By SARAH MORGAN
They may be a godsend for last-minute shoppers, but gift cards have come under heavy scrutiny in recent years for their high fees and hidden strings. Will this holiday season be a different story?
Nearly 80% of consumers plan to buy at least one gift card this year, reports the National Retail Federation. And total gift card transactions are expected to exceed $100 billion this year, according to TowerGroup. It's not too surprising, experts say, with retailers offering a broader array of electronic and mobile options and handing out more gift cards free with purchases. Rising interest has spawned bigger deals at sites that sell pre-owned gift cards at a discount. And card terms are friendlier due to new fee-disclosure rules that went into place earlier this year, experts say. "It leads to a better gift," says Odysseas Papadimitriou, chief executive of credit card comparison site CardHub.com.
Of course, it's a gift for the retailer, too, says Dan Horne, a professor of marketing at Providence College. Not only do they make their standard profit margin on the goods purchased, they also entice shoppers to spend more. The typical gift card recipient spends 140% of the card's face value during their redemption trip, he says.
Retailers, for their part, are introducing more electronic gift cards, which can be purchased and delivered online, or sent to a smartphone. Starbucks, Best Buy, Gap, Pizza Hut, Staples, Overstock.com and American Express have each added e-card options since last year, according to a recent study from Bankrate.com. Virtual gift cards are essentially only a year old, but "it's quickly become a billion-dollar market," says Brian Riley, senior research director at TowerGroup. Unlike plastic cards, whose value usually disappears if they're lost or stolen, e-cards are recorded in emails and in the retailers' databases, making them harder to misplace, Riley says. About 30% of virtual cards can only be redeemed online, however, so consumers should look into that before buying, says Judd Lillestrand, chief executive of ScripSmart , a gift card comparison site.
The growing e-card market has also made it easier for online shoppers to score discounts on their holiday purchases. Sites like PlasticJungle.com or CardPool.com that sell used gift cards often have some of the virtual options, too. At PlasticJungle, for example, a $100 Gap virtual gift card sells for $91, 18% off; a $25 JC Penney card is $21.25, a 15% discount.
Retailers are offering more gift cards as rewards and promotions for loyal shoppers, Horne says. Old Navy recently sent shoppers a printable coupon for 10% off gift card purchases with their store credit card by Dec. 31. Applebee's will offer a $10 bonus card for every $50 card bought, and Target is bundling a $25 gift card with Nintendo 3DS purchases through Nov. 19. But gift cards given out as promotions may have special terms -- like requiring a minimum purchase -- and typically come with expiration dates. "The reality is it's treated like a coupon," says Horne.
Consumers may also get a break on fees thanks to a lingering CARD Act of 2009 provision on disclosure that went into effect January 31. Issuers must now clearly disclose all fees before the card is purchased. (Under provisions that went into effect last August, cards can't expire in less than five years, can't charge any inactivity fees before a year has passed and then, can't charge more than one such fee a month.) TowerGroup estimates that lost value on gift cards will reach an all-time low of $2 billion this year, thanks to these improvements.
Prepaid gift cards in particular have become friendlier over the past year to comply with the new law, says Lillestrand. Consumers typically pay a "purchase fee," often around $2.95 to buy a bank-issued gift card, but that's down from a typical $4.95 fee a few years ago. Although many bank-issued cards still technically have expiration dates to make them comply with credit card security technology, some can now be renewed indefinitely. Plus, 18% of bank-issued gift cards now have no inactivity fees, and 63% never expire, he says.