Gift cards now account for over 55% of the entire amount that the average shopper spends on gifts throughout the year, - [Julia] And it's not hard to understand why they're easy to buy, easy to give and vary in demand.

In fact, gift cards are the most requested category of gift beating out clothes, books, and electronics.

- So gift givers are happy and gift receivers are happy.

Sounds like a win-win.

Yet somehow I feel a bah humbug is coming.

- Sorry.

Scrooges gotta scrooge.

While economists were once all "Joy to the World" about gift cards.

More recent data suggests that "It's Beginning to Look a Lot Like Griftmas."

What?

I just don't want them to get "Fleeced Navidad".

(upbeat music) - First, the good news.

Gift cards have likely minimized the infamous deadweight loss of Christmas.

Deadweight loss is an economic term for the negative gap between what something costs and how much positive benefit it brings.

If your aunt sends you a $10 fruitcake and you stick it in the back of your fridge only to find it two years later when moving apartments and quickly toss it in the trash without unwrapping it, that is a deadweight loss of $10.

- In the 1990s, economist Joel Waldfogel estimated the annual deadweight loss of Christmas time to be between $4 and $13 billion every year, and it's surely much higher today.

That's a lot of ugly sweaters.

- At the time, Waldfogel was enthusiastic about gift cards as a way to alleviate this problem, since in theory, they allowed the recipient to buy what they really want and therefore maximize the enjoyment to cost ratio.

- However, since then, the explosive popularity of gift cards has revealed an ugly economic downside.

One study found that around 70% of gift cards get redeemed in the first six months, but after that, the odds of redemption fall precipitously.

There's a lot of potential reasons for this.

Maybe the card got lost or forgotten.

Maybe the recipient doesn't like the store or can't get there, or maybe they used most of the balance but left a few bucks on the card, which is now gathering dust in the bottom of some junk drawer.

That all adds up to some pretty big numbers.

- One estimate suggests that up to 3% of all gift card value will never be redeemed, and since over $300 billion is spent annually on gift cards in the US, that's a ton of money languishing in America's collective junk drawer.

Enough to eliminate malaria in dozens of countries or provide safe drinking water to a hundred million people every year.

- But wait, that money isn't actually in our junk drawers.

It's in the retailers' bank accounts.

- That's true.

In a sense when we buy a gift card, we are giving the company an interest-free loan, which they can spend or earn interest from.

- [Julia] But that amount is counted as a liability since the loan holder, you, can demand repayment at any moment in the form of merchandise.

- However, if the gift card isn't used for a long time, they are allowed to count a portion of it as "breakage income," the percentage they estimate will never be redeemed and may be treated as revenue.

In 2024, Starbucks revealed that they make about $200 million in breakage income every year.

Basically money for nothing.

Just a little annual Christmas gift from the American people to the world's largest coffee house chain.

- This bonanza for retailers has spurred some regulatory action.

Federal law now mandates that gift cards have an expiration date of at least five years from the moment of purchase, and retailers may not start deducting inactivity fees until after 12 months of disuse.

Some states have more consumer protections like California, where gift cards may never expire and balances under $10 can be redeemed for cash.

Or New York, where breakage income goes not to the retailer, but to a state controlled account where it may be claimed by the gift card owner or used to pay for public services.

If you have unredeemed gift card money in your name, not common but possible, you can search for it on your state's unclaimed funds website.

- There are other dangers with gift cards like a store going out of business.

After declaring bankruptcy retailers like Joann's Fabrics, Forever 21 and Bed Bath & Beyond were allowed to refuse to honor gift cards.

Under bankruptcy laws secured creditors like banks get paid back first.

Unsecured creditors like gift card holders are at the bottom of the list and unlikely to get paid back at all.

- There is also around $217 million of gift card related fraud perpetrated every year.

And I'm not just talking about hunky Marines stationed overseas who need iTunes credits.

Some scammers will scan the barcode of a gift card while it's still on the rack, wait for someone to buy it and load it with money and then spend the balance before it's even gifted.

- If you're looking for an alternative to gift cards this holiday, there is something that has intrinsic value, never expires, carries no risk of deadweight loss, and isn't a donation to giant retailers: cash!

There's a stigma around giving cash as a gift, but has anyone really ever been disappointed to receive it?

It may be less personal than hand knit sweater, but so are gift cards.

And if you wanna add a thoughtful touch, buy a nice greeting card and write something heartfelt in it.

- Another gift giving strategy is to make detailed wishlists of what you want and share them with family and friends.

Some complain that this takes the surprise out of gift giving, but let's be honest, most people don't wanna be surprised, they want what they want.

- [Philip] Of course, gift giving isn't really about maximizing cost to benefit ratios or eliminating deadweight loss.

It's about strengthening emotional bonds between people.

- [Julia] And the gift giver gets something out of the interaction as well.

The chance to show that they care enough and they know you well enough to choose the perfect gift.

- They may not always succeed (or even often), but maybe making the attempt is worth a little economic inefficiency.

- [Both] And that that's our two cents.