Stockpiling gift cards?

My esteemed colleague Trevor wrote a post recently about the stockpiling of discount giftcards, and I wanted to share some thoughts on the topic.   I really hate stockpiling, but there are times when I find myself also doing it, the calculation that I make is as follows:

Is the discounted price today greater than the cost of future purchase?

Sounds like the sort of logic most of you would use.  But the key is where to look at the future cost. Some might look at a $100 eBay giftcard at $70 and say the discount is $30, but it isn’t… actually the calculation is a touch more complex.

Variables

• Risk of Loss or Theft.  If these happen you are somewhat screwed, but you would be also if you lost or had thefted a wallet of cash.
• Fraud Risk.  Some cards are second hand, which means someone has access to the number/pin combination, and some vendors of such cards will only guarantee the balance for a period of time, Raise.com, which had a number of sales last week will only guarantee your funds for 100 days.
• No FDIC insurance.  If you have a pile of Sears cards and they finally go bankrupt, who is going reimburse you?
• Product Risk – Gift cards are ecosystem shifters.  You take money out of one system (often the original monetary system) and allow another firm to operate it.  This means that you create a restricted market.  If your vendor stops selling your product, you could find yourself struggling to unload that card, and having to use real money at another vendor.
• Giving away interest -you are giving a free loan to the company, if you have debts then this is rarely a good idea.

When you add all this up you get an effective ‘discount rate’.  Every bullet point has a cash value. This is akin to an APR.   The shifting your money into a gift card means you are accepting a debt, and paying out at the above rate.  The longer you hold the debt, the more erosion is made to your value.

From the 5 bullet points above (which isn’t necessarily an exhaustive list) there are two different types of discount variable occurring.

Taking Risk Ownership (probability derived)

While some of the risks are real, they may never occur.  The chance of fraud occurring will impact a percentage of transactions.  The discount we consider here is akin to buying an insurance policy against it.  If 5% of cards end in total loss, then you’d need a discount greater than 5% to make that a ‘good bet’. Example:

You can buy 21 $100 gift cards for $2000, but you know that one is going to be drained fraudulently. That would make it breakeven, and not worth the effort.  However, if you were told that you could buy 42 gift cards for $4,000, and one would be fraudulent, then you’d be ahead by $100.  There’s simply not enough ‘insurance’ in the first case, so the discount is not good enough.

Stockpiling comes into play here again. If we consider Raise.com with the 100 day refund, they mitigage the need for insurance for those buyers who liquidate within 100 days.. so you don’t need that insurance discount, which equates to increased profit.

Giving Wealth Ownership (guaranteed)

This is a real problem.  It’s also a Now problem.  Unlike the former risks, this one is actually happening to you right now.  If you ecosystem shift money, you are gifting the rights to use that money to earn interest, or reduce debt.  If you have debt already, this is easy to calculate.  For example, if you have a student loan with an effective rate of 3%, you are going to be paying out $3 per year per $100 that you shifted into gift cards, rather than shifted into paying down your debt.

$100 in funny money isn’t $100 in cash

This doesn’t meant that there isn’t value in a $100 eBay card for $70… it means that you should probably start thinking that the face value of the card is less than $100.  Next, remember that every day that you stockpile, you increase the risk of catastrophic loss.  You also are losing out on appreciation of the $100, or the savings had you allocated it to debt.

Running the numbers

Everything is going to be subjective, as we all have different levels of debt, and different ways to earn money.  Also, the risks are variable in relation to the effectiveness of mitigation and circumstances.  Just like in traditional financial decisions, diversification can change the equation.  Example:

• Person A only ever buys a specific size and brand from eBay, let’s say Cohiba #5 Cigars.
• Person B uses eBay for household cleaning, diapers, regular video game purchases, and some other tosh.

Person A faces more of threat from Product risk, because they only have one outlet for their ecosystem.  Though Person B also has to think if they will still need diapers 1 year from now…

Wrap

I’ve considered a theory in the past for shifting spend on to gift cards, and it might just work, however, I was always thinking to keep a bare bones amount, as the more you keep, and the longer you keep them, the more you are paying in risk and lost income.  When you run your own numbers, remember to back out the prices, and inflate that number based on how many days you intend to keep the card before using it. There is always going to be a price that makes sense, but the more you stockpile, the lower it must be.