Every holiday season, gift cards dominate wish lists across America, eclipsing popular items like AirPods, PlayStations, or vinyl albums from trending artists. Year after year, they've reigned supreme as the go-to present of choice—and for good reason. Their appeal lies in their simplicity: they're easy for the giver to purchase and provide the recipient with the flexibility to choose their preferred gift. These features have made gift cards so popular that they about 40% of shoppers total holiday spend are allocated to buying gift cards.
However, beneath this veneer of simplicity lies a hidden economic truth: not all gift cards are redeemed. The phenomenon of unused gift cards creates billions of dollars in unclaimed revenue and there's only one real winner - the companies that sell them.
The Fate of Unused Gift Cards
Most gift card recipients redeem their cards within six months, with a redemption rate of over 70% during that period. But after this initial flurry of spending, usage starts to taper off. By the one-year mark, fewer than 80% of gift cards have been redeemed. As time stretches on, the likelihood of a card being used dwindles further.
At any given moment, between 10% and 19% of gift card balances remain untouched, and around 6% of gift cards are never used at all. These seemingly small percentages translate into massive sums when you consider the sheer volume of gift cards sold. Over the past decade, Americans have purchased more than $1 trillion in gift cards. From 2005 to 2015 alone, unredeemed gift card balances totaled an astonishing $45.7 billion. That's a lot of unclaimed steak dinners, burrito bowls, and cups of coffee.
Why Don't We Use Our Gift Cards?
The reasons for unspent gift cards are as varied as the gifts themselves:
- Forgetfulness: We simply forget we have them.
- Loss: Gift cards are easily misplaced.
- Disinterest: The retailer or restaurant isn't appealing.
- Inaccessibility: The issuing store may be out of reach or inconvenient.
- Partial Spending: A leftover balance remains on the card after a purchase.
- Expiration or Fees: Some cards come with restrictions or inactivity fees.
Despite federal protections ensuring gift cards remain valid for at least five years, certain states allow issuers to charge inactivity fees after 12 months. These fees—ranging from $2 to $5 per month—can quickly erode a card's value, making redemption even less likely over time.
Why Retailers Love Gift Cards
For businesses, gift cards represent a rare financial opportunity. When someone purchases a $25 Cheesecake Factory gift card, the company receives $25 in cash but doesn't record it as revenue until the card is redeemed. Until that moment, the balance sits on their books as a liability.
However, after a certain period (typically 6 to 24 months), companies are permitted to classify unredeemed gift card funds as "breakage income." In essence, this is money they've earned without providing any goods or services. Consider this: if you never use that $25 gift card, The Cheesecake Factory pockets the full amount — essentially a 100% profit margin.
In 2017, major corporations like Starbucks, Best Buy, and Home Depot collectively raked in millions in breakage income:
- Starbucks: $105 million (the equivalent of 57 million cups of coffee)
- Best Buy: $37 million (enough for 148,000 Smart TVs)
- Home Depot: $34 million (representing 493,000 cordless drills)
While some states, such as Delaware and New York, have laws redirecting unclaimed gift card funds to state coffers, the lion's share still ends up in corporate hands.
Why Businesses Prefer Redemption
Interestingly, companies often make more money when customers redeem their gift cards. Here's why:
- Overspending: 75% of shoppers spend more than the value of their gift cards, with an average overspend of $59.
- Full-Price Purchases: Gift card users are 2.5 times more likely to pay full price than those paying with cash or credit.
- New Customers: 34% of gift card users visit stores they wouldn't otherwise frequent.
- Repeat Visits: Partial redemptions prompt shoppers to return multiple times, boosting foot traffic.
The Case for Cash
While gift cards have their merits, they pale in comparison to the most practical gift of all: cash.
Economist Joel Waldfogel explored this idea in his 1993 paper, "The Deadweight Loss of Christmas." He found that recipients value their gifts at 10% to 30% less than what the giver paid for them. If these findings hold true today, Americans waste between $73 billion and $219 billion annually on holiday gifts, including $17 billion to $51 billion in gift card purchases.
Though cash might seem impersonal, it offers unmatched flexibility. Platforms now exist to convert gift cards into cash at 60% to 90% of their value, providing an escape route for those stuck with cards they'll never use.
The Bottom Line
Gift cards may strike a balance between thoughtfulness and convenience, but their economic underpinnings tell a more complex story. Whether redeemed or forgotten, one thing remains certain: the companies selling gift cards will always come out ahead.
Sources: Bankrate, Paytronix, The Hustle, CBS News, PYMNTS
