The agency benefits of gift cards

Hopscotch recently launched gift cards. You can use them to pay for your Hopscotch order—the items, delivery fee, and any service charges. When you buy a gift card, we email you a code you can share with someone else. The intended recipient redeems the card by entering the code on our checkout page, when placing their order.

We built gift cards because several customers wanted to prepay for others. Mainly, people wanted to buy a delivery for a family member, and conference organizers needed to distribute lunch vouchers to attendees. But I could imagine a parent living overseas giving one to their child studying in Barbados to cover a semester of food and groceries, or larger companies providing them to office workers, either as a general benefit or to cover working nights. They might be popular Christmas gifts.

This got me thinking about how the economics of gift cards differ from those of the typical Hopscotch purchase. The difference stems from the fact that in a gift card transaction, the buyer is different from and in a sense, acting on behalf of, the ultimate beneficiary. In economic and political theory, in similar situations you’d call the buyer the “agent”, and beneficiary the “principal”.

“Agency problems” arise when the interests of agents and principals diverge. The prototypical example is the conflict between elected officials and citizens. People elect public officials to act on their behalf, but once in power, these officials have strong incentives to look after themselves instead. The relationship between a company’s shareholders and its board of directors is similar.

Agency problems emerge in theory because of misaligned incentives, but are made possible in practice by asymmetrical information. Donville Inniss managed to accept bribes for awarding contracts, and the Barbados Mutual’s board could allegedly favour board members over policyholders, only because the victims footing the bill were unaware. Ignorance enables these misdeeds like darkness enables burglary.

People don’t contract others to buy them gift cards, so the relationship between the gift card purchaser and the recipient isn’t quite that of agent and principal. Still, transactions funded by gift cards may end up being preferable for Hopscotch, for reasons similar to those underlying agency problems:

1. What the purchaser wants isn’t the same as what the recipient wants; and
2. The purchaser and the recipient have different access to information about gift card usage.

A gift card recipient wants whatever benefits the card confers. In Hopscotch’s case, this is the purchase of goods from merchants on our site.

But the purchaser’s goal is different. The purchaser wants to satisfy the recipient, but is less concerned with the specifics of individual transactions. When I buy my mother an Amazon voucher, I intend to make her happy, but I don’t want to know every time she buys a pair of garden gloves. And the human resources manager who bought gift cards for 100 employees is only ticking a box.

Of course, the gift card purchaser is not only less vested in individual transactions, but also removed from them. Unless the recipient informs them, the purchaser doesn’t even know when redemptions happen. The more distant the relationship between purchaser and recipient, and the greater the time between gift card purchase and redemption, the less likely the recipient is to contact the purchaser if something goes wrong with their order.

This asymmetrical interest in gift card redemptions probably makes credit card chargebacks related to gift card transactions less likely. That is, the recipient is more likely to appeal to Hopscotch directly with any complaints about their order than they are to ask the purchaser to file a dispute with their bank. This works in Hopscotch’s favour, given that the chargeback process heavily and unfairly favours the customer over the merchant.

Furthermore, some recipients won’t redeem their gift cards at all. This also has to do with misaligned goals and access to information between the purchaser and the recipient: The recipient loses nothing if their gift card goes unused, while the purchaser would prefer that their money not go to waste. Meanwhile, the purchaser may have used and enjoyed Hopscotch’s service before, while the recipient may not have. In such cases, the recipient may not want to invest the time and effort required to navigate some new website whose services they’ve been managing fine without. According to one 2020 survey, almost 60% of U.S. customers have held unused gift cards or store credit for more than a year, and 25% have let a gift card expire.

All this is good news for Hopscotch. To be clear, we want recipients to get exactly what they’re entitled to, to enjoy our service, and to spread the word. But if it turns out that on average, gift card purchases end up being more profitable or less administratively onerous, we’ll take it.