Should retailers honour rivals' gift cards ?

In December, HH Gregg announced that it would honour gift cards sold by it's now bankrupt rival, Circuit City till the Super Bowl weekend (click here). HH Gregg checks the balance on the gift card and the balance can be applied for a 20% discount on merchandise only(click here).

Similarly, Toys'R'Us announced on January 12 that it would honour KB Toys gift cards (click here). They give a 15% discount coupon in return for the KB Toys gift card: "The gift card exchange can be made at Toys"R"Us stores' Guest Service Center. KB Toys Gift Cards must be surrendered at time of purchase, and only one 15% Toys"R"Us coupon will be granted per gift card surrendered. The 15% Toys"R"Us coupon cannot be combined with any other "R"Us offer for the same item and excludes"...certain toy categories with high-value toys. KB Toys had earlier announced that its cards would be honoured only at local toy stores where they were purchased.

The business question is: "Should retailers honour rivals' gift cards?

It seems to make business sense to allow customers to use rivals gift cards, especially if the face value of the card is only allowed for a 15-20% discount.

However there are many disadvantages to an exchange program which does not check the value of the rival gif card and offers a discount on a purchase. These include:

Gift card fraud: As this NRF link (click here) shows, gift card fraud is a big issue. There are various forms of internal fraud (perpetrated by store employees) and external fraud (such as use of fraudulent credit/debit cards, cloning of gift card, etc). Retailers use advanced analytics to recognize patterns in their fraud detection programs. However detecting fraud on a rival's gift card is extremely difficult. Also if the exchange program does not check the value of the card (like Toys "R" Us), expect a flurry of fraudulent activity.

There are many websites which trade gift cards (e.g., the Star Gift Card Exchange ). They buy gift cards at a significant discount to value (click here). I would bet that a lot of fraudulent gift cards get traded in these exchanges. However these exchanges are fairly savvy about not buying cards of bankrupt retailers.

Value to the customer: While the HH Gregg exchange program offers a fair value to the customer (one might consider swapping a $X free item at Circuit City for a $X discount at HH Gregg), the Toys'R'Us program offers no value to a genuine gift card holder. Why would you exchange a $X gift card (which is accepted at a local KB Toys store) for a 15% discount on one toy (from the lower-value categories)?

I would love to hear your thoughts....