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Gift Cards Sales Poised to Exceed $80 Billion in 2006

TowerGroup says it "expects gift cards to be a major hit again this holiday season. Combined gift card sales in the U.S. will exceed US$80 billion in 2006 -- a more than 20% increase over their 2005 level -- with the breakdown by segment as follows: Retail, $29 billion; Restaurant / Fast Food, $18 billion; Miscellaneous (gas, services, etc.), $12 billion, Universally accepted (i.e., bank-issued), $23 billion." TowerGroup notes that the unused value on these cards, often referred to as "breakage" in the payments industry, has a bigger impact on consumers than the combined total of both debit and credit card fraud.

Despite the popularity of gift cards with consumers, the space continues to be a source of controversy in terms of fee-structures and redemption rules. While retailers do not generate revenue until a card is either used or permitted to be declared as dormant, they do receive a "free float" on unused cards. One large retailer recently showed a $42 million benefit to its income statement for unused gift cards more than two years old.

TowerGroup notes that the unused value on these cards, often referred to as "breakage" in the payments industry, has a bigger impact on consumers than the combined total of both debit and credit card fraud. While debit and credit card fraud in the U.S. totals $3.5 billion annually, TowerGroup estimates that nearly $8 billion is lost due to unredeemed value, expiration or loss of gift cards. Unlike dormant accounts in the traditional credit card realm, which typically fall under escheatment laws regulated by states, anonymous gift cards often languish on retailers' accounting books.

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