The Dark Side of Gift Cards, Coupons, and Prepaid Cards: What They Don’t Want You to Know

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We've all been there: You pull out a gift card, perhaps one from a distant birthday, and head to a store eager to make your purchase, only to be met with an unfriendly or dismissive attitude. The cashier may give you a few excuses as to why you can't redeem your gift card, why it doesn't work with certain items, or even why it's "only good for clearance items." It feels like a scheme designed to frustrate you—one that leaves you feeling helpless and disillusioned with the very concept of prepaid cards, gift cards, and coupons. Unfortunately, this is not an isolated incident.

While many businesses honor gift cards and prepaid cards, treating customers with the respect they deserve, there are far too many others that subtly—or not so subtly—use their gift card systems in ways that don't always have the customer’s best interests at heart. The business model itself, while convenient and often lucrative, can feel more like a manipulation rather than a thoughtful gesture.

The Genius Business Model Behind Gift Cards

To understand why this happens, let's take a step back and look at how gift cards and prepaid cards function as a business model. When a company sells a gift card, they receive payment upfront—essentially, the customer has already paid for goods or services, but the company hasn’t delivered them yet. It's an interest-free, collateral-free loan that can only be spent within the company's ecosystem. In a way, it’s like a store-issued currency, with no expiration date (often) and no way to convert it back to cash.

Think about that: When you buy a gift card, you're essentially giving the company an interest-free loan that they don’t have to repay unless you redeem it. This setup allows retailers to operate without the burden of regulations or the complexities associated with banks and public companies. There's no need to worry about stock issuance, reserves, or strict oversight, which makes this industry a trillion-dollar giant, ripe for manipulation.

The Breakage Phenomenon

The truly insidious side of this model, however, comes in the form of breakage. Breakage refers to the percentage of gift cards or prepaid cards that are sold but never redeemed. That’s right—many people purchase gift cards, only to forget about them, misplace them, or never get around to using them. And the company keeps the money without ever having to deliver the goods. For example, in 2021, Starbucks reported $155 million in non-taxable profit from unused gift and loyalty cards alone. Think about that number for a moment—$155 million just sitting there, in customer funds that will never be claimed.

This unclaimed money, while not always maliciously manipulated, can be a tempting revenue stream for less scrupulous businesses. By constantly changing terms and conditions, increasing friction in the redemption process, or offering a subpar customer experience, some companies make it intentionally difficult for customers to redeem their gift cards. In this way, they rely on breakage to increase their profits.

Real-Life Experiences: The Frustrations of Prepaid Cards

We've all encountered the frustrations that come with trying to redeem a gift card or prepaid card, especially when systems suddenly change or become more restrictive. Take, for instance, a personal experience with a prepaid card I had been using regularly for nearly 10 years. One day, without any notice, the system was updated, and my prepaid card was no longer accepted. Despite a significant balance left on it, the establishment informed me they could only accept another form of payment.

What followed was a complicated process that included long waits, phone calls, and tedious forms, all designed to migrate my funds to a new platform. It was a huge inconvenience, especially considering how long I had been a loyal customer. And this isn’t just a rare occurrence. Similar issues are popping up with frequent flyer miles, where customers face endless loops of error messages, hoping they’ll give up in frustration.

So, What Can We Do About It?

The gift card and prepaid card industry is a massive and lucrative sector, but it’s also one that heavily relies on customer loyalty—and often, that loyalty isn’t reciprocated. Here’s what consumers and businesses alike can do to address the darker side of the industry:

For Consumers:

Use Prepaid Cards Quickly: Don’t let money sit on prepaid cards. If you’ve been given a gift card or purchase one yourself, use it as soon as possible. If it’s not being used, it could become a forgotten liability.

Avoid Storing Money on Prepaid Cards: Don’t leave a balance on a prepaid card that you may never use. If a store doesn’t offer value that exceeds what you’d get with cash, it’s not worth storing money in their system.

Consider Credit Cards with Rewards: Rather than using gift cards or prepaid cards that offer little to no return, opt for credit cards that provide rewards or cash back—just make sure to pay them off in full each month to avoid high interest rates.

For Businesses:

Treat Prepaid Customers Like VIPs: Gift cards should be treated as good as cash. Customers who invest in these cards should feel like they are getting a high-value experience and should be able to redeem them with ease.

Prevent Breakage: To minimize unclaimed gift cards or rewards, businesses should introduce more transparent terms and make the redemption process easier, not more difficult. Ensure the customer experience remains at the forefront.

Escrow for Prepaid Funds: When prepaid cards hit a certain threshold, companies should be required to hold those funds in escrow until they are used. This would prevent companies from treating prepaid funds as their own money and ensure customers get the value they paid for.

Conclusion

Gift cards, coupons, and prepaid cards have become ubiquitous in the modern marketplace, but behind the convenience lies a darker side. While they can be useful and offer value to consumers, there are elements of the business model that exploit customers in subtle but impactful ways. The sheer scale of unclaimed gift cards, the changes to redemption processes, and the general treatment of prepaid customers as liabilities rather than assets can create a frustrating experience for many.

As consumers, we can take steps to protect ourselves by using prepaid cards promptly and seeking out options that provide more tangible rewards. At the same time, businesses should recognize the power of loyalty and provide a fair, transparent system that truly rewards their customers for the money they’ve invested. Only then can the gift card industry fulfill its promise of convenience and value for all.

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