Float (Part 1 of 3)

As we continue on this Christmas season, let's look at something that didn't exist thirty (30) years ago: the gift card. Oh, it was still possible to get gift certificates for other people but this modern incarnation where every grocery store, every bar, basically every place of commerce has a tiny section where gift cards from restaurants, high end stores, Ebay, MMORPG's and Facebook games can be had there. Why is this happening?

Some of you may say that these are profitable, that they take little shelf space, or list shop-lifting reasons.

Yes, they are profitable as the merchant gets a percentage of each sale of a gift card, but that isn't why there is an explosion.

Yes, they take up little shelf space, which also explains why every merchant seems to be selling DVD's on the side.

Yes, who cares if someone takes a handful as they have no value until the register places value on that card. Which is similar to these pre-paid phone cards model.

While all are valid reasons, the reason gift cards have become popular is something the industry calls float. What is float? It is money that a company has been given for future goods and services to be given at a later date. From that definition, it doesn't sound that great. Until you realize the consequences of exposing the real world to this concept.

First off, there is the obvious benefit of being able to draw interest on float. If a company gives $10,000 in gift cards before Christmas and they are all redeemed a month later, that $10,000 can net a company $50, assuming a .5% monthly rate of return. Doesn't sound like much, but it is a start.

Not everyone redeems their gift cards immediately. This just gives a company more float in interest.

But some gift cards get lost. Now that is the real value of float. Not only do you get the interest from the float, but you also get the float itself. A 2009 study reveals that in the United States alone, the value of unclaimed gift cards exceeds $8,000,000,000 annually. No wonder companies love gift cards.

How does this involve MTGO Library? I'll discuss that next time.