On the surface, gift cards seem like a straightforward win-win:
- Your customers don’t have to fret about buying the perfect gift.
- You can generate cash flow, bring in new customers and gather consumer data.
Underneath the surface, however, it can be difficult to know how much gift card revenue you’re allowed to keep and when. Because, let's face it, we probably all have an unspent gift card hanging out in a drawer somewhere right now; what happens to that balance as it hangs in the balance? (pun completely intended)
Start with the sale
At the time of purchase, any fees levied on top of the value of the gift card are yours to keep (minus anything you owe to the issuer or other parties). For example, if you sold a $100 gift card with a $5 fee and an agreement to give 10% of that fee to the issuer, you would be allowed to keep $4.50 right away. At that point, the rest of the face value of that card becomes a liability.
Whenever the customer uses their gift card, your liability decreases accordingly, and revenue is recognized on their purchases just like any other form of payment.
Ideally your customers would spend the full amount of their gift card so your liability is reduced to $0…but what if they don’t?
What about breakage?
Unfortunately, not everyone will spend the full amount of their gift card. Whatever amount is leftover is known as breakage. Understanding your gift card breakage is crucial, because it may or may not become a source of revenue depending on your local jurisdiction.
The reason why breakage wouldn't be revenue is due to escheatment laws. Escheatment refers to the government's right to take custody of the outstanding balance on gift cards after a determined amount of time. So, for example, the government could have the right to seize the breakage on your outstanding gift cards after five years. And if you aren't prepared to pay up, it can be pretty surprising when they come to collect.
Escheatment laws can vary based on state jurisdiction, so you’ll need to find out what percentage of your gift card portfolio is subject to these laws, and how long you’ll have to wait before breakage is escheated. With this in mind, you'll be better prepared to start maximizing your gift card revenue.
Recognizing breakage revenue
Any breakage that is not subject to escheatment is yours to keep — but you can't claim that breakage all at once. Instead, national and international account regulations require that you recognize your breakage revenue over time. This is possible with the help of sophisticated models that predict your gift card breakage.
Here’s how it works:
- Let’s say your breakage models forecast that 10% of your gift cards’ value will go unused based on historical customer data.
- For this example, let's say you issue a $100 gift card.
- Using your forecasted breakage of 10%, you can expect $90 to be redeemed and $10 to become breakage.
- Next, let's say that 20% of your $10 breakage is subject to escheatment laws, and 80% is yours to keep.
- This means that over time, you would get to keep $8 of breakage revenue, and $2 would be escheated to the government.
You would recognize this $8 in revenue in proportion to the redemption of the their gift card. So if the customer came in with a gift card and spent 15% of the total amount they are predicted to spend, then you would recognize 15% of the predicted breakage revenue with that purchase.
As you can see, none of this would be possible with sophisticated, accurate forecasting models. For more information on how to track and analyze breakage, check out our post: Gift Card Breakage: Which Statistics Matter.
Gift card revenue without the hassle
The formula for recognizing gift card revenue is pretty straightforward, but predicting breakage and tracking it at scale can be overwhelming. The easiest way to keep your customers and your accountant happy is to employ the use of a sophisticated analytics program.
This software can automatically track, predict and dispatch gift card revenue, so you can get back to serving your customers. Ready to see for yourself? Schedule a demo with KYROS to experience what the power of analytics can do for your gift card portfolio today.