They are a convenient way to buy something for someone while allowing them the freedom to choose the specific items. As a gift-giver, your greatest goal is to find someone the perfect item that you're sure they'll like, but this is hard to do unless you know the person very well.
However, giving plain cash is often considered very bland as it takes no thought to give someone money. Also, when given money, a responsible person may feel obligated to spend it on other things such as rent, food, bills, etc. rather than something for themselves (which is the point of gifts).
Enter the gift card. If you know a store that has items that your recipient would like, but not the specific item(s), buying them credit gives them the flexibility to choose what they wish, but not to spend it on something you didn't intend. For many gift givers, this is a great solution.
As with rebates and warranties, gift cards are money you give stores something for nothing immediate in return. A store gains revenue for as long as it takes the recipient to use the card which may be only days, but could be as long as months or years.
In most cases, the recipient will buy something worth more than the card's value since no one likes to lose money. But in other cases, people will use most of the value and eventually forget about the few cents to few dollars left on the card (bonus for the retailers!). Add to all that the fact that many people lose cards and you can begin to see why gift cards are so common now.
All of the above are reasons why it's good for stores to offer gift cards and that's only assuming that they're playing fair. Make sure it doesn't have any of these "gotchas" before you buy it (and don't rely on the salesperson's opinion, read the terms).
- Expiration dates: It's easy to misplace a gift card for a while or lose track of time and not make it to the target store for many months. If the card expires before the recipient can use it, the company keeps the money and no one gets anything out of it.
- Restrictions: You'll need to check the legal terms to see if the card can truly be used for anything in the store or not. Perhaps it's only good on purchase of home theater items (which could make it useless to a recipient who wasn't planning to buy any of those kinds of items).
- Refundable: Most gift cards are non-refundable, but what if your recipient is in the military and moves far away from any of that store's outlets? And what of the case where they spend all but a few dollars. Will the store give a cash refund for trivially small remaining balances?
- Usable online: If the store has an online presence, can the card be used the same way there?
Fees and declining balances: This is complete bull. There is no reason to ever charge a fee for giving a store money. If there are any fees on purchase or use of a card, don't buy it, no matter how small the fee.
A lost card will almost always require a fee to reissue (which is okay considering it's your fault for losing it, but that assumes they'll even reissue a lost card).