to go use it," he said.

TGI Friday's didn't respond to a MarketWatch request for comment.

As for the broader question of whether gift cards remain a good idea in general, there's no denying their popularity. But Chuck Bell, a financial-policy advocate with Consumer Reports, isn't convinced - echoing as a particular concern the risk that a business might shut down.

Bell added that there's always a solid alternative to a gift-card purchase. "We've argued for years," he said, "that nothing says, 'I love you,' as much as cold, hard cash."

-Charles Passy

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November 12, 2024 13:02 ET (18:02 GMT)

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