Gift cards cards are safer, but not safe, and rebate cards are tricky — 30 Days of Gotchas

Complicated rebates have largely disappeared. They still appear in major appliance purchases, however.

(NOTE: This is a free excerpt from my new book: Gotcha Capitalism, 10 years later.  A lot has happened in the world of credit cards since 2008.  It’s fun to look back….)

Gift cards could be pretty diabolical when they burst onto the scene in the late 1990s. Junk fees could drain their value from the moment they were purchased. There were dormancy fees, use fees, account opening fees, and the biggest fee of all — the “use it or lose it” fee. Unspent gift card balances had become an epidemic. By 2011, the TowerGroup said there was $41 billion in unredeemed gift cards lying around. There was so much money that cash-strapped state governments started to attack the piles of leftover money with arcane escheat laws, even as corporations nibbled up the cash to help their own balance sheets.

It’s *almost* all better now.

Beginning a decade ago, individual states started passing laws banning many fees. Then, both Congress and the Federal Reserve acted, basically guaranteeing that consumers have five years to spend gift cards. With these helpful new rules in place, “breakage” and “spillage” started to decline. Annual gift card sales are now about $130 billion, but spillage is down to about $1 billion annually. That’s still a decent chunk of change, but the free market has had a hand in helping consumers, too. Numerous firms like Israeli startup Zeek make it easy for consumers to sell unwanted and unused cards on the Internet — trading the plastic in for cash. (The givers should have just given cash in the first place!)

Not all gift cards are created equal, however. “Store” or “retail” gift cards have the strongest protections now, so it’s always best, and most thoughtful, to give someone a card with a store brand name on it. That shows you at least thought a little about what the recipient might want.

Bank gift cards still come with more fees. There’s often an activation fee, for example. These cards are issued with a credit-card network logo, like MasterCard or Visa, and have the advantage of being spendable almost anywhere. Thanks to strong competition, fees on these cards have become more reasonable through the years. Still, who wants to pay $44 to give someone $40? Just give them cash! It never expires, and it’s free to check the balance!

It’s easy to confuse bank gift cards with other kinds of stored-value cards, like the Walmart/Amex Bluebird card, which is designed for ongoing use as a faux checking account. Bluebird is a good deal for someone who can’t get a traditional checking account or for a parent wanting to give an ongoing allowance to a child. It’s not a good deal when a simple gift card would do.

Meanwhile, there’s another wrinkle in the gift-card world: increased fraud. When banks switched credit cards to chip-enabled EMV cards, they left behind a huge vulnerability — anything else with a magnetic stripe. Criminals frustrated by EMV made a hard left turn and started attacking gift cards and their outdated security back in 2016. Bot-enabled attacks have hit on card numbering patterns, letting criminals systematically raid and drain thousands of cards.

Worse yet: Gift cards don’t come with the fraud or liability protection that credit and debit cards do. So when a hacker drains a gift card, there’s nothing a consumer can do except beg for mercy. Really.

It happened to JoNel Aleccia of Seattle. She bought a $100 Nike gift card for her son-in-law at a QFC grocery store. By the time he got it, the card had only $6.76 in value left. She complained to QFC, which sent her to Nike customer service. Nike said the card was used for $93.24 at a nearby factory outlet store. And that was it.

“Nike told me the card was used in Seattle and they’ve had no further response,” Aleccia said. She went to the QFC store where she bought the card, and a manager wrote down her name, but nothing further happened.

Fortunately, Aleccia’s story has a happy ending. After I contacted Nike about the incident, the firm told me it would refund her money.

But you might not be so lucky. So I’m recommending you stop buying gift cards for now; at a bare minimum, don’t buy them from third parties like grocery stores. And if you get a gift card, spend it immediately. Until gift cards come with real consumer fraud protection, I just don’t consider them safe, particularly now that hackers have their sights set on them.

Finally, there’s another entrance in the gift-card category that is sure to both delight and confuse consumers soon: It’s sometimes called “eGifting.” Consumers using stored-value smartphone apps like Dunkin’ Donuts’ or banking apps like Apple Pay can give money as a gift without even purchasing a piece of plastic. It’s a relatively small market now, but it’s creeping up toward 10 percent of the gift-card market. Experts expect it to be more popular as time goes by. The Venmo generation doesn’t need to bother with plastic or a card! They’ll just beam the money.

Once again, it’s critical to understand what consumer protections are in place — or are missing — when you move money this way. Venmo suffered lots of growing pains when consumers realized it was more like Western Union and less like Visa, meaning transactions couldn’t be reversed and there were precious few fraud protections. Starbucks app users keep learning the hard way that it’s pretty easy for criminals to raid their apps — and even use the app to access linked bank accounts — but it can be hard to get their money back from the coffee giant.

Whenever there’s a new money system, consumer protections and fraud controls are always last to arrive. They’ll come, but they won’t come fast enough for you when a criminal steals from you.

So, I’ll say it again: You can always give cash!

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