Can Cardpool Solve the Unused Gift Card Problem?

Gift cards, as far as my friend Barry Ritholz is concerned, represent the end of civility, as with them the giver says: I put very little thought into buying this for you. But for me, lack of time — or information about the recipient’s tastes — prompt me to buy them, and increasingly so.
Whatever the motivation, I’m not alone. The gift card business has nearly quintupled since 1999, to stand at some $100 billion. According to credit card-processing firm First Data, sales of merchant-branded gift cards were up 2.1 percent during the most recent (and economically challenging) holiday season. But along with the growth in the number of gift cards being purchased has come a unique problem: More and more people are forgetting to use them. According to some estimates, nearly $5 billion worth of cards go unclaimed every year.
In my case, I simply ignore some of these cards that I receive, mostly because they represent brands that don’t measure up to my sensibilities. Pottery Barn, The Gap and Macy’s are among the brands found in my unused gift card collection. I’ve often thought how great it would be if I could swap them for cards from retailers that I do patronize, like Amazon (s amzn) or iTunes (s aapl).
Anson Tsai and Tim Wong had the same thought, and to that end have created Cardpool, a San Francisco-based startup that offers a platform to buy or sell (and eventually trade) unused gift cards. This tiny little company has raised about $130,000 in angel funding from the likes of Mitch Kapor and Y Combinator. Tsai’s MIT classmate and close friend, Xobni co-founder Adam Smith, is another angel investor in the company that launched last week.
“If you look at it, many of the systems in the financial industry are totally broken and consumers are the ones who are taken advantage of,” Tsai said. “Gift cards are a broken industry.” It is said nearly $30 billion in gift cards have gone unclaimed over the years.
Tsai plan for generating revenue for Cardpool involves building a black box that marries gift card trade data (buying and selling information) with machine learning and analytics and using the system to make money off the arbitrage. The problem is that in order to do that, the company needs to have very high trading volume on its platform.
And there is also a very crowded marketplace to consider. Several small startups, such as Gift Card Rescue, Rackup, Swap A Gift, Plastic Jungle and Gift Card Buy Back are also looking to profit off the unused gift card market.  Frankly, it’s hard for me to tell one service from another as they’re all remarkably similar.
Tsai believes that the sheer simplicity of his service is what’s going to help Cardpool stand out amongst the sea of competitors. He’s also confident that the automated back end is going to help the company get a leg up. That said, Tsai and Wong clearly have their work cut out for them.
They are going to have to figure out a way to get more users to their platform. For now, the early signs are encouraging — Cardpool saw about 100 transactions in its first week. If they can grow that number to a few thousand transactions a day, they might have a big enough business.
Last week, when I met with Tim Brown, chief executive officer of IDEO, the Palo Alto-based design powerhouse, we marveled at Mint, the finance startup that was recently acquired by Intuit (s intu) for a whopping $170 million. We talked about why it was a breath of fresh air because it removed the complexity surrounding financial services, cheating the system, in a way, in order to make consumers’ lives a little bit easier. In other words, Tsai and Wong are right that this act of simplifying and demystifying financial services is a wide-open opportunity –- one that is ripe for the taking.