Gift card scams?
June 27, 2017 9:04 PM   Subscribe

My local chain grocery store occasionally has gift cards (Visa/Mastercard gift cards, or the Gap or Amazon gift cards etc.) for sale at a discount (ex. $10 off if you buy a $100 gift card). On the surface this seems like a good deal - I'm guessing there is a catch. What is the catch?

I shop at Amazon anyway, so why not get a $100 gift card at $10 off and then use it on my next purchase. I'm worried that these gift cards come with some scam attached - like an unlisted $10 fee for using it the first time, or a too-soon expiration date. Should I be worried, or are these discounted cards as good as they sound on the surface?
posted by Toddles to Shopping (12 answers total) 4 users marked this as a favorite
No catch in this context (buying from a reputable retailer) There are (at least) 3 reasons places want you to buy gift cards:

1) You're lending them money (that theoretically eventually you'll cash in for goods).
2) A portion of gift cards never get used so they just get to keep the money forever.
3) When people do use them, it's likely that they'll spend more than the value of the gift card, and in a lot of cases it's people who might not have spent that money to begin with.

So even at a 10% discount this is going to be a money positive thing for most of these retailers most of the time.
posted by brainmouse at 9:15 PM on June 27, 2017 [21 favorites]

If your chain grocery store is selling gift cards for other merchants (e.g. a Kroger selling cards for Nordstrom for 90% of face value), there's another possibility: the merchant is selling cards that it bought for a steeper discount.

There are a lot of places that now advertise "turn your unwanted gift cards into cash." They work by someone having, let's say, a $100 gift card to Apple that they don't want. Gift Card Buyer, Inc. pays individual seller $82.50 (a 17.5% discount off of face value) in cash. Gift Card Buyer, Inc. now turns around and markets that $100 Apple gift card to you for $90. If you buy it, Gift Card Buyer, Inc. makes a profit of $7.50, you got $10 off, and individual seller "lost" $17.50 of value that individual seller wasn't going to use in the first place.

It's pretty much arbitrage.
posted by fireoyster at 9:34 PM on June 27, 2017 [8 favorites]

This past spring I bought a $100 Google Play gift card at Safeway and received 1,000 fuel reward points, worth $1 a gallon off of up to 25 gallons of gas. Our Durango has a 24.6-gallon tank and so I waited until it was almost dry to cash in the fuel reward for $24 off, meaning I paid $76 for my $100 of Google Play gilt. I am now using this balance to pay my monthly subscription to their music subscription service.

No catch.
posted by kindall at 10:02 PM on June 27, 2017 [1 favorite]

local chain grocery store

Your answer is right here. Your local chain grocery store wants to be the first place you think of going for groceries. Or for a bottle of Aleve. Or cat litter. Or alcohol. Or a million other things. Groceries are places where people can routinely drop large quantities of money. A $10 discount for a store that is courting the business of people who might spend $800 a month in groceries for their family is almost a no-brainer. They almost certainly don't pay a full $100 for it anyway, but even if they have to eat part of that, promotions like this buy brand loyalty, and grocery stores are desperate for brand loyalty.
posted by Sequence at 10:19 PM on June 27, 2017 [2 favorites]

The discounts on gift cards to other stores are pretty simple - it's partially a funky coupon and partially to save on credit card fees. Each credit card transaction costs the retailer a fixed amount plus a percentage of the transaction. If the retailer can avoid two or three of those fees, it can almost pay for the discount they're offering.

And it brings in business they might not have otherwise gotten. If you were shopping and had no intent of going to the Gap or whatever but see a $100 gift card for a discount and buy it, you've now committed to going there and spending that much. And possibly more, once you go on a shopping spree. Would they rather get full price? Sure, but if the profit margin from bargain seekers is still good enough to make sense, then pulling in those shoppers is a net win.

Lastly, the grocery store may be eating some portion of the discount as a loss leader to get your loyalty and attempt to lure you into the store where you'll spend enough to make up for the cost to them.
posted by Candleman at 10:39 PM on June 27, 2017 [1 favorite]

Visa/Mastercard gift cards

These commonly have activation fees as well. With no discount someone could end up paying $105.99 for a $100 gift card
posted by the man of twists and turns at 11:52 PM on June 27, 2017

They might also be able to count the cost of the gift cards as a business related marketing expense and save on taxes that way.
posted by Waiting for Pierce Inverarity at 3:53 AM on June 28, 2017 [1 favorite]

One of the big kiosks at the supermarket? Probably called "Gift Card Mall" or some such? If so, that's basically a 3rd party pop up shop set up in the middle of your Safeway. Their business model is:
- Buy gift cards from retailers (Amazon, Olive Garden, Home Depot, and yes Visa and MC) at a discount - probably either 25% or 33% off the face value.
- Pay rent to the supermarket or other store for their end cap kiosk
- You buy the gift card at either face value or the small discount you mentioned.
- The 3rd party pop up makes profit on the difference between what they paid (75% of face value) and what you paid (90% of face value).
- The supermarket makes the profit from the end cap rental plus likely a small cut of the proceeds for each sale.
- The original retailer sells cards at a discount for the reasons mentioned above -- the money that ends up unused is pretty high, plus their mark up on their products is higher than the discount on the gift card, so even when you use the exact value of the card they still make money.

There is no catch for you provided you use the card.
posted by anastasiav at 5:42 AM on June 28, 2017

Prepaid cards that can be used anywhere being sold at a discount are dicey. They will tend to have high fees, fast expiration, or other features that tend to make up for the discount. Research very carefully.

Prepaid cards that can be used at a specific merchant work very simply: a higher percentage of value goes unredeemed (because usable only in one place), the merchant's merchandise markups are high relative to the discount, and you often will buy more than the gift card.

Let's take the example of a $50 Olive Garden gift card sold for (say) $33 at retail, with Olive Garden getting $30 and the store getting $3. Let's say for a diner who shows up the first $50 has a cost of $40 to service. The $30 redemption is a loss of $10. BUT, 20% of overall gift card value will go unredeemed. That adds $6 (20% of $30) back, so your loss is now only $4. AND half the people who show up will spend a further $50 which only costs $30 to service (increasing marginal returns). So that's another average of $10 per card ($20 times 50%). You've now made $6 more than you would have had you never sold that card.
posted by MattD at 6:55 AM on June 28, 2017

One of my local big-box markets regularly has their store gift cards on sale at $10 lower than face value. My wife will buy one, then immediately use it to pay for our groceries. Never been a fee or anything assessed. I think it's merely a come-on to get you to buy stuff in the store.
posted by Thorzdad at 7:33 AM on June 28, 2017

Imagine Store was instead offering a store benefit card that offered a 10% discount on all products to card holders if you purchase at least $100 worth of stuff. This is, effectively, the same thing. You agreed to give the store $100. They agreed to give you a discount. In a way its even better. You might not buy $100 worth of stuff from them.
posted by Green With You at 9:00 AM on June 28, 2017

Commission for a gift card is based on volume sold but, typically, around 7% of the value. So on a $100 card, it cost the grocery $93 to purchase and they get $7 revenue when it's sold at full price.

Therefore they can offer $10 off a card and only be losing $3 each time.
posted by mr_silver at 12:33 AM on June 29, 2017

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