A Deep Dive on Buy Local Gift Cards for Local Economies:
As local governments explore innovative ways to stimulate economic growth and support local businesses, the promotion of multi-merchant gift cards has emerged as a popular quick and simple strategy. These gift cards allow recipients to shop at various local and larger retailers, providing a unique opportunity to boost community spending. However, this approach comes with both advantages and disadvantages. In this blog post, we’ll examine the pros and cons of multi-merchant gift cards, considering factors such as consumer accessibility, fraud risks, and regional differences in gift card laws.
PROS OF MULTI-MERCHANT GIFT CARDS
Support for Local Economy:
A multi-merchant gift card program can play a small role in boosting the local economy by encouraging consumers to spend their money within the community. This initiative helps retain capital within local businesses, which is essential for their survival, especially in the face of competition from Online Giants and out-of-town Big Box Retailers. By offering a multi-merchant card, the program ensures that funds are distributed across a variety of businesses, both large and small, thereby sustaining local jobs and fostering economic resilience.
Convenience and Flexibility:
These Multi-merchant gift cards are appear attractive to consumers due to their flexibility. Recipients can choose from a wide range of participating businesses, which increases the likelihood of the card being used. This variety appeals to a broad audience, making these gift cards a popular choice for gifts. The inclusion of large retailers also guarantees that recipients have accessible options, reducing the chance of the card going unused. This convenience boosts consumer satisfaction and ensures that the program reaches a wide demographic.
Encouragement of Local Shopping Habits:
Including both large retailers and smaller, independent businesses in the program can influence consumer behaviour. Shoppers who typically gravitate towards big-box stores might be encouraged to explore local businesses that are part of the same gift card network. This strategy can help diversify shopping habits, gradually increasing foot traffic to smaller, independent businesses. Over time, this could lead to a stronger local shopping culture, where residents prefer spending within their community.
Boosting Local Marketing:
The promotion of multi-merchant gift cards by local governments doubles as a marketing tool for participating businesses. It not only drives immediate sales but also raises awareness of local shops and services. This heightened visibility can attract new customers who may have been unaware of certain businesses, leading to long-term customer relationships and sustained local spending.
Increased Sales During Peak Seasons:
Gift cards are a popular choice during holidays and special occasions, leading to a surge in sales during these times. The promotion of multi-merchant gift cards can significantly boost spending within the local economy during peak seasons. This influx of sales provides a critical revenue stream for businesses, helping them to manage cash flow and invest in future growth.
CONS OF MULTI-MERCHANT GIFT CARDS
Limited Local Vendor Participation:
The requirement for vendors to have specific point-of-sale (POS) equipment to accept gift cards can exclude many small or independent businesses. These businesses may not have the resources to upgrade their systems, which limits their ability to participate in the program. This exclusion undermines the program's goal of supporting the entire local business community and could lead to frustration among business owners who feel left out.
The Inconvenience of Online Gift Card Purchases:
Delays and Frustrations on purchasing a gift card online can be inconvenient and time-consuming, requiring buyers to navigate websites, enter payment details, and deal with the limitations of debit or credit card-only transactions. The process often feels cumbersome, particularly for those who prefer using cash or need the gift quickly. Additionally, the delay in delivery, as the physical card is mailed, can be frustrating, especially when a timely gift is needed for a special occasion. These factors can make buying a gift card less appealing, potentially deterring people from using this method to support local businesses.
Consumers Favouring The Big Box Retailers:
While the inclusion of Large Big Box Retailers in the program makes the gift cards more versatile, it also raises concerns about how and where the funds are spent. There is a risk that most of the funds will be used at Big Box Retailers, which often have greater purchasing power and marketing reach. This could overshadow smaller, independent businesses and diminish the positive impact on the local economy. Consequently, the program might inadvertently support the dominance of large Big Box Retailers at the expense of the local businesses it aims to protect, ultimately defeating the entire purpose of promoting local shopping.
Localwashing!
How Big Box Retailers Undermine the Buy Local Movement:
Much like the concept of "greenwashing," the Buy Local gift card movement has been compromised by what could be termed "localwashing." While intended to support small, local businesses, the initiative has been co-opted by Big Box retailers. These large national and international chains have infiltrated the program, capturing funds meant for local businesses and diluting the movement's true purpose. As a result, the community-driven spirit of promoting Buy-Local shopping is overshadowed by corporate interests, leaving the original goal of supporting genuine local businesses largely unfulfilled.
When Good Intentions Meet Convenience:
The Mixed Impact of Buy Local Gift Cards, While the purchaser of a Buy Local gift card aims to support local businesses, the recipient may not share the same intent. If the card can be used at both small businesses and large national or international Big Box Retailers, the recipient might choose convenience and familiarity, opting to spend at Big Box Retailer instead. This can undermine the purpose of the buy local gift card, diverting funds away from the local economy and diminishing the intended support for community businesses. The success of such initiatives relies not only on the giver’s intentions but also on the recipient’s spending choices.
UK Short Expiry Period Compared to U.S. Regulations:
The 12-month validity period for gift cards is notably shorter than the five years mandated in the United States. U.S. federal regulations require that gift cards cannot expire before five years from the date of purchase, and reloadable gift card funds are valid for five years from the date of the most recent reload. This significant difference means that, in regions with a shorter validity period, a substantial portion of gift cards might go unused if recipients forget or delay using them.
Millions wasted as people don’t spend gift vouchers: See GOV.UK Press Release
According to the UK Government every year as much as 6% of vouchers bought by consumers go unused as they lay forgotten in people’s wallets and drawers. This issue, known as breakage, refers to the phenomenon where gift cards expire before they are fully redeemed. Breakage benefits the issuing company or retailer, as they get to retain the unused funds. However, it can lead to consumer dissatisfaction and reduce the perceived value of gift cards, which could negatively impact the program's reputation.
Who Gets The Unused Money, Called Breakage?:
The concept of breakage is a critical consideration in gift card programs. Breakage occurs when the money on gift cards are not fully utilized before they expire, leaving unspent balances. In contrast to U.S. federal regulations, which prohibit post-sale fees from being imposed until after one year of inactivity and limit them to one fee per month, some other regions might have less consumer-friendly terms. Once a gift card reaches its validity period and remains unused or has a leftover balance, the issuing company benefits financially from these unredeemed funds. While this may be advantageous for the issuer, it can create a negative experience for consumers, who might feel shortchanged. The existence of breakage might also lead to criticism of the program, as it could be perceived as a revenue-generating tool for the issuers and retailers rather than a genuine effort to support local businesses especially if the gift card issuer is a large foreign entity and some of these funds are removed to a foreign country.
Environmental Impact:
The physical nature of the gift cards, which are made of plastic and need to be sent via post, raises environmental concerns. In an increasingly eco-conscious world, the use of plastic cards and the carbon footprint associated with mailing them could be seen as environmentally unfriendly. This could lead to criticism from consumers and businesses alike, particularly as digital alternatives become more viable and preferred. Adopting digital gift cards could reduce waste and appeal to a more environmentally aware consumer base.
Administrative and Distribution Costs:
The logistics of printing, managing, and distributing physical gift cards adds a layer of cost and complexity to the program. These administrative costs can eat into the overall budget, potentially reducing the funds available to directly support local businesses. Additionally, the reliance on postal services for distribution introduces delays and the possibility of cards being lost or damaged, which could further diminish the program's effectiveness and consumer trust.
Exclusion of Cash Purchases:
A critical limitation of these multi-merchant gift cards is that they can only be purchased online using debit or credit cards, with no option for cash purchases. This exclusion has several significant implications:
- Access and Inclusivity: Consumers who do not have access to debit or credit cards, such as those who are unbanked or prefer to use cash, are effectively excluded from participating in the program. This could alienate a segment of the population that might already face financial challenges, further limiting their ability to support local businesses.
- Digital Divide: The requirement to purchase the gift cards online also assumes that all potential buyers have internet access and are comfortable with online transactions. This assumption overlooks individuals who may have limited access to digital resources or are not adept at using online platforms, particularly older adults or those living in rural areas with poor internet connectivity.
- Reduced Impulse Purchases: The inability to purchase these gift cards with cash in physical locations, such as local shops or markets, might reduce the likelihood of impulse purchases. Consumers who might otherwise buy a gift card on the spot when shopping with cash are unable to do so, potentially reducing the overall sales of these cards and the associated benefits for local businesses.
Surge in Gift Card Fraud and Criminal Activities:
A critical and growing concern related to the promotion of gift cards is their increasing use in fraudulent schemes and criminal activities, including drug trafficking. Gift cards have become a preferred tool for scammers because they are relatively untraceable, easy to use, and can be converted into cash or other valuable goods. Here are some key ways in which gift cards are exploited:
- Scams Targeting Individuals: Scammers often trick individuals into purchasing gift cards as a supposed payment method for taxes, fines, or other fraudulent demands. The victims are instructed to buy gift cards and then provide the card details to the scammer, who then quickly drains the value. These scams can result in significant financial losses for victims, often with little recourse for recovery.
- Money Laundering: Criminals use gift cards to launder money because they are difficult to track. They might purchase gift cards with illegally obtained funds and then sell or use these cards in legitimate transactions, effectively "cleaning" the money. This use of gift cards in money laundering schemes complicates efforts by law enforcement to track illegal activities and disrupts the financial integrity of the gift card program.
- Drug Trafficking: In some cases, drug traffickers use gift cards as a currency for their operations. Gift cards can be traded or used to purchase goods that are then resold for cash, which can finance further criminal activities. The anonymity and convenience of gift cards make them attractive for these illicit purposes, posing a significant challenge to law enforcement agencies.
Lack of Consumer Protection:
Gift card purchases often lack the robust consumer protections that apply to other financial products. For example, if a gift card is lost or stolen, many issuers may not replace the lost funds, leaving consumers at a loss. This lack of accountability can deter consumers from purchasing gift cards and may lead to negative perceptions of the program.
Value Fluctuation and Fees:
Some gift cards may have terms that allow issuers to impose fees or reduce the value over time. For instance, if a gift card is inactive for a certain period, the issuer may deduct a monthly fee from the card balance. This practice can significantly reduce the card's value before it is even used and can frustrate consumers who may not be aware of such policies.
Risk of Card Deactivation:
Gift cards may also face the risk of deactivation by the issuer if they remain unused for an extended period such as 12 months. Consumers may find that their gift cards are inactive when they attempt to redeem them, leading to disappointment and potential financial loss. This issue can contribute to consumer distrust of gift card programs, particularly if individuals are unaware of the terms governing their use.
Consumer Trust Issues:
The lack of transparency and accountability can lead to consumer mistrust of gift cards. Individuals may be hesitant to purchase gift cards if they believe that their funds could be misused or if they fear becoming victims of scams that exploit the anonymity of these cards.
Fat Wallet Syndrome and Market Saturation:
As more retailers and local governments promote gift cards, the market may become saturated, leading to consumer fatigue. If consumers feel overwhelmed by the number of gift card options available, they may become less likely to purchase or use them. This market saturation could dilute the effectiveness of gift card programs as a promotional tool for local businesses.
Anonymity and Lack of Proof of Identity:
Gift cards are often purchased and used anonymously, which can pose significant risks. The lack of a requirement for proof of identity during purchase and redemption allows individuals to conduct transactions without revealing their identities. This anonymity can facilitate fraudulent activities, as scammers can exploit this feature to carry out their schemes with little risk of being traced.
The Surge in Gift Card Fraud:
Gift Cards and their use in criminal activities, and issues of anonymity present serious challenges that undermine the integrity and trust in gift card programs. While the promotion of multi-merchant gift cards by local governments has many benefits, these risks highlight the need for robust safeguards and public awareness campaigns to protect consumers and businesses from falling victim to fraud. By carefully weighing these pros and cons, including the significant differences in gift card laws between the UK and the USA, the exclusion of cash purchases, and the rising threat of gift card fraud and anonymity issues, local governments can better understand the potential impacts of promoting multi-merchant gift cards.
Balancing Benefits and Challenges for Local Economies:
While multi-merchant gift cards offer benefits such as supporting local economies and providing consumer flexibility, they also present significant challenges, including fraud risks, issues of accessibility, and concerns about market saturation. Local governments must carefully weigh these pros and cons, considering differences in gift card laws between the UK and the USA, to ensure these programs effectively support local businesses while protecting consumers.
Unintended Consequences of Buy Local Gift Cards:
The Buy Local gift card initiative, while well-intentioned in its aim to support small businesses, has led to unintended consequences that undermine its purpose. The phenomenon of "localwashing" has allowed Big Box Retailers to infiltrate these programs, diverting funds away from genuine local merchants and diluting the economic impact that the initiative was meant to foster. Additionally, recipients of the gift cards often prioritize spending at familiar large retailers over local shops, further eroding the movement's goals.
