Prepaid Gift Cards

My wife said over cards the other night that economists are "not known for their big hearts," which may be in reference to one of her stocking stuffers this Christmas - a prepaid Mastercard. As everyone knows, Christmas has huge deadweight losses, which is why it's better whenever possible to give cash. But, cash is also very lame, and says basically the giver spent zero time thinking of something nice. When giving gifts, part of the value received is knowing the person spent time searching for the "perfect gift." In that sense, wasteful gifts are probably a kind of signalling game played in which the giver shows he is a special loved one because he spent hours thinking and searching for this perfect gift. So, this Christmas, I hedged a little - I searched for a bunch of things, and then came back to the Mastercard since my wife needs clothes, and in that dimension, I think she needs a more efficient gift.

Which brings me back around. Prepaid gift cards backed by national banks are an interesting thing. They are the fastest-growing segment of the gift-card industry, expected to reach nearly $100 billion this year, but they also have many hidden fees, which is kind of aggravating since you're basically left having to rationalize why it's worth more to give them a card than it is to give them the equal amount in cash. Also, I don't really understand why the banks charge fees. Many of these cards never are fully redeemed, or when they are redeemed, they are redeemed slowly over time. So aren't I basically giving the bank an interest-free loan? An interest-free loan of $100 billion even? Sounds like a steal - I should be charging them fees, not vice versa. I suspect the bank gift cards are a little different, though, than say an Apple or Gap gift card. For one, since I can use a mastercard anywhere, maybe I spend it down more quickly than I would a Gap card, wherein I can sit on it for months until I find that perfect sweater. Then there are of course the transaction costs for making this work with every retailer, which banks argue are non-trivial. But to that I keep thinking about how fractional reserve banking would work in this situation. If they could operate like a fractional reserve bank works, then wouldn't their lending out ultimately help cover those costs? But then maybe these Mastercard gift cards become a kind of money, too. The cards say $10, $20, $50, $100 on them - are they money then? If so, is Mastercard and Visa printing money when they issue these cards?