Wednesday, November 22, 2006
Gift cards tug at hearts, prostates
I'm probably going to be in the minority on this one, but once again, lawmakers are sticking their beaks too far into someone's business. Some lawmakers in Minnesota want to ban fees and expirations on gift cards. Now you're thinking, "Sweet! I hate those fucking fees! Way to go to bat for the little guy! And here's another sentence with an exclamation point!" I'm going to go on record and say that laws completely banning fees and expirations on gift cards, laws that would indeed be to the advantage of consumers such as myself, are unnecessary and unfair to businesses.
Yes, I actually said "unfair to businesses." Why? Imagine that you buy a used car from your well-off cousin Sven for $2,000. Your cousin, trusting you since you're family and all, accepts a personal check as payment. You mark down the check number and amount in your checkbook, and proudly drive your car home, leaving clouds of thick, black exhaust rolling behind you. A couple of weeks go by, and you decide to peek at your checking account balance online. "That's funny," you think to yourself. "Why hasn't Sven cashed that check yet? Oh well." You are curious, but remain unconcerned.
Another six weeks later, you check your account balance again. Sven has still not cashed the check. On the one hand, you're cool with having the money in your account all the longer, but you're also getting perturbed. You want to be able to balance your checkbook and have things in order. That money is in your account, but it's not really yours and you can't really count it as such when doing your accounting. Maybe 6 months down the road, things are a little tight money-wise. The memory of that check has faded somewhat, and one night while having a few strippers grind your junk, you realize you're out of cash. You check your balance, realize you have more than enough to grab a couple c-notes and go upstairs for a couple bed dances.
The next day, cousin Sven is digging through his car for the connector cable for his iPod and comes across the check he tossed carelessly in the glove box a few months ago. "Sweet! I totally forgot about this check. I have to go to the bank today anyway. Might as well deposit it!" Unfortunately the check clears the day before your automatic mortgage and several other electronic bill payments go through. Oops! Overdraft fees out the ass.
Ok, so it still was irresponsible of you to spend money you didn't have. However, I used that example to illustrate the inconvenience of having to continuously account for that uncashed check, never knowing when numb nuts would finally get around to depositing it. In a way, the same is true for gift cards, albeit in a rather inverse fashion. Let's say you buy a $200 Best Buy gift card for your father for his birthday. Your dad is a bit of a technological neophyte and really doesn't know where to begin in spending this geek loot. He tosses the card into a drawer and forgets about it until nearly a year later when he's looking for lube for your mother's dried up cootch. He sees it, makes note of it, continues his feeble attempts at pleasuring your mom, and drives to Best Buy the next day to load up on batteries, surge protectors, and blank DVDs (after being told they no longer carry blank VHS tapes and not realizing he doesn't have a DVD burner or for that matter, a DVD player).
For a year, Best Buy has not been able to count that $200 as a sale. Now take that $200 and multiply it by tens, even hundreds of thousands. That is millions of dollars they cannot count as a sale. I know, I know. Poor Best Buy! Can't spend or reallocate all those multiple millions of dollars. Here's me playing the world's smallest violin. Ok, so what if the gift card wasn't from Best Buy? You bought it at a smaller local chain with only a couple of stores and razor thin profit margins. That $200 multiplied by a few dozen customers can make a big difference.
So now you're thinking to yourself, "Jeremy is a big fucking pro-big business Republican George Bush lover!!!" Nope. I like money, and I like it better when it's in my pocket than being spent by government or big business, but you're off the track. I'm not suggesting that there should be absolutely no regulation of gift card fees. What I am suggesting is that an outright ban is shortsighted and heavy-handed. Banning gift card expirations? Perhaps. But if you're going to ban expirations, then fees should still be allowed with legal restrictions as to the rates and amounts. Those rates and fees should also be clearly printed in larger type on the front of the card, not in fine print on the back. Smart retailers would tout low-fee or no-fee cards as advantages to buying their gift cards over those of their competitors.
I do agree with one of the proposed changes, and that would require the retailer to give cash back for any balance on the card less than $5 if requested. Let me rephrase that. I don't agree that should be a law, but it is a fair term that retailers should consider implementing on their own. The amount is small enough that it wouldn't be a huge inconvenience to the retailer and large enough that the consumer could use the gift card without feeling compelled to purchase items costing more than the gift card amount just to use the whole thing.
End unpopular rant.
Yes, I actually said "unfair to businesses." Why? Imagine that you buy a used car from your well-off cousin Sven for $2,000. Your cousin, trusting you since you're family and all, accepts a personal check as payment. You mark down the check number and amount in your checkbook, and proudly drive your car home, leaving clouds of thick, black exhaust rolling behind you. A couple of weeks go by, and you decide to peek at your checking account balance online. "That's funny," you think to yourself. "Why hasn't Sven cashed that check yet? Oh well." You are curious, but remain unconcerned.
Another six weeks later, you check your account balance again. Sven has still not cashed the check. On the one hand, you're cool with having the money in your account all the longer, but you're also getting perturbed. You want to be able to balance your checkbook and have things in order. That money is in your account, but it's not really yours and you can't really count it as such when doing your accounting. Maybe 6 months down the road, things are a little tight money-wise. The memory of that check has faded somewhat, and one night while having a few strippers grind your junk, you realize you're out of cash. You check your balance, realize you have more than enough to grab a couple c-notes and go upstairs for a couple bed dances.
The next day, cousin Sven is digging through his car for the connector cable for his iPod and comes across the check he tossed carelessly in the glove box a few months ago. "Sweet! I totally forgot about this check. I have to go to the bank today anyway. Might as well deposit it!" Unfortunately the check clears the day before your automatic mortgage and several other electronic bill payments go through. Oops! Overdraft fees out the ass.
Ok, so it still was irresponsible of you to spend money you didn't have. However, I used that example to illustrate the inconvenience of having to continuously account for that uncashed check, never knowing when numb nuts would finally get around to depositing it. In a way, the same is true for gift cards, albeit in a rather inverse fashion. Let's say you buy a $200 Best Buy gift card for your father for his birthday. Your dad is a bit of a technological neophyte and really doesn't know where to begin in spending this geek loot. He tosses the card into a drawer and forgets about it until nearly a year later when he's looking for lube for your mother's dried up cootch. He sees it, makes note of it, continues his feeble attempts at pleasuring your mom, and drives to Best Buy the next day to load up on batteries, surge protectors, and blank DVDs (after being told they no longer carry blank VHS tapes and not realizing he doesn't have a DVD burner or for that matter, a DVD player).
For a year, Best Buy has not been able to count that $200 as a sale. Now take that $200 and multiply it by tens, even hundreds of thousands. That is millions of dollars they cannot count as a sale. I know, I know. Poor Best Buy! Can't spend or reallocate all those multiple millions of dollars. Here's me playing the world's smallest violin. Ok, so what if the gift card wasn't from Best Buy? You bought it at a smaller local chain with only a couple of stores and razor thin profit margins. That $200 multiplied by a few dozen customers can make a big difference.
So now you're thinking to yourself, "Jeremy is a big fucking pro-big business Republican George Bush lover!!!" Nope. I like money, and I like it better when it's in my pocket than being spent by government or big business, but you're off the track. I'm not suggesting that there should be absolutely no regulation of gift card fees. What I am suggesting is that an outright ban is shortsighted and heavy-handed. Banning gift card expirations? Perhaps. But if you're going to ban expirations, then fees should still be allowed with legal restrictions as to the rates and amounts. Those rates and fees should also be clearly printed in larger type on the front of the card, not in fine print on the back. Smart retailers would tout low-fee or no-fee cards as advantages to buying their gift cards over those of their competitors.
I do agree with one of the proposed changes, and that would require the retailer to give cash back for any balance on the card less than $5 if requested. Let me rephrase that. I don't agree that should be a law, but it is a fair term that retailers should consider implementing on their own. The amount is small enough that it wouldn't be a huge inconvenience to the retailer and large enough that the consumer could use the gift card without feeling compelled to purchase items costing more than the gift card amount just to use the whole thing.
End unpopular rant.
But they have the cash... its not like they don't have the money and don't count it. Its the money that is important to them, and it is not like the card will be spent later, and there won't be any worth to it. A person shouldn't be charged for giving Best Buy a small loan of their money... if anything, the person who bought the card should be able to charge interest on this small loan they have given to whoever they bought the card from. We don't ask for the interest on the "loan" so they shouldn't ask us for a "Fee"
Though I have written software related to financial reconciliation and accounting, I will preface this supplementary explanation with a disclaimer that I am not an accountant. My primary background is computer science and math. I welcome and encourage comments from anyone with a finance/accounting background to support or dispute my statements. In other words, I could be full of shit, but these are the facts to the best of my understanding.
You're correct that they have the money, but incorrect in that can't "count it." They may have taken in $100 on a gift card purchase, but rules of financial reconciliation dictate that cash cannot be considered as income on the books until the gift card has been redeemed. Example: Publicly traded Company X sells $250,000 in products and $50,000 in gift cards in a fiscal year. So they have taken in a total of $300,000. Their operating expenses for that year are $280,000. So it would appear they can report to their investors that they had profits of $20,000 for that year, right? Wrong. Unfortunately only $25,000 worth of the gift cards were redeemed, so they can only report to their investors that they had sales of $275,000 ($25,0000 in products + the $25,000 in redeemed gift cards). $275,000 in income - $280,000 in operating expenses = $5,000 in the hole. That means they have to report a loss to their investors, despite having taken in more money than they spent. The potential impact? Perhaps a lower stock price and/or a lowered credit rating for the company and consequently higher interest rates on loans from creditors. Ok, what if they made a generous $1,000 in interest on that unreconciled $25,000 while it sat in the bank that year? That still leaves them $4,000 in the hole. Additional accounting overhead, lowered stock price, lowered credit rating/higher loan interest would pretty quickly burn through that $1,000 and then some.
(I hope I'm remotely close with my painfully convoluted, yet oversimplified explanation)
Also, why does the government need to step in and legally prevent them from charging that fee? Again I submit that reasonable fees are ok provided they are disclosed openly up front at the time the card is purchased. Put the terms in large print on the front of the card to disclose the terms readily to both the purchaser and the gift recipient. If consumers are so put off by these fees, then they will revolt by not buying the gift cards.