Breakage costs arise when customers do not redeem the full value of prepaid services, gift cards, loyalty points, or similar credits. Businesses record these items as liabilities—promises to provide products or services in the future. However, when customers forget, lose, or let these credits expire, companies can recognize the unclaimed amounts as income, known as breakage.
How Breakage Benefits Businesses
Companies benefit financially because breakage turns potential future expenses into immediate revenue without delivering goods or services. For instance, if a customer purchases a $50 gift card but only redeems $40, the remaining $10 often becomes breakage revenue after expiration or significantly reduced likelihood of redemption. This revenue boost is factored into many companies’ financial projections.
Common Sources of Breakage
- Gift Cards: Unused balances from lost, forgotten, or partially redeemed gift cards.
- Loyalty Programs: Expired airline miles, hotel points, or retail rewards.
- Prepaid Services: Unused gym memberships, subscriptions, or service packages.
- Store Credits: Forgotten or partially used store credit balances.
- Unclaimed Refunds or Deposits: Unclaimed funds after required holding periods.
Impact on Consumers
Breakage means lost value for consumers who have paid for or earned these credits but do not fully utilize them. Although individual amounts may seem small, industry-wide breakage represents billions of dollars annually.
Preventing Personal Breakage
To minimize lost value, consumers should:
- Use gift cards and loyalty points promptly.
- Monitor expiration dates and program rules.
- Consolidate small balances when possible.
- Consider regifting or selling unused gift cards responsibly.
- Track and redeem even small leftover amounts.
Legal and Accounting Context
Breakage is legal and accounted for in financial statements according to companies’ best estimates of redemption rates, often based on historical data. It differs from escheatment, the legal process where unclaimed property must be turned over to state governments after dormancy periods (usually 3–5 years).
For authoritative details on gift cards and breakage, see the Consumer Financial Protection Bureau’s Gift Cards guide. Also, explore our related article on Employee Rewards Program Costs Deduction for insights into corporate accounting practices.
Understanding breakage can help consumers avoid lost value and recognize how companies generate additional revenue from unredeemed credits.
