Magazine Article | April 1, 2003

Secure Customers With Gift Cards

Source: Innovative Retail Technologies

Customer gift cards provide retailers with all the benefits of paper certificates plus superior security and higher profit margins.

Integrated Solutions For Retailers, April 2003

According to consultants Bain & Co., 2002 gift card purchases approached $38 billion - up 20% compared to 2001. If your business is still relying on paper gift certificates as the prepaid gift of choice, you're missing out on what gift cards offer.

Card Technology Thwarts Fraud, Theft
With paper certificates, retailers can expect a certain amount of fraud. Most paper certificates can be duplicated or stolen - and redeemed. Even if the original certificate owner puts his name on the gift certificate, there is a slim chance the person who stole the certificate will be asked to show ID when using the certificate. Gift cards, on the other hand, have several built-in security features, which makes them a superior choice over their paper certificate counterparts. "Besides a 19-digit account number, our gift cards include an 8-digit CVV [card validation value] and a 4-digit PIN to ensure the card is used only by the authorized user," says Gary Dinkin, CEO of gift card solution provider SmartClixx (Raleigh, NC). If a gift card is stolen, the owner of the card can call the merchant's toll-free number and have the card immediately deactivated. Because there is no such process with paper certificates, retailers en masse are replacing paper certificates with gift cards.

Gift Cards Boost Customer Loyalty
It isn't just better security that's driving the widespread adoption of gift cards. Another factor contributing to this trend relates to CRM (customer relationship management). Because gift cards are tied into retailers' back end systems, they can serve as useful information-gathering tools. For instance, many retailers provide gift card customers with toll-free numbers and/or Web site addresses where customers can reload cards, check card balances, and report card theft. While on the phone or at the retailers' Web sites, customers may be prompted to provide information about themselves, which retailers can use to associate the cards' account numbers with the people using the cards. After capturing this information, retailers can use it for a variety of revenue-generating activities such as targeted marketing campaigns. "A mass merchandiser, for instance, may reward a customer who used a gift card toward the purchase of a home gym with a coupon worth 20% off the purchase of workout attire," says Bob Clarke, VP of sales and marketing for card provider CPI Card Group, Inc. (Littleton, CO).

Retailers are using gift cards to boost customer loyalty and gain repeat business in a few ways. "Fashion Bug, for instance, ran a Mother's Day promotion last year where they gave away a free $10 gift card for every $50 gift card purchase. The $10 card had a different start and expiration date, promoting additional up sell opportunities," says Dinkin. In other instances, retailers have rewarded customers who bought a featured television set with a $25 gift card redeemable toward future purchases at the store or from the retailer's Web site, thereby serving a dual purpose of rewarding customers and driving them to the retailer's Web site. Another way gift cards are used to increase customer loyalty is for tracking employee purchases and offering rewards directly related to customers' interests. After using up a $30 prepaid grocery store card, for instance, customers may receive coupons toward similar grocery items they purchased with their cards.

Card Programs Promote 'Use It Or Lose It'
Just about every aspect of using gift programs can benefit the retailers that use them. Consider one other significant advantage cards offer compared to paper certificates. "With gift cards, retailers are prepaid on purchases and they never have to give cash back," says Dinkin. "Unlike paper certificates, where users get cash back on purchases less than the maximum amount on the certificate, gift cards keep the balance on the card." No matter what cardholders do with their remaining balances, retailers still benefit. If, for instance, a person makes an extra trip back to the store to use up a $5 balance, they're likely to buy $35 worth of merchandise. Or, perhaps a cardholder will put a gift card in a drawer and forget about the remaining balance. In this case, the retailer can charge a monthly service fee on the account until the card's balance is used up.

Who Owns Your Data?
Because of the buzz surrounding gift cards, major credit card companies like Visa and MasterCard, as well as gift card solution providers, are competing for retailers' attention. The major difference among the card transaction entities deals with who hosts the retailers' data. "In the past the trend has been for retailers to outsource their gift card programs - including customer data capture, help desk support, and payment authorization," says Dinkin. "But, in the last year or so, we've seen a shift toward retailers wanting to bring their gift card programs in-house so they can avoid paying per-transaction fees and they own their customer data." For larger retailers that already have payment processing solutions, dedicated payment authorization lines, and help desks in place, it makes sense to operate their gift card programs themselves.

Don't Be Shy About Your Gift Card Program
While many retailers are making major gains with gift card programs, there will inevitably be those that don't see such dramatic results. For those retailers, Clarke offers the following advice. "The biggest mistake I've seen with gift card programs is taking a defensive position about the program. 'Everybody else is doing it so we had to do it, too.' You need to understand the potential revenue and other benefits to be gained from your gift card program, and advertise your program the way you would a new product you want the world to know about."