26 Aug 2021

Interest-Free

Starbucks currently has US$1.6b in unused credit sitting on its gift cards, more than 85% of bank in the US. This is essentially an interest free loan from its customers. We investigate the big business that is unused gift card credit.

The Bank of You. You may not realise it, but you are acting as a lender to some of the biggest corporations in the world. Check your wallet. Any gift cards leftover from Christmas?

Buying and holding a gift card is essentially the equivalent of an upfront loan to the store issuing the gift card with no interest paid to you. Sure, there are transaction costs incurred by the stores to sell cards, but these flow through to the providers.

Starbucks has mastered this game better than most. It’s estimated that US$1.6b currently sits on their gift cards. 85% of banks in the US have assets under US$1.6b.

By offering specials perks and offers for prepaid cardholders, 41% of their user base completes purchases by this method. That’s US$1.6b Starbucks can use today and payout at cost price over years in small increments. On top of that, around 10% of gift card credit is never used. This is known as breakage. In 2020, $SBUX earned US$130m in breakage income.

It’s a topic earning attention from the Federal Reserve. In a presentation on the future of payments, the Fed raised the issue with converting very liquid cash to gift card money.
While the crypto crew may argue otherwise, largely you can have faith that a $20 note will always be worth its face value and exchanged for a range of goods, $20 on a gift card can only be exchanged for a few goods and services and worth nothing if the company goes broke.

Paypal holds US$22.5b in customer funds for example which are not subject to the regular insurance that proper financial institutions have. Banking with a US bank like JP Morgan will leave you eligible for FDIC Insurance, US$500,000 worth of cover per account by the government should the bank go broke. Stake is covered by FDIC insurance. Paypal is not.

We do not imply or expect the integrity of Paypal to ever falter but the Federal Reserve reminds people of the immediate value and security loss in converting cash.