Gift cards are an unexpected source of revenue for franchisors.
In recent years some franchisors have derived significant revenue from classifying unused gift card balances as revenue--most notably Coldstone Creamery.Rick Pulito has a good update on the issue of breakage and credit cards. Recall that almost 20% of gift cards are not used, this is referred to as "breakage". Now who owns the breakage?
So what does this mean for a franchisee operator? Well, what is going to happen is that the franchisor is going to collect the revenue from the sale of a gift card, declare the breakage as revenue, and then when it comes time to pay the state their escheatment, the franchisor will have an clause in the franchise agreement that requires indemnification from the operator should the franchisor pay the state the required escheatment."In many states the escheatment period occurs prior to the end of the mandated life-span for the card.
Example: In some states, the unspent balance on the gift card reverts to the state after three years.
However, the Federal Reserve Bank requires that balances be available to consumers for a period of not less than five years. What happens, then, in years four and five?
Technically, the retailer must turn over the balance of the cards that are unspent to the state, yet keep the balance on the card available to the consumer for up to two more years.
The Federal Reserve Bank has adopted a stance whereby the retailer will have to honor the card from the consumer, and then apply to the state for reimbursement of the escheated amounts."
I use frequently a gift card when I want to make a gift, many times I pay for them, some times I win them.And I never ever have complaints from my wife and she is tough to please.