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Gift cards are the allowance of the era. Aftermost year, shoppers spent about $25 billion on cards of all kinds, from acceptable stored amount and promotional cards to loyalty, rebate, electronic, and e-cards. In fact, balloon Zhu Zhu Pets or Tickle Me Elmo: allowance cards accept been the best accepted anniversary allowance address the accomplished four years running, according to the National Retail Foundation, which estimates that added than 75% of shoppers purchased one or added allowance cards aftermost Christmas.

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In aloof a few years, the gift-card industry has become a rapidly accretion banking cosmos in which banks, credit-card companies, retailers, and makers of chump appurtenances always enhance their strategies for this advantageous market. The industry has alike spawned a accessory bazaar in which recipients can sell, swap, and buy one another’s cards. And it has accustomed acceleration to a growing acreage of third-party processors to administer the cards’ beginning legal, regulatory, and accounting issues.

That aftermost angle of the gift-card apple is bound acceptable a affair for CFOs. Take, for example, the circuitous liabilities that appear aback a agenda expires afterwards actuality adored by the consumer. Certain cash-strapped states say the bare balances (or “breakage,” in industry parlance) are bearding acreage due them beneath accompaniment escheatment laws. Accustomed that an estimated 10% to 20% of the sums spent on cards anniversary year is breakage, it’s no admiration the states are interested.

“Some states, like Arizona and Maryland, accept either absolutely or partially exempted allowance cards as a acreage accountable to escheatment laws,” says Giles Sutton, tax accomplice in accounting close Grant Thornton’s Dallas office. “But abounding others, like New York and New Jersey, are accumulative their following of abeyant cards to addition revenue, which is apparent as beneath abhorrent than a tax increase.”

Then there are the accompaniment tax consequences. For a accompaniment to tax an article affairs a allowance card, the article charge accept antecedent — a concrete or bread-and-er attendance establishing administration in that state. This gets ambiguous aback the issuer is an online business with no brick-and-mortar stores, like But, says Sutton, “if a allowance agenda is on a kiosk, does the buying of a agenda on that kiosk, afterwards any added activities by the gift-card issuer in that state, authorize a concrete attendance for the issuer? In some states this is abundant to authorize nexus, authoritative acquiescence intricate.”

Nonetheless, issuers assert that allowance cards are annual the headaches. They “are a way for us to strengthen our brand, access interactions with consumers, drive cartage to our Website, and animate consumers to absorb above the banned on the cards,” says Tracey Swain, administrator of accumulated accounts at TaylorMade Adidas Golf, a maker of golf clothes and equipment. Like added companies that affair allowance cards, TaylorMade started out by alms cardboard allowance certificates. Three years ago, it began to action accepted allowance cards to golf retailers (that could be accustomed abroad as golf-tournament prizes, for example).

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Golf highlights one above address of allowance cards — they can be personal, yet pragmatic. “You apperceive your dad loves golf; you may alike apperceive the cast of golf club he prefers. But he’s activity to appetite to baddest his own clubs,” says Samuel Cochrane, ambassador for Golf Town, a 59-store alternation that offers a array of gift-card options, including some that can be reloaded with cash.

Be Loyal to Your BurritoBoloco, a alternation of burrito restaurants, additionally offers a allowance agenda that can bifold as a adherence card, and which can be reloaded with banknote via the company’s Website. “It’s not a acclaim agenda — it can be acclimated alone at our restaurants or on our Website to buy Boloco merchandise,” says Patrick Renna, CFO of the company, which generates $18 actor a year in revenues.

The cards accept become so accepted that “you about never accept to use banknote here,” Renna boasts. “People aloof accumulate reloading their cards with money and application them afresh and again.” The cards additionally accord Boloco the adventitious to adeptness out to those barter afresh and again, with assorted promotions.

That’s a nice business edge, but Renna cites “customer frequency” as the number-one annual of Boloco’s allowance cards. “Retaining barter costs a lot beneath than breeding new customers,” he explains. “People with registered Boloco cards additionally absorb added money per appointment than addition afterwards a card, apparently because they’re apt to try new dishes.”

What’s next? “We’ve aloof amorphous to tap amusing media, so that if a chump has a complaint, the aide can instantly add credibility to that person’s agenda and tweet, ‘Sorry about your aftermost appointment — appear by and try us afresh for free,’” says Renna.

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Indeed, gift-giving seems to be aloof a baby allotment of what these cards can do as they morph into their own anatomy of currency. Young America Corp., for example, works with retailers and chump packaged-goods makers to accommodate rebates as branded prepaid cards. “A abatement acclimated to be banknote you accustomed at the point of sale, but there’s greater amount in putting a abatement on a prepaid agenda with your company’s logo,” says Mark Lockwood, arch carnality admiral of acquittal casework at the company. “Even admitting the abatement can be spent anywhere, our analysis indicates that at atomic 10% to 15% of it will be spent aback at the abundance or on the company’s products. The logo drives purchasing behavior.”

Michael Chittaro, arch of Visa’s accumulated prepaid-products group, addendum that “given that estimates of abatement promotions are about $6 billion a year, the economics of branded cards are huge.”

Another aberration on this affair is actuality played by Coinstar, provider of self-service coin-counting machines about begin at supermarkets and added retail locations. Typically, consumers able accessible their aback banks and cascade the capacity into the machines and accept a agenda for banknote or in-store acclaim in return, for which Coinstar accuse a 9.8% fee. A few years ago, it came up with an addition approach: accord bread redeemers the advantage of accepting allowance cards from ally like iTunes,, Lowe’s, and Banana Republic, and pay no fee to Coinstar. “We’re aloof as to who pays us — the chump for demography banknote or the banker for the allowance card,” says Scott Di Valerio, CFO of Coinstar. “Although the lion’s allotment of consumers opt for the banknote back, we are alluring the fee-avoider articulation of the chump population.”

Back-End BurdensThese and added envelope-pushing gift-card strategies are evolving faster than agency to tax, regulate, and annual for them. Larger companies, such as Visa, Coinstar, and Golf Town, accept adult legal, finance, and business departments that are able to affair cards, clue purchases and bare balances, and cope with accompaniment and federal acquiescence issues. Smaller apparel like Boloco leave the workload to annual firms like Paytronix, Agenda Compliant, and others. These companies can assay through “whether a acquirement on a accumulated value/promo agenda should be advised as a abatement or a tender,” as Scott Walters, a Paytronix sales representative, puts it. “Restaurants that try to do this on their own about mark a bargain as acquirement aback it is an amount [a bearings breadth credibility are acclimated to accomplish a purchase].”

Mike Loritz, a actor at accounting close Mayer Hoffman McCann, says the third-party providers serve a all-important purpose. “If I were arising these cards, my better affair would be tracking the record-keeping requirements,” he explains. “New federal revenue-recognition standards, free what is and isn’t tax or a accountability beneath GAAP and tax rules, and again blockage adjustable with the escheatment laws crave near-full-time attention. You charge three sets of books — GAAP books, tax books, and what I’ll alarm acknowledged books.”

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For a agenda issuer that does not appoint cessation dates or cessation fees (or, in some states, is banned from accomplishing so), Loritz says it now has a “liability that lives on forever. You charge to derecognize this accountability at some point and booty it to assets so it no best appears on the GAAP books. But, there are assorted tax laws [that dictate] aback you can and can’t do this. And if addition redeems the agenda 10 years from now, you still charge to accept the banknote in a belted annual or a assurance account. Otherwise, you’ll charge operating banknote accessible to abate the liability.”

Reputation additionally comes into play, say some CFOs. While abounding cards will never be redeemed, for those consumers who do aback acquisition an old card, Boloco and others agreement to account it, no amount the accurate absolute cost. “We’re a consumer-oriented company; we’d account them,” Renna says.

The Banned of the LawSeeking to accommodate some accuracy to gift-card purveyors, the Federal Reserve implemented new rules in August 2010, apprenticed by the Acclaim Agenda Accountability Responsibility and Acknowledgment Act of 2009. The Fed beefed up acknowledgment requirements and put restrictions on dormancy, inactivity, and annual fees, which can bang in alone afterwards a chump has not acclimated a allowance agenda for at atomic a year. It additionally about prohibits the bargain or arising of allowance cards if they accept an cessation date of beneath than bristles years.

That legislation was aimed primarily at convalescent chump protections, but it competes with a morass of adverse accompaniment laws. “Because the federal act does not accroach accompaniment law unless the accompaniment law is inferior [to the federal rules] insofar as attention the consumer, companies charge still assay on a state-by-state base whether or not their gift-card programs are compliant,” says Carol Osborne, accumulated administration armchair for Denver-based law close Holme Roberts & Owen. “The claiming for CFOs is that they anticipate they accept set up a affairs correctly, but again the business accumulation tweaks it actuality and there. Anniversary change adeptness accept the appropriate business outcomes, but they charge to be vetted by finance.”

Osborne has two recommendations. “The better aberration a aggregation can accomplish is not ambience up the affairs correctly,” she says. “You charge to accept an accomplished law close or acquiescence consultancy advice you to accomplish the business allowances you appetite afterwards any acquiescence issues. Again it is up to accounts to advance a band of advice with marketing, which absolutely drives these programs, to ensure they accept that allowance cards aren’t aloof about authoritative barter blessed and active added chump interactions; there are abundant acquiescence risks as well.” Osborne says the amount of designing a affairs with admonition can be beneath than $10,000.

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Grant Thornton’s Sutton predicts an access in both the pros and cons: the affiliation of gift-card strategies will addition sales for issuers while additionally causing added back-office headaches. “I’ve heard of $25 cards that buy $50 in merchandise, and alike coupons that are attenuated into allowance cards,” he says. “Just brainstorm the [accounting] implications.”

Sutton abounding the National Retail Federation barter appearance beforehand this year and says the cardinal of technology firms outstripped absolute retailers. “Retail is now 90% technology,” he says. “The approaching is allowance cards conjugal to adaptable apps.”

That may advice the basal line, but additionally seems acceptable to accomplish allowance cards alike added circuitous to manage.

Russ Banham is a accidental editor of CFO.

Gift-Card Power Plays

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Consumers about ambition they had added ascendancy over how to use allowance cards; some retailers ambition consumers had less. These days, both parties accept options for accepting what they want.

For the chump who wishes the cards were added like cash, there are a cardinal of new Web-based services, including Swapopolis, Plastic Jungle, and Swapagift, that aim to do aloof that. “We’re all attractive to get beyond to bodies that they can about-face their exceptionable allowance cards into capital allowance cards, cash, or donations to their admired charity, while enabling them to amplitude their arcade dollars and buy these allowance cards at a discount,” says Swapopolis architect and arch bandy administrator Sean Snyder.

Swapopolis offers affluence of adaptability to gift-card holders. Although it afresh phased out an eBay-like bargain process, it does acquiesce consumers to bandy cards by affairs them on the armpit and application the gain to buy addition card, or they can advertise allowance cards absolute to addition user, anon to Swapopolis, or accord cards to charity.

Meanwhile, merchants continued for a little beneath fungibility. Enter a aggregation alleged StoreFinancial, which offers arcade centers, malls, and added audience with groups of detached merchants a way to bind gift-card redemptions to alone that location. The agenda can be adored at any abundance in a accustomed arcade center, for example, but not at the aforementioned abundance in addition center. “You can use it at the Gap in one mall, but not at addition Gap bottomward the street,” says StoreFinancial CEO Jeffrey Brown.

Consumers still accept affluence of flexibility, the altercation goes, because they can use the agenda at dozens of food in a accustomed applicant site. The annual for the centermost is what Brown calls “lift” — the adeptness to accompany bodies into a arcade breadth through promotional means.

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Where this all gets a bit circuitous is at the aback end. StoreFinancial ally with Bank of America, UMB, and Peoples Trust, which affair the cards and booty a cut, as do the arcade centermost and StoreFinancial. “We administer and achieve the monies, and accommodate the accounting and pooling of funds,” says Brown. The aggregation additionally provides advertisement and added back-office support. — R.B.

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