Gift cards might feel like free money or a clever budget hack, but they are really interest-free loans to stores that make billions in profit when you forget to spend them.
In this episode of Classonomics, Sabrina Maddeaux and Mike Moffatt unpack the business of gift cards and why those holiday deals might not be the bargain they seem.
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Below is an AI-generated transcript of the Missing Middle podcast, lightly edited.
Sabrina Maddeaux: It’s officially gift card season. Restaurants are rolling out their buy $50, get $10 bonus card deals, and Costco will sell you $100 worth of restaurant gift cards for $80.
When everyone’s hunting for value, that feels like free money and an easy ‘what could go wrong’ type of gift. But a recent Quartz newsletter put it in a way that I can’t stop thinking about: that every gift card is a loan from you to a store.
Mike Moffatt: And this store has done the math on that loan long before you have. After all, they wouldn’t offer these deals if they thought they’d be money losers.
Part of that is getting you in the door in January. But part of it is also betting that some of the money you put on these cards never gets spent at all.
Sabrina Maddeaux: Today, in a year when Canadians are stretching every dollar, are gift card deals actually a good deal? And who’s really winning when that card ends up in the junk drawer?
Let’s start with the scale: how much are Canadians actually putting on gift cards?
Mike Moffatt: I think it’s more than most people think. It’s certainly more than I thought.
The Retail Council of Canada and Leger surveyed Canadians every fall about their holiday shopping. This year, people are planning to spend just under or over $900 on gifts, and gift cards are expected to make up about 16% of that.
You do the math, and that’s about $150 per person on gift cards alone, just for the holidays. And they’re getting more popular every year. Last year, 47% of Canadians said they plan to buy gift cards, which was up from 42% the year before. We’re reaching majority territory here, and over a full year, that adds up fast.
Estimates are all over the place, but one industry research firm, PayNXT360, puts Canada’s gift card market at close to $9 billion US every single year.
A growing part of that is that these gift cards have moved well beyond plastic on a rack. Most of the time they’re digital, they’re on apps, and they auto-reload for a lot of chains. They’re wired right into the loyalty program, so you’re tying your gift cards to your loyalty points. We can talk about that in a few minutes.
Sabrina, the part that surprised me is who’s buying the gift cards and for whom. It used to be that gift cards were just that, a gift. It was right in the name. Now people are buying them for themselves.
In the US, Blackhawk Network, one of the big gift card distributors, found that 56% of consumers plan to buy gift cards for their own use this year. That’s up from 31% the year before.
That’s a pretty massive jump, and it strikes me as a bit odd. Why would anyone buy themselves a gift card rather than just paying for their purchases on their debit or credit card?
Sabrina Maddeaux: That’s a really interesting increase, and it surprised me, but when I think about how my own habits have changed, I’ve bought myself some gift cards over the past year.
For many people, it’s a budgeting hack. You put $100 on a grocery or coffee card at the start of the month, and that’s your limit. It’s the same instinct as the cash-stuffing envelopes trend all over TikTok, which is actually pretty old school in that you take out cash, put it in an envelope, and that’s your budget for the month.
The industry itself calls this a defensive spending strategy. And, when the people selling the cards are pitching them as guardrails for stretched budgets, that tells you how stretched people actually are. It’s households with the least room doing it.
Blackhawk also found that the people buying gift cards for their own use mostly have household incomes under $50,000 a year in the US.
That same story goes on the gifting side. In last year’s RCC survey, 57% of Canadians said holiday shopping felt stressful, which is the highest it’s been in four years. At the same time, gift card plans went up in the US, with nearly half of Gen Z and Millennial shoppers saying they’d give gift cards instead of clothes because of price worries.
It’s this cost of living story with a bow on it. The irony is that people with the least financial slack are the ones handing billion-dollar companies interest-free loans.
From my own perspective, I’m a user of those Costco gift cards where you can get an Uber gift card for $80, but it’s worth $100, or for a meal delivery company where you get that extra 20%. It feels like you’re saving money, and you are saving money, as long as you’re actually using them.
I’d love you to walk us through what actually happens to that money once it’s on the card, because I think most people assume a $50 gift card is just a $50 sale for a brand.
Mike Moffatt: I’d be happy to, but I’m going to have to commit a professional sin here. Business schools, where I spent almost all of my career, are divided into area groups, and those area groups can be a little bit protective of their turf. I spent my career in the economics and public policy group. Now Professor Mike is going to move over to managerial accounting and wear my accounting hat. Hopefully, we don’t get too many angry emails from some of my colleagues over there.
When you load $50 onto a card, the store gets your cash right away, but it’s not counted as a sale. Instead, on the company’s balance sheet, assets go up by $50, but liabilities go up by $50. What’s happening here is the store effectively owes you that $50 because you haven’t received anything in return for it yet. We can think of it almost as you loaning the store $50.
Does that make sense so far?
Sabrina Maddeaux: Totally.
Mike Moffatt: We’ve got assets of $50 and liabilities of $50, so it’s all netting out. But here’s where things change.
Let’s say a bank makes a loan to a store. You can be really sure they’re not going to forget about that. That kind of loan is not going to go away. But when it comes to a gift card, a lot of us do forget about it.
Either the gift card doesn’t get used at all, it gets lost, or only some of the money gets spent on that card. It just contains a balance until the end of time. This is what accountants call breakage.
Companies can take all the data they’ve collected about us for years, build these really sophisticated models using some of those biz school grads over in the management science area group, and calculate what percentage of these funds will never get spent. Then they basically book that as revenue. It’s no longer a loan; it’s almost a gift.
In other words, that money on your gift card goes from loaning Walmart money to gifting your money to Walmart, because as we all know, the Walton family needs even more of your money.
Sabrina Maddeaux: It’s a gift card in more ways than one to some unexpected recipients.
Mike Moffatt: Absolutely. The other gift doesn’t go to your uncle or whoever; it goes to the Walton family.
The thing about this is the company doesn’t actually have to wait for you to forget about that gift card your Aunt Susan gave you.
Big chains typically book a little bit of that expected breakage every time someone spends on a card based on how much they predict will never come back. They can start to write some of this off or book it as revenue right away.
A gift card program does three things for a retailer: first, it gets your money early; second, it keeps whatever you forget; and third, when you do come back, you tend to spend even more than the gift card is worth.
Blackhawk found that nearly 60% of American shoppers go over the card’s value when they redeem it by an average of $73, so it tends to get you to spend more than you probably otherwise would have.
Sabrina Maddeaux: Quite a bit more. That’s not $2 or $5; $73 is pretty significant, which is where the “stores are secretly banks” argument comes in.
There was news making that case about Starbucks, and it might be the purest example of the entire model. Mike, I’m curious, why Starbucks?
Mike Moffatt: Starbucks took the gift card and turned it into a deposit account. Most people don’t think of the Starbucks app as a gift card, but that’s what it is. You pre-load money and pay from the balance, and the rewards program is what pulls the money in.
As of 2024, you earn stars twice as fast by loading money into the app as by paying with a credit card. That’s exactly what a bank does: it pays you interest to attract deposits. But instead of a bank paying you in small interest payments, Starbucks pays you in lattes.
It was funny, when we were planning this episode, I was thinking I don’t use gift cards. But surprise, surprise, I’m one of the biggest users of the Starbucks app. Everyone knows how much coffee I drink, so I am one of those folks who have been lending Starbucks money for years, or putting my money into the Bank of Starbucks.
Sabrina Maddeaux: Somehow your high caffeine intake does not surprise me at all, Mike.
Mike Moffatt: In my defence, there are so many people like me engaging in this behaviour; it’s not just me. And because of that, the deposits in the Bank of Starbucks are huge.
As of the 2025 fiscal year, Starbucks owed customers about $1.75 billion US dollars in card balances and loyalty points. This latest filing actually has it above $1.8 billion.
If we go back to 2002, the company’s CFO reportedly called the card program a $20 million interest-free loan from our customers. It’s 90 times larger now than it was back then in 2002. MarketWatch pointed out that this so-called Bank of Starbucks has more in deposits than the typical community bank holds in deposits.
It’s absolutely massive, but it’s a bank that has none of the obligations of a bank. A real bank pays interest in cash, so it has to hold capital, your deposits are insured, and so on. You can walk in and take your money out.
With Starbucks, I can walk in and say I want my money back from the app, but the only thing you can withdraw is a latte. Or in my case, a grande dark roast.
Sabrina Maddeaux: I don’t use the Starbucks app, but I am a bad person with gift cards in that I have a little drawer and a pile of them. A lot of them have not been used, and I’ve had them for six months, a year, or two years, or there are balances remaining on them. I’m always thinking to use these and take them out of the drawer, but somehow they just end up back in the drawer.
There’s also this stat that made my jaw drop on the Starbucks front: an economist writing in the Daily Economy worked out that the breakage was about 8% of Starbucks’ operating profit in fiscal 2025. Is that real?
Mike Moffatt: It is. It’s a massive amount of profit to be made here - 8% just from people forgetting about their Starbucks card.
There is a caveat here. That profit was $222 million against about $2.9 billion in operating income. That gets you the 8%. But 2025 was a rough year for Starbucks. It spent heavily, closed stores, and was restructuring, so its operating income in that year was about half of what it normally is. In a more normal year, you’re looking at 4%, not 8%.
That’s still pretty big, because when you think about it, every other dollar Starbucks earns, they have to do something for that, which comes with expenses like beans, milk, rent, and wages.
Profit from breakage comes with none of those associated expenses. It’s about as close to pure profit as a business can get.
Starbucks is just the company that shows its work in public filings. Pretty much every chain with a gift card program is running some version of this, and many of these programs aren’t nearly as transparent as Starbucks.
Sabrina Maddeaux: Literally, just as you were going through that, I remembered I do have an unused Starbucks gift card that I forgot about until this moment. It was sent to me last year, and because it was an e-gift card, it’s technically in an email with the code. I don’t use the app, and the email just disappeared into my inbox somewhere. After this episode, I need to go find that.
But that’s exactly why the junk drawer keeps getting fuller. Bankrate has tracked this in the US every single year. The average unused balance was $116 in 2021. Then the next year it was $175, then $187, and by 2024 it was $244. That’s more than double in three years, right through a cost-of-living crisis, and about $27 billion total.
When people are supposedly counting every dollar and every penny, everyone’s on a strict budget and worried about making rent, why on earth aren’t people spending these?
Mike Moffatt: It’s weird and goes against the economist’s view of rationality. This is really a behavioural economics issue here. It really comes down to how our brains treat money—that we really do compartmentalize.
The first is that we procrastinate on fun stuff, not just chores. I’m one of the worst people for this. I’ll often put off even fun things in the future, saving them for a special occasion.
Research has found the more time people have to use a gift certificate, the less likely they are to actually use it because they forget about it or lose it. While legislation has stopped regular gift cards from expiring, it also means that because people know this gift card isn’t going to expire, it allows them to procrastinate even further.
The second reason is that gift card money feels like treat money. We don’t mentally account for it the same way; we put it in a different mental envelope. People tend to be like me: they save it for something special, and in a cost-of-living crunch, treats are usually the first things to go.
So the card sits there waiting for a splurge that never feels justified. I never feel like I’ve earned that special treat. That’s even more true if the gift card only covers part of the purchase. If I have this $50 gift card but the thing I want at the store is $150, I go, “I can’t afford that $100,” so the gift card never gets used at all.
There are all kinds of frictions when it comes to using these cards. A card for one specific store is easy to forget, and it’s even harder to use if that store isn’t on your way anywhere.
Almost a quarter of Canadians aged 18 to 34 say they lose or misplace gift cards every year, and when the balances on those cards get low, they’re often forgotten about entirely. Nobody is going to drive across town to spend $4.17.
For us, we might not notice, but when they’re aggregating that over tens of thousands or hundreds of thousands of customers, that is real profit for these stores.
Sabrina Maddeaux: Right. We know millennials hold the most unused balances - $332 on average in the US versus $142 for Gen Z. That also tracks because they are busy with careers, young kids, and a card for a restaurant across town from your old apartment, especially in Toronto traffic, isn’t that easy to actually use.
Small gift cards are a perfect example of this friction problem. They’re a popular gift because they cover an entire mall. The sender thinks they’re giving their gift recipient a lot of options, but the big ones actually only work in person. For example, a Cadillac Fairview card can’t be used online, and Oxford gift cards actually have to be swapped for a plastic card at guest services before you can spend them.
That’s a lot to ask when so much of our shopping happens on our phones, in between meetings or after work. You actually have to get yourself into a mall, and malls are fewer and farther between these days.
Visa and Mastercard gift cards have their own trap. They’re another popular option because they seem to offer a lot of different ways you can spend the money, but once the balance drops below what you’re buying, they’re close to useless online. They go in that credit card field you fill out, and most checkouts won’t let you split one across two cards.
That last $11 or $20 can really only be spent in person, where you have to know your exact balance, ask the cashier to split the payment, and take out multiple cards. A lot of people would rather not be that person holding up the line or even bothering with it. There’s still this little stigma about splitting the payment between multiple cards, so those balances just sit there and go to waste.
The other thing about some of those gift cards is when you don’t use them, there ends up being a small fee to maintain the balance after years that then eats away at the balance you haven’t spent.
The last thing is the amounts haven’t kept up either.
Gift cards are still mostly sold in round $25, $50, or $100 amounts, and our sense of what a normal gift card should be hasn’t really moved with inflation. A $50 card used to cover dinner or a good sweater, and now often doesn’t. You end up topping it up with your own money, and even a gift card bought to cover an item’s price a year ago could actually be significantly underpriced by now with the way costs are rising.
This all brings us right back to the start, where I was talking about gift card popularity being subtly tied to the cost of living. Givers like those round numbers because they keep spending under control. That’s backed up by Blackhawk, who found that three in four American shoppers say gift cards actually help them stick to their holiday budgets.
But on the other side, that fixed amount means the person receiving it often has to chip in to actually use it. That’s exactly where the upspend retailers love happens, even more so if it means people actually never use the cards.
At the end of the day, Mike, the Costco deals, the bonus cards, loading up a card to stick to a budget—are these smart money moves or bad deals dressed up as good ones?
Mike Moffatt: Some of them are genuinely good, but with a catch. If you’ve got no debt and a hard limit stops you from overspending, there can be real value here. Like those Costco deals where you get $100 of restaurant cards for $80. That’s over a 20% return, which is better than anything your bank is going to offer you.
But that’s only if you spend every dollar, if you were planning on going out anyway. Nobody publishes how many of those discounted cards get fully used, and the restaurants are happy either way. Either you don’t cash it in, and it’s free money for them, or you do cash it in, and maybe you top it up or weren’t planning on going to the restaurant anyway, so that’s additional sales they wouldn’t have otherwise made.
The bonus cards are even trickier because they’re promotional. By law, they’re one of the few gift cards that are allowed to expire. Most of them you can’t use until January, so you might get them as a Christmas gift, forget about it until January, and then it runs out a few months later.
Outside of a genuine discount, parking money on a card is a worse deal than it looks. First, you’re giving up interest. That’s money you could have in a savings account or TFSA. If it’s just sitting on a card, you’re not earning anything for it.
The next problem is that the value of that card gets eaten away by inflation. The Daily Economy had a great example of this: if you bought a $25 Starbucks card a few years ago, that might have bought you five drinks at $5 apiece. Now those drinks are $6 or $7, so you’re only getting maybe four drinks. It’s the same amount of cash, so basically the value you parked on that card got eaten away by inflation.
The big one is that if you have debt, particularly credit card debt, you’d be so much better off parking that cash on your credit card because you’re probably paying something like 20% interest.
By buying one of these cards, you’re loaning a store like Walmart, Starbucks, Target, or Apple at 0%, while at the same time paying Mastercard and Visa 20% on the money you owe them.
It makes no sense. Instead of lending your money to Apple or Starbucks, pay down your Mastercard and Visa loans instead, and you’ll be so much better off.
Sabrina Maddeaux: That’s not even the worst-case scenario, because then there’s the scenario where you don’t just lose the interest, you lose the entire thing. Which brings me to Hudson’s Bay, if you want to explain this one, Mike.
Mike Moffatt: Absolutely, and it goes back to this idea of a gift card being a loan. You’re loaning the store money, but in this case, legally, it’s an unsecured loan. It’s not backed by any kind of collateral, and when a retailer goes under, the gift card holders are unsecured creditors, which puts you basically at the back of the line when it comes to getting debts paid off behind lenders who have actual collateral.
When Hudson’s Bay filed for creditor protection back in March of 2025, Canadians were holding about $24 million in The Bay gift cards. The company stopped selling them and set a deadline of April 6th to use them. After that, they were done.
If you or I or anyone else finds a Bay gift card lying around the house, you’re not going to be able to use it anymore.
This has always been a thing. If you have gift certificates from Blockbuster Video from 20 years ago, you’re not getting your money back on that, though they might fetch a few bucks on eBay as a vintage collectible, so maybe it’s still worth something.
Sabrina Maddeaux: At least with Hudson’s Bay, there’s a deadline. I’m thinking about gift cards to local small restaurants that open and close regularly, and you might not even get any notice. What protections do Canadians actually have here?
Mike Moffatt: There’s more than you might think, particularly on that expiry date piece. Ontario was the first province in Canada to ban expiry dates on most gift cards all the way back in 2007, so this has been on governments’ radar for a while. Since then, most provinces have followed, and stores generally can’t charge fees that chip away at your balance either.
There are exceptions, like cards for a specific service like a spa treatment, or promotional cards you got for free, where the rules are a bit different. The one to watch out for is the mall gift card, which you mentioned earlier. In Ontario, a mall can charge a $1.50 activation fee, and after 15 months, a dormancy fee of up to $2.50 a month. If you have a $50 mall card that gets lost in a drawer, it’s going to erode down to about nothing in about three years, so you’ve got to go out and use that quickly.
Outside of these mall cards, though, your gift card is good forever in most of Canada, which is great. But forever is a long time to keep track of a little piece of plastic, and the value on that little piece of plastic is going down less and less—not because the store is taking away your money, but because of inflation.
Sabrina Maddeaux: Which brings us right back to where we started: that gift card season got sold to us as a way to stretch our money, and this year, stretching it really matters to a lot of people. The companies on the other side of the counter absolutely know that Canadians are planning to spend less on the holidays this year, about $911, down from $975 last year. But gift cards are still holding their share of that smaller budget.
The deal is lopsided on information. The company has a pretty good estimate of how much this season’s gift card money will never get spent, but you have no idea which card in your drawer or your gifts is going to be the one, so the risk is entirely with the consumer.
As a closing thought, somewhere in a finance department, someone has already estimated how much of this holiday season gift card money will never come back. The only question is whose.
Thank you so much for watching and listening. Our producer is Meredith Martin and our editor is Sean Foreman.
Mike Moffatt: If you have any thoughts or questions about the Starbucks app or anything we talked about today, please leave a comment on YouTube, and also like and subscribe while you’re there. It would really help us out a lot.
Sabrina Maddeaux: And we’ll see you next time.
Additional Reading/Listening that Helped Inform the Episode:
Canadians Keep Gift Spending Steady — and Push Deal-Hunting to New Heights – Retail Council of Canada
Canada Gift Card Business Report 2026: An $11.18 Billion Market by 2030 – GlobeNewswire / Research and Markets
With Their Eyes on Affordability, Consumers Increasingly Gift Themselves, Blackhawk Finds – Digital Transactions
Gift Cards and Mental Accounting: Green‐Lighting Hedonic Spending – Journal of Behavioral Decision Making (Wiley Online Library)
Starbucks Could Use a CIO to Invest the $2.2B Float from Its Rewards – Sherwood News
Your Starbucks Balance Is Working Harder Than You Think – The Daily Economy
Over 2 in 5 U.S. Adults Have at Least One Unused Gift Card, Totaling About $27 Billion – Bankrate Survey Report
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