Seigniorage fact of the day

Last winter, Best Buy Co. reported a $43 million gain in fiscal 2006 from cards that hadn’t been used in two or more years.  Limited Brands Inc. recorded $30 million in 2005 revenue because of unredeemed cards.

so, this holiday season is likely to see record sales of gift cards.
The National Retail Federation, a trade group, estimates that shoppers
will buy $24.8 billion worth of cards, up 34 percent from last year.

Here is the full story.  The bottom line?

”It can be fun to get them, but then I forget about them,” said
Deborah Cabaret, 46, who has hundreds of dollars worth of unused cards.
”Or I walk into the store, I look around, I don’t know what I want,
and I leave.”

About 6 percent, or $4.8 billion, of this year’s gift cards will go
unused, estimated Laura Lane, vice president of unclaimed property
services for Keane Co., a compliance and risk management consulting

Consumer Reports put the figure even higher, estimating
that 19 percent of those who received cards last year had not used them
because the cards were lost or expired.

Imagine that, the "showing-that-you-care" benefits of gift-giving, but without the deadweight loss.  Just a pure transfer from an individual to some shareholders, no one has to divert resources by cashing in on a not very valuable present.

Here is a not unrelated story about insurance.


Your remarks on gift cards do not even mention the outrageous gift cards from credit-card companies where interest is charged when you don't use the money. Is this a negative interest rate? -- you pay them up front, give the card to a recipient, then (if they don't use it in a couple of months) interest incrues on THEIR DEBT to your gift recipient. Every time I read about this I think I must have misunderstood, but it always seems to be the case.

I believe the value of the gift card is accounted for on the issuing company's balance sheet as deferred revenue. If they never expire the value continues to accumulate. Some people may sit on them for several years and eventually use it but there will always be cards that are lost or forgotten and that value will never go off the balance sheet and flow to the income staement without adding an expiration to the gift card.

The argument I've been given is that the value starts to affect financial performance numbers like return on equity. But to me that makes no sense. You could keep the value on the balance sheet and use it in the place of debt thereby lowering interest cost which would enhance financial performance. So likely its just an excuse to rip people off in an underhanded way.

After reading all of this, I found myself wondering if seigniorage is the right word for what's going on here. I'm not a derivatives expert by any means, but isn't this more of an option?

From the article, the National Retail Federation estimates $24.8 billion will be sold this year and Laura Lane estimates 6% or $4.8 billion will go unused. Huh?

The issue is that if you leave the balance on your books, it's going to start driving down return on assets / return on capital ratios eventually. Also, it drives up the total liabilities of the company.... I'm not in favor of expiration dates but it's understandable. After 5-10 years, you need to have a way to write off these cards. Maybe an alternative would be to have them done by an off-balance sheet entity much like extended warranties -- the store would buy them off another company, and when they get cashed in, the store bills the other company for the value of the card. The only problem is then you couldn't book the profit from the breakage.


Yes the money owed from these cards are a liability on the balance sheet but so are deposits on the books of a bank. Buffett got to be as wealthy as he is in part because he recognized that the free float that the insurance industry generates (the time between when premiums are collected and when claims are paid out) is essentially a very large free loan as long as you are at least breaking even on your underwriting. So I think that the deferred revenue these unused cards generate could be looked at as a low cost form of financing as it is basically a loan that you pay zero interest on.

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