Monday, August 10, 2015

Amex Gift Cards and Manufactured Spending- How Long Can it Go On?

UPDATE:  It seems that the answer to my question was: "Not long."  Amex has changed their terms with all of the portals that offered cashback on Amex gift cards.  Under the new terms only cards with a face value of $200 or less offer cashback.  Because the $3.95 activation fee on a $200 card amounts to a 2% premium, this deal is dead for now.

 After posting about the current Manufactured Spending opportunity involving the Amex Giftcard Cycle, I read a recent post by one of my favorite points & miles Bloggers: Greg at The Frequent Miler.

     Greg's post goes a bit more in depth regarding shipping options with Amex and is a "must read."  But it got me thinking about how long this MS avenue could possibly go on.  As the saying goes: "If something can't go on forever, it wont."  

     The Amex Gift Card Cyle is not quite Greg's El Dorado, the Perpetual Points Machine, but it's close.  Since liquidation usually involves around a 1.3% bite, even 1.5% cashback covers your costs (except for time).  The real question is how long this can possibly go on and which link in the quasi-PPM will break first.  Amex takes a hit on interchange fees when it sells the card, but gets it all back when the card is liquidated (and likely then some).  The retailer presumably takes a cut of the load fee for each pre-paid debit card (PPDC) it sells and shares (or passes on entirely) the interchange fee on the PPDC purchase.  WU and Moneygram get their fees when money orders are bought.  That just leaves Vanilla and the other companies.  One can only assume that the PPDC companies are the ones left out in the cold.

     Think about it.  The PPDC issuer has four potential sources of revenue:
  1. The load fee, which can be anywhere from $2.95 for lower value cards to $5.95 for variable load cards.  An MSer will almost always purchase only $500 cards, meaning that the load cost represents approx. 1%-1.2% of the card's value.  It's safe to assume that some portion of that load fee goes to the merchant who actually sells the PPDC.
  2. Interchange fees.
  3. Conversion to reloadable PPDCs.  Many PPDC issuers offer the ability to convert a regular PPDC to a "premium" debit card.  Those cards often come with increased fees, including monthly maintenance fees.
  4. Breakage.  This is an industry term for funds that get loaded onto gift cards and PPDCs that simply never gets spent by the consumer.  Either the card is lost, forgotten about, or simply has a balance that is too low to make it practical to use.  However it comes about, the result is pure profit to the issuer.
     I think that, with respect to MSers, only source 1 really counts.  <caveat: the following is pure speculation>  

     Source 1: Load fees are invariable.  There's no trick, no savvy way to get around them, they're a fact of life.  But even there, a savvy MSer is going to get the most bang for his buck, giving up only (at most) 1.2% of the card's value.  But for every MSer maxing out a variable load there are X casual users paying a much higher percentage.  A $200 fixed value card may carry a $6.95 fee (3.475%).  When grandma buys a $25 card as a gift, she may pay a $3.95 fee (15.8%).  A fee over 10% of the card's face value is huge.  Not in itself, of course, but in the aggregate PPDC companies must be making a lot of money on these cards.

     Source 2:  With MSers, interchange fees are minimal.  When PPDCs originally came out, they were technically "debit" cards, but could only be used for signature based (credit) transactions.  Signature based transactions come with higher interchange fees, thus the PPDC company earned more revenue on the cards.  With the advent of the Durbin Amendment to Dodd-Frank, all that changed and PPDC issuers had to start making PINs available.  So now most PPDCs can be used for many PIN-based transactions (such as the purchase of money orders).  Presumably most casual users of PPDCs likely use the PIN feature seldomly, if ever.  Each card will be used for a single PIN-based purchase.  The fee amounts to "21 cents plus 0.05 percent multiplied by the value of the transaction, plus a 1-cent fraud-prevention adjustment, if eligible."  So, for a, say, $500 PIN-based transaction, the fee would be either 46 or 47 cents (approx. 0.09%).  Not a lot of return there.

     Source 3:  I'll go out on a limb and speculate that virtually no MSers convert to "premium" cards.  And if they do, its probably because there's a good reason to (and one that the PPDC company won't like).

     Source 4:  Since MSers typically liquidate cards almost immediately after their purchase, there's little chance of breakage in MSing.

     In the final analysis, I speculate that MSing is not profitable for PPDC issuers.  If I had to pick a number <wild speculation> I'd say they are losing around 2% on each MS-type sale </wild speculation>.  How long can this go on?  Probably as long as MSing stays small enough that it gets lost in the noise (and much higher profits) generated by casual PPDC purchasers.  Figuring out exactly how long that is is left as an exercise for the reader.

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