Gift card charges equal bad business

DSN Retailing Today, Oct 25, 2004 by Ken Rankin

When retailers and shopping malls across the country began making gift cards available to their customers a few years back, it had all the earmarks of a win-win proposition.

The cards brought in significant extra revenue for the retail industry, and as an added bonus, they helped to reduce the expense associated with hundreds of millions of dollars in returns of unwanted merchandise.

For their part, consumers benefited from a popular and convenient new customer service. Instead of buying grandpa another tie for his birthday, they could simply pop for a gift card from a favorite retailer. Then grandpa could use the card to buy a fishing rod, a socket wrench, or even another tie.

The public's response has been enthusiastic. Gift card use has increased by an average of 20% annually since 1996, and current estimates indicate that consumers will spend between $32 billion and $45 billion for these cards in 2004.

But now there's a problem. What should have been a big customer relations plus for retailers is turning into an all-out public relations nightmare for the industry. Instead of fostering good will for retailing, gift cards have encouraged a new round of industry regulation in a number of states, and have raised the prospect of corrective federal legislation in Congress.

At issue is the decision by many chains, shopping malls, and other issuers of gift cards to impose "dormancy fees" on consumers who don't use their gift cards quickly enough.

In some cases, recipients of gift cards who haven't gotten around to redeeming them within six months are discovering that they are being slapped with fees of $2 to $2.50 for every month that the card goes unused. Still other cards allow the issuer to pocket the money paid by purchasers if it is not redeemed before an arbitrary expiration date.

Retailers who impose these fees defend the practice as necessary to cover the costs associated with issuing gift cards, or to provide some accounting "closure" for inactive cards. As long as terms are disclosed to the purchaser--typically in small print on the back of the card--gift card issuers are within their rights to impose dormancy fees, they argue.

But critics of the practice say the basis for these fees is nothing more than pure greed. Retailers, they argue, are getting interest-free use of a customer's money for months or even years. Then, instead of thanking consumers for their generosity, these card issuers are slapping their customers with a monthly dormancy fee.

Who's right? I don't know. But I do know who's going to lose this battle.

By enraging consumers, retailers have already lost more in terms of goodwill then the corporate bean counters will ever collect in charges for unused gift cards.

Worse still, these practices are playing into the hands of industry critics who have already secured legislation regulating gift cards. Laws on the books now in Connecticut and New Hampshire flatly prohibit dormancy charges, a new California law entitles residents of that state to a full refund for unredeemed gift cards, while Massachusetts now prohibits card expiration dates less than seven years.

Meanwhile back on Capitol Hill, Sen. Charles Schumer (DNY) is warning retailers that unless they eliminate "hidden monthly service fees" for dormant gift cards, he'll push for federal legislation regulating this practice.

Can retailing afford to continue offering gift cards without imposing fees on consumers who don't use them quickly enough? Some of the industry's biggest players seem to think so. Sears, Marshalls, Casual Corner, TJ Maxx, Bed Bath & Beyond, Home Depot and Macy's all make gift cards available to their customers--without any dormancy fees.

These chains, I suspect, spend more time listening to their customers than to their bean counters.