Magazine Article | August 21, 2006

The Steadfast Gift Card

Source: Innovative Retail Technologies

Between the retailers’ imagination and the advancements of POS technology, merchandising and branding progressed with gift card offerings. 

Integrated Solutions For Retailers, September 2006

Do you remember a time when gift certificates were considered an unacceptable gift? Those receiving the gift expected more thought to go into the purchase, so it was almost insulting to receive one. That time was a mere 10 years ago.

Today, it seems that gift cards are preferred by many recipients. Gift cards share many qualities with credit cards, except a bill doesn’t arrive at a later date. Instead, many gift card recipients view them as “free” money.  

Gift Cards Sell Merchandise, Branding
The technology and innovation surrounding gift cards has changed in recent years. “Retailers want to promote loyalty, increase traffic flow, and grow revenue; gift cards hit all of these goals,” says Conan Lane, COO at PNC Merchant Services, a member of The PNC Financial Services Group. “Gift cards have become mainstream to many consumers.” Larger retailers pushed the gift card market, but many smaller retailers and hospitality providers also offer them now to promote their merchandise or services. With small-scale POS systems capable of processing gift cards at a reasonable price, this method of payment is feasible now for any size retailer.

Gift cards provide a two-for-one purchasing opportunity. With each gift card purchase, you expose your store to two customers. Once they enter, the upsell opportunities are endless. The purchaser of the gift card had the opportunity to buy additional items during that visit. Furthermore, because of the “free” money perception, most gift-card recipients spend more than the value contained on the gift card. Consumers are likely to add $40 to a gift card of $50 to purchase the sweater they’ve been dreaming about, but were too thrifty to buy at full price. The irony of the situation is, the sweater is still full price, but to the consumer, it feels like it was half price; thus the “free” money syndrome prevails.

The gift card itself provides a branding opportunity for retailers. “The average consumer typically has one or more gift cards in their wallets at all times,” says Lane. “The cards might be for a grocery store, clothing retailer, convenience store, restaurant, or any other merchant, but every time the wallet is opened, it’s an immediate advertisement and a reminder of that merchant’s existence.” Some retailers believe in the power of branding so heavily that they customize their gift cards with more than their logos. “Socially conscious retailers may opt for more environmentally friendly cards like those made from corn-based products,” says Mari Ellis, COO at First Data Prepaid. “Some cards, when tilted, display a double image, a hologram —  such as candle lighting on a birthday cake. Scratch-n-sniff cards offer opportunities to promote products supplementary to the business’ main activity. For example, movie theaters might offer a card that smells like popcorn to encourage patrons to visit the concession stands. Other cards can incorporate special die-cuts, coloring, and textures, as well as recorded messages or photos, so the cards will have a personal feel even when sent across the country.” Due to branding, the presentation of the gift card is becoming as important as the dollar value placed on it.

Explosive Growth In Gift Cards Options
When gift cards are purchased and redeemable at a retailer’s locations only, they are considered closed loop. These are the traditional cards with value opportunities, such as the two-for-one purchasing opportunity already discussed. If the card has a STAR, MasterCard, Visa, or Amex name associated with it (meaning it’s redeemable anywhere that these names are accepted), it’s considered open loop. Within the last few years, open-loop cards have become more popular and provide other value opportunities for retailers and customers.

Open-loop cards act as universal gift cards. A minimal fee may be associated with the cards for activation. Retailers and credit card companies view this as a convenience fee because the card is usable anywhere. “The use of open-loop cards is becoming more institutionalized,” says Ellis. “When the cards were first introduced, there were some hurdles associated with redemption in some locations, usually due to the POS system a retailer was using. As they became more widespread, the problems disappeared.” This type of card has a quality that can be considered a value opportunity and a downfall — they are accepted at retailers other than that at which they were purchased. While this provides flexibility for the consumer, it also potentially eliminates the two-for-one value proposition that closed-loop cards maintain. On the other hand, it does provide a convenience to customers seeking cards, as well as a branding opportunity for other retailers, if you offer another retailer’s cards at your location.

Some retailers work together and offer one another’s cards as a convenience to consumers. Additionally, they sometimes combine these offerings with their loyalty programs. “For example, I know of a store that sells gift cards from several restaurants and retailers,” says Lane. “I think this type of card offering is taking hold in the marketplace and will continue to grow.”  

Additionally, some gift card suppliers/processors offer a network of retailers that participate in gift card offerings. For example, First Data Prepaid offers a closed-loop product network that was created at Blockbuster’s request back in the mid-1990s. “This network provides several options,” states Ellis. “If a retailer wants a branded card for its store, First Data Prepaid can facilitate cross-selling of the closed-loop card at other, noncompeting or complementary First Data partner locations.”  

Gift Card Technology Reaches Beyond Traditional Retail
The technology base for gift cards has opened doors for several other uses of prepaid or reloadable cards. Retailers provide customer rewards through gift cards. For example, a customer of a clothing store may receive a gift card from a direct mailing that has no denomination associated with it. This entices the consumer to enter the store, make a purchase, and redeem the card for whatever dollar amount it contains. Retailers also provide cards to their employees as perks and/or as part of payroll. For temporary employees, such as holiday workers, or those without bank accounts for direct deposit, instead of processing payroll through paper checks, the employees might be paid in universal open-loop cards.

While the concept is different, the technology behind other uses is the same. For those consumers with marginal or poor credit histories, prepaid cards can help them budget their money, while benefiting from the flexibility of using a card instead of cash. This technique also enables college students to learn budgeting. Reloadable cards allow parents to add money to the cards as frequently as they wish, while the students have the flexibility of using a card instead of cash. Insurance companies even offer preloaded cards for insurance claims and healthcare spending accounts.

The popularity of gift cards, reloadable cards, and flexible universal cards has experienced exponential growth. This is expected to grow in the future, as well. Since retailers are constantly seeking additional value opportunities to increase loyalty and traffic from customers, expect the innovation surrounding gift cards to continue.