As a changing gift card industry offers new incentives and protections for consumers, a CreditCards.com/Bankrate.com survey of card issuers shows that some cards deliver more value than others.
Gift cards have in recent years been one of the most sought-after gift items among gift recipients, according to the National Retail Federation, but sales in the $87 billion market are poised to go even higher as new regulations, technology and incentive programs add convenience and value for consumers.
CreditCards.com and Bankrate.com surveyed 54 issuers' gift cards (see Chart: Compare gift cards), and found that certain segments of the market are more consumer-friendly than others. Open-loop gift cards -- those that are issued by banks or credit card companies and can be redeemed by any retailer -- naturally give the card recipient more purchase options. However, such freedom comes at a cost, as closed-loop or merchant-branded gift cards -- those issued by retailers for use at that particular retailer only -- tend to have fewer fees and restrictions placed on them.
Of the 54 gift cards included in the gift card survey, only seven charged a purchase fee, all of them being banks rather than retailers. Only six of the issuers surveyed charged dormancy or maintenance fees. For example, Chase charges a $2.50 monthly fee after the first 12 calendar months following the gift card's purchase. Likewise, Discover charges a $2.50-per-month maintenance fee if the gift card is not used for 12 consecutive months following the card's activation.
Expiration dates were uncommon with gift cards from most retailers surveyed. However, again, banks were more likely to impose a date limit, with Fifth Third Bank, Harris Bank, Chase, U.S. Bank and Wells Fargo all offering gift cards that expire. With the prevalence of gift card swapping sites and other discount sites, it's important to note that some retailers may impose no expiration dates on new cards, though older cards in the marketplace still may expire.
If you lose your gift card, you're in luck with 40 of the issuers surveyed that will replace the card. However, read the fine print because some issuers have certain requirements, such as that your card be registered or you know the card number. Also, some of the banks surveyed, such as Chase and Wells Fargo, charge a fee for replacing a lost card.
Fewer fees, fewer restrictions
While many retailers have been steering away from imposing dormancy fees and expiration dates, the Credit CARD Act of 2009 ensures that all traditional gift card issuers follow new rules. (Prepaid telephone cards, reloadable cards not marketed as gift cards and rewards and promotional cards are exempt). "Gift cards are a bit friendlier than they used to be," says Pamela Banks, senior policy counsel for Consumers Union, the nonprofit publisher of Consumer Reports. Among the changes that card issuers must adhere to: There can be no maintenance or dormancy fees assessed for 12 months from the date of purchase or the last time the card has been reloaded. After that time period is up, only one fee can be charged per month. However, the downside, warns Banks, is that there's no limit to the amount that fee can be.
Another change resulting from the Credit CARD Act is that cards cannot expire until five years after they've been purchased. Finally, issuers must do better about communicating consumers' rights when using the cards. "The issuer has to provide you with disclosures to let you know that the card is good for five years and give you a number to call in order to get service on your card," Banks adds.
Initially, these changes were supposed to go into effect in August, "but card issuers prevailed on Congress and they passed a law to extend that until Jan. 31, 2011," says Banks. "Unfortunately we're going to go through another holiday season where consumers may not know what their rights are and they may be eaten up with fees immediately rather than having all cards be free of fees for a year," Banks says.
Incentives to buy
Of the issuers surveyed by CreditCards.com, 23 had an e-card currently available. With the Internet being the second most popular source for gifts behind discount stores such as Wal-Mart and Target, that number is poised to grow, according to Pam Danziger, president of Unity Marketing, which this year released the "Gifting Report 2010: The Ultimate Guide to the Consumer Gift-Giving Market." Brian Riley, research director of bank cards for advisory firm TowerGroup, agrees, saying virtual gift cards "are going to create more options and will probably affect the sales volume of gift cards positively."
Another benefit virtual gift cards offer is convenience, a big draw for many gift card buyers. "I like to buy gift cards because it's quick shopping," says Pamela Kirkland, of Bowie, Md. They also ease the shopping process for events such as birthdays for the friends of her 9-year-old son, Garrett, "because the person can get what they want," Kirkland says.
For those like Kirkland who expect to buy multiple gift cards this year, there's another reason that gift cards may be an ideal solution. "We noticed a strong trend in 2009 of merchants using their gift cards as incentive devices," says Michael Hursta, vice president of First Data Prepaid Services. "These incentives included activating an additional gift card for a shopper if they purchased merchandise or another gift card above a certain monetary threshold. We expect that trend to continue this year, which should provide a bump in gift card activations as well," Hursta says.
While more consumers are buying gift cards to pay for practical items rather than luxuries, the amount consumers spend on gift cards is slightly rising, says Hursta. The average gift card value increased slightly in the first six months of 2010 over the same period in 2009, moving from an average of $33.11 in 2009 to $33.73 in 2010. In its 2010 First-Half Gift Card Performance Report, First Data also found that specialty retail gift cards for stores that sell such items as clothing, electronics, books and home goods experienced significant growth, as did quick-service restaurants such as fast food and coffee/pastry locations.
Though experts point to many reasons for more consumers to jump on the gift card bandwagon, they are still quick to point out that it's too soon to know exactly how -- and whether -- consumers will react positively. "Gift cards are changing so significantly recently, who knows what we'll see?" says Kathy Grannis, a spokeswoman for the National Retail Federation.
See related: Chart: Compare gift cards, How to replace a lost or stolen gift card, 13 ways to get gift cards for less, Fed issues rules restricting gift card fees, expiration, 4 ways to receive bonus gift cards, Collectible gift cards can be both practical and fun, Giving charity gift cards? Mind the fine print, Top 10 creative ways to wrap gift cards