Magazine Article | April 17, 2006

Don't Underestimate The Value Of Gift Cards

Source: Innovative Retail Technologies

Gift cards are more than replacements for paper gift certificates. They can help increase sales and marketing opportunities, adding to your bottom line.

Integrated Solutions For Retailers, April 2006

The phrase “gift card” could soon be considered a misnomer. Sure, retailers experience a surge in gift card sales around the December holidays as consumers purchase them to give as gifts. Retail spending this January was higher than analysts predicted due to the recipients of those gift cards using them – and spending more than just the amount on the card. But gift cards can be used in ways other than just as gifts around holiday seasons, hence the fact that the term “gift card” will soon need to be replaced with simply “prepaid card.” For this month’s Retail Solutions Forum, Karen Larsen, senior VP and chief marketing officer at First Data Commercial Services, and Tim Sloane, director, Debit Advisory Service, Mercator Advisory Group, discuss the trends in prepaid cards and how those trends will impact your operations.

Look ahead in the stored value industry.
What should retailers expect to see?

Sloane: I expect three significant trends. 1) Open systems and closed systems will continue to be integrated in interesting ways. Today, open debit cards are linked to prepaid mobile minutes accounts. I expect the debit account to become a primary account for dollars that will then be dispersed across different prepaid solutions, including mobile, long distance, and even accounts associated with coffee, food, and other commodities that can be replenished. 2) Prepaid accounts will gradually spread from the card format to any format via contactless technologies. 3) I predicted last year that prepaid would change the face of consumer incentives as we currently know it. I trust 2006 will introduce at least one breakout consumer incentive solution.

Larsen: We’ll see more choice, more flexibility, and more convenience – for consumers and merchants alike. Over the past 10 years, gift cards have laid a very solid foundation for diverse growth opportunities throughout the prepaid industry. The morphing of open and closed network programs will provide the consumer with more choices as the retail and restaurant industries’ most innovative companies find creative ways to design programs that fit growing consumer needs and wants. These innovators will open doors for themselves and consumers through added convenience in transaction processing, marketing, branding, and cross-promotion. In addition, consumer rewards, incentives, loyalty programs, and human resource applications will begin to blossom in 2006 and grow strongly in the years ahead.

What consumer demands will retailers be facing?
How will new gift card products help retailers meet the demands?

Sloane: Beyond the use of prepaid technology for consumer incentives, retailers will discover that “gift cards” is a major misnomer. “Reloadable cards” will become a much more common term as retailers attempt to drive repeat business through prepaid cards. This will be accomplished with loyalty programs and alliances that drive higher dollar values on prepaid cards and associated rewards accounts. I expect retailers to recognize the opportunity to link their prepaid offerings to mobile minutes cards and novel messaging and promotions being made through those connections (e.g. register your XYZ prepaid mobile account and get free minutes for every dollar you spend in the store and receive free SMS [short message service] messages of major sales events).

Larsen: Gift cards are simply the common name given to prepaid products around the December holidays. But prepaid cards are used by consumers throughout the year because of the products’ numerous attributes, including reloadability, budgeting, employee and consumer rewards, and other human resource applications. Consumer demand and access to prepaid products in all aspects of our lives will continue to grow both domestically and internationally.

How will ensuing gift card trends add to retailers’ bottom lines?
Sloane: Consumers will be spending more because they’ll view prepaid cards not in a spend-until-depleted way, but in a continue-to-add-value way. Also, retailers can do more targeted cross-selling, which will reduce the cost of customer acquisition.

Larsen: The most recent data indicates that prepaid cards are running at about 2% to 4% of retailers’ annual sales. Most industry indicators and research show that a majority of consumers spend more than the initial value of a prepaid card that was given to them. In addition, the increase in cross-promotion opportunities, incentives, and loyalty will help open doors for consumers as they are introduced to new brands, new retail concepts, and merchants.

How can the concept of stored value be used elsewhere
in the retail environment (beyond the POS)?

Larsen: Again, cross-promotional activities with noncompeting brands, high-profile marketing, loyalty, consumer incentives, and rewards are destined to drive the industry to greater heights and financial rewards over the short- and long-term. The industry is starting to experience strong benefits via the introduction of prepaid/stored value products in diverse business units. From a mainstream payment tool to an in-store merchandise credit platform, and, most recently, as a human resource product (e.g. paycard and employee benefits), stored value products will proliferate the consumer and employee environments of retailers and restaurants of all sizes.

What other, newer technologies related to consumer
use are affecting the stored value industry?

Sloane: The stored value concept will enable businesses to embed payment technologies into almost any form factor. For example, a coffee mug can have an RFID (radio frequency identification) chip embedded in it so that the customer can go to a machine and refill the mug and have an account automatically debited – eliminating the need to check out in the traditional sense. This same concept can be applied to almost any transaction.

Larsen: Retailers can open their financial transaction systems through growing payment applications that enable speed, convenience, and security. Contactless payment options have begun to be popular with consumers purchasing everyday items, as well as accessing transportation and other services. Exploration into the use and acceptance of biometrics continues at a strong pace, and we will see early adopters push this technology in the coming year. In general, the mobile payment options category will be strongly developed and enhanced in the next three to five years.