By Amit Raizada
Three months after the holiday season, Americans are left with millions of gift cards – many of which will sit unused. Fox Business reported last month that Americans have over $21 billion in unspent gift card funds. Understanding how we reached this moment in the gift card industry will help inform where we can go from here – and illuminate the vast potential that lies ahead.
Gift cards have created a range of unexpected benefits to many retailers, restaurants, and service businesses, bringing in cash up-front, promoting brands through the gifting process, and encouraging foot traffic in stores and online. Most importantly for businessowners, gift cards allow companies to enjoy a monetary “float” between the time they sell the card and the time that it is redeemed. Yet, when the gift card industry began to take off, few predicted just how much money would sit unused in gift cards.
At the outset, the quickly accumulated gift card debt posed a major issue for companies that wanted to start phasing in gift cards. The problem: issuers could not legally keep the unused funds when users lost the cards or let the cards sit unused in a drawer. State and local governments realized that those funds did not qualify as money “earned” by the companies and, therefore, should be kept as a liability on balance sheets. Over time, most states subjected unused gift card funds to escheat laws, which transfer ownership of unclaimed property to the state.
This regulation created a significant challenge to issuers. Businesses that wanted to issue gift cards now had to navigate complex laws and bureaucracies as if they were financial institutions. To comply with the law, they needed to file documents with every state they operated in, periodically submit the correct escheat amounts, and adjust their balance sheets accordingly. To make matters worse, business owners needed to plan for the possibility that a gift card holder may suddenly show up wanting to redeem a five-year old gift card. To add to the challenge, compliance regulations varied significantly across states, with regulations changing year to year!
All of this amounted to a compliance nightmare for retailers interested in adopting gift cards.
That’s when Card Compliant stepped in.
Watching this problem unfold, I invested in a nascent start-up that created a technology-based solution to the gift card dilemma. Card Compliant used advanced algorithms to follow changing state laws, track data on gift card transactions, and generate reports for clients that clearly stated the amount they owed each state in escheat. For a fee, the card issuers could get away from the resource-intensive bookkeeping and receive accurate, easily digestible data. Most importantly, Card Compliant had the tools to accurately predict how much a card issuer would have in unspent funds in any given period of time, allowing companies to more quickly remove gift card funds as balance sheet liabilities.
Card Compiant’s services didn’t stop there. After a successful launch, we began to offer additional gift card management services and reporting. The company grew from a start-up to an industry powerhouse with several hundred clients in a matter of months, servicing many of the largest retailers, restaurant chains, and service businesses in the world. Card Compliant was soon serving the Goliaths of industry, providing a service that they needed and could rely upon. The company was even able to expand into government-issued reloadable cards for social programs.
Successful venture opportunities require investors to see the world differently – an important facet of investment I’ve written about extensively. They require shrewd observers of market behavior to identify problems, source solutions early, and identify trends before they become popular – as I did when I first identified the massive potential in gaming. In the case of Card Compliant, I saw that gift cards offered vendors tremendous new advantages, but that they also presented significant challenges that frightened many would-be issuers. Card Compliant figured out how to adapt technical solutions to a problem that threatened to tank the gift card industry. Since their first clients, Card Compliant has continued to evolve and dominate their niche in the industry. Like in many of my investments, I have stayed close to the company as it has grown from startup to industry leader.
Aspiring investors should remember that seemingly obscure business opportunities can often prove lucrative in the long run. In this case, we found an opportunity to disrupt a market riddled with problems by creating a solution that satisfied retailers various needs in an easy and novel way.