It’s a financial gimmick. The company realizes the income immediately while service is rendered later. This has positive impact on the finances.

▲

quesera 3 days ago | parent | next [-]

That's backwards. The company treats the GC as a liability. It cannot recognize the funds as revenue until they are spent. This is GAAP and law (but see exception below).

GCs are valuable to brands because they are marketing tools. Recipients are prompted to go to the merchant to spend money, and they usually spend about 40% more than the face value of the card.

Also, GCs are valuable to merchants for breakage. This is when a card (or partial balance) goes unused. Starbucks, as an imperfect example, recognizes about 10% of their total outstanding GC balance as revenue every year, due to breakage. This amounts to hundreds of millions of dollars.

▲

Workaccount2 3 days ago | parent | next [-]

But all those GC funds sit in investment accounts until they are used. It's genuinely profitable to have millions in unredeemed gift cards (and mobile app dollars) sitting around unused.

I've never had my $100 GC be worth $104 a year later, but for the issuer it is. They just keep the $4.

▲

dev_l1x_be 3 days ago | parent | prev [-]

Sorry I was not aware of GAAP. Anyways, I think the primary benefit is the interest-free financing. The company gets to hold the customer's cash and use it for operations (working capital) for the entire time the gift card is unspent. Maybe I was not right with the account terminology and should have mentioned the cash flow positive impact only.

Maybe it is more accurate this way?

	▲	quesera 2 days ago \| parent [-]
		It's a combination of things: marketing (difficult to quantify, but > 0), interest/appreciation on the float (4-10% annually), forecasted overspend (30-40%), and breakage (5-10%). The GC face value is a liability on the books though. It's treated as debt when doing cash calculations. They actually do want you to use the cards though. The overspend is more valuable to them than the other disposition possibilities. Recognized revenue is always the best outcome. The interest/appreciation is the same for the merchant, whether on float or on revenue, but revenue is better for reports. More broadly: All benefits of the cards definitely accrue to the merchant. There's absolutely nothing valuable to consumers about the deal!

▲

stavros 3 days ago | parent | prev [-]

Well yes, obviously, and the company doesn't have to pay anything for the cost of locking you out of all your work files forever and costing you however much, so it's all upside for them.

If they had to reimburse you for the cost of all your lost files, then we'd see the real impact on finances.