12/02/2010 11:20 am ET | Updated May 25, 2011

Startup Tango Card Aims To Save Billions In Lost Gift Card Value

Evidence shows that if you bought a gift card for a family member or friend, there's a strong chance you inadvertently gave a gift to the retailer or bank that issued it too.

Last year recipients left nearly $5 billion on gift cards, according to TowerGroup, a financial services consulting firm. The unspent money -- which the gift card industry calls "breakage" -- sits in an escrow account until the issuer, often a retail giant, decides to recognize it as revenue. Best Buy netted $38 million of breakage in a recent fiscal year, while Home Depot banked $37 million during the same year, reports The New York Times.

Determined to pioneer a new kind of gift card that holders don't tend to squander, a new startup is selling the Tango Card, which gives recipients the flexibility to make purchases at eleven different retailers, donate their balance to charity or redeem it for cash.

Tango Card isn't the first to offer a solution to the multi-billion dollar heap of unused gift cards that piles up each year. The Federal Reserve, for its part, proposed new industry guidelines at the onset of last year's holiday season aimed at stemming lost gift card value. Effective in August, the rules require a company to wait at least five years before it can call a card "expired" and then snatch up the unspent balance.

But the rules may have a limited effect. Often expiration dates aren't to blame for unused gift cards -- humans are. We tend to throw away gift cards when they have a low balance or we don't use them at all. (How many are collecting dust in your wallet or purse right now?)

"While the new rules will likely reduce the transfer of value from the buyer to the issuer of gift cards, they won't have an effect on the mundane sources of lost gift card value such as lost or forgotten cards," economist Joel Waldfogel said in an interview with HuffPost.

Waldfogel refers to a 2007 Consumer Reports survey that shows that 27 percent of gift card recipients hadn't used one or more of the gift cards a year after they received them. The top three reasons? Cardholders said they didn't have enough time (58%), they couldn't find anything they wanted (35%) or they forgot about the card (32%). Most notably, only 4 percent of the survey's respondents said they hadn't used the card because it expired.

For nearly two decades, Waldfogel has researched (and bemoaned) the gift card industry. He's found that, as a result of the gift card recipients who don't spend the full amount on their cards, 10 percent of the billions of dollars loaded onto gift certificates each year goes to waste.

Waldfogel even included a yuletide wish in the last chapters of a book he published in late 2009 on the inefficiencies of holiday gift-giving. The "scrooge economist" asked the industry for a new kind of gift card, one that not only reminds recipients they're still holding cards, but also sends the card's balance to charity after a pre-disclosed period of inactivity.

At around the same time, Tango Card CEO David Leeds, a serial entrepreneur with several successful startups under his belt, had launched an iPhone application designed to help consumers better manage the value of their gift cards. The app enabled users to store gift card information, check balances and set reminders.

"I read Joel's book and immediately e-mailed him. A day later, he responded," says Leeds. Months later, Waldfogel joined Tango Card's board of advisers.

In Waldfogel, Leeds found a gift-card guru who was willing and able to roll up his sleeves and measure the impact of what Tango Card was trying to do. In Leeds, Waldfogel found an entrepreneur whose business idea aimed to solve the exact problem his years of research had identified.

Last month, Leeds re-launched a new Tango Card. Cardholders now have the option to spend "Tango Dollars" with eleven different retailers, donate balances to eight different non-profit partners or, for a 5 percent administrative fee, redeem the card's value for cash. And the startup's web platform and iPhone app continue to offer informational content that reminds users of the balances on the cards they still hold.

After stumbling during the recession, "the U.S. market for gift cards is set to exceed $100 billion by 2011," writes Brian Riley, the research director at TowerGroup, in a report released last month. "[Gift cards] will continue to play a substantial role in global commerce and will begin to experience more technology enhancements," Riley notes.

Tango Card may be at the forefront of these technology enhancements. Its services might solve a societal problem that the Fed could not -- with a little guidance from academia, that is.

"In searching for advisers, a lot of startups try to get the biggest name they can get," says David Leeds. "My advice is less sexy: find an adviser that is truly passionate about what you're doing -- someone who has some skin in the game"