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10/02/2007

Expert On Gift Cards Replies To Oct. 25 Article On Gift Certificates

(Submitted by Mike Kelly, CEO of SwapaGift.com.)

The issue of escheatment (surrendering the unclaimed value) is, as you noted, a state regulated issue. Issuers of stored value cards are forced to turn over the value on these cards in many cases (I believe over 35 states now). What doesn't get mentioned often, is that the issuer is still carrying a balance sheet liability in their pre-paid sales account.

What this means is that the revenue collected from the sale of these unused gift cards is not recognized because the issuer has not delivered merchandise against it. The cash is there, but the ability to recognize it is not. There becomes a real accounting issue with significant consequences...another article in and of itself. 

Issuers in the past, have addressed this problem by utilizing expiration dates and inactive card fees, to �reclaim� the liability or a portion of it. In the case of an expiration date, the total amount of the liability was satisfied; with inactive fees, it was recognized incrementally. 

The consumer obviously isn't concerned with the issuer�s accounting issue - only the fact that the card should keep its value indefinitely. Hence, state legislators have come to the consumer�s defense. After all, who is going to promote that big businesses should be allowed to take your money and charge you for holding it?

In response, some issuers have taken expensive and temporary measures to safeguard their gift card revenue. As an example, the issuer could spin off the gift card issuing portion of their business, and re-establish it in a state that doesn�t escheat these cards. This is really only a temporary solution.

As you pointed out the list of states banning expiration dates and regulating the unclaimed property is increasing. There are fewer places where reorganizing the business this way can be done. Crazy!!

Small businesses (spas, restaurants, etc.) are less impacted from an accounting perspective, because they tend to perform cash-based accounting. They�ll recognize the revenue when it is received, not when they deliver service/merchandise against it.

They are however, often regulated to honor lengthy time frames and buyback commitments�adding administrative costs. Here, the consumer takes a bigger risk, because the likelihood that a small retailer will be out of business is higher than that of a national chain (just a fact of life).

The bartering of gift cards, on sites such as SwapaGift.com, allow the consumer to realize the full value of their card/certificate, and often times liquidate at a discount that is higher than any state-mandated laws. In a swap transaction, both parties typically trade cards that are of equal value...and therefore are not forced to discount the scrip.

Effectively, the parties are really trading the restrictions that these cards represent (good at the issuer only). The opportunity to trade scrip at parity or purchase scrip at a discount, are inviting to value-seeking consumers...reasons why www.SwapaGift.com has been able to establish a sound, liquid, secondary market.


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