There’s a lot of bad press when public companies report how much gift card liability they have, but it doesn’t automatically mean that a company is utilizing those funds for financial gain.
“Take Starbucks, for example. It’s reporting over a billion dollars in liability in their annual report,” said Jordan Hirschfield, Director of Prepaid at Javelin Strategy & Research. “That looks like a massive number, but they have $13 billion in sales. So the liability left over is around 8%.”
In his recent report, Unused Value in Prepaid Cards: Breaking the Misconceptions, Hirschfield delves into gift card liability and why it may be considered a misleading term. The report also examines how businesses can strengthen and maintain their prepaid programs and encourage the spending of unused balances.
Breaking Down Breakage
When a gift card is purchased it’s not recorded as revenue—it’s considered a liability because someone still has to redeem it.
That’s likely where the misconception around liability comes from, because when reporting on quarterly revenues, companies indicate how much gift card liability they have. And many people who see a lot of prepaid liability on a company’s balance sheet take that to indicate that the company is using the liability or breakage to boost revenues artificially.
Companies don’t actually generate revenues from the outstanding gift card balances. They can, however, invest it and earn interest on it. Companies term the money that never gets redeemed as “breakage,” which is distinct from liability and is generally applied for funds determined by formulas set by the company based on long term disuse.
For example, Starbucks had around $190 million dollars in breakage in 2022. That is a significant sum of money, but compared to the $13.5 billion that it’s selling every year in prepaid cards, it’s not necessarily impacting the company’s bottom line.
“Javelin estimates breakage averages out across the industry to about 1.5%,” Hirschfield said. “Starbucks, for example, has breakage just slightly above that figure at 1.6%.”
Every company has a formula to calculate breakage. “Usually companies consider gift cards that are five years as unredeemed breakage,” Hirschfield said.
Interestingly, not everyone reports their breakage.
Liability is an accounting term for the amount that they know will be redeemed in the future. “They can’t book it as revenue,” Hirschfield said. “But the likelihood is, it’s going to be redeemed fairly quickly.”
Learn more about what happens to balances on unused prepaid cards, the regulatory issues issuers and prepaid managers need to be aware of when they consider unused value, and how consumer behavior is affecting the use of gift cards and stored-value accounts.