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The Green Sheet Online Edition

May 25, 2009 • Issue 09:05:02

Loyalty is closed-loop gift card's 'second wind'

While private-label, closed-loop gift cards will remain a staple of retailers' product offerings, Aite Group LLC Senior Analyst Adil Moussa believes they have reached the limit of their popularity. Moussa expects open-loop, network-branded gift cards and other prepaid instruments to erode closed-loop gift cards' market share in the coming years.

Moussa said private-label cards are "slightly on the decline." Even though Aite expects the total amount of money loaded onto private-label gift cards to reach $39 billion annually by 2011 (up from $38 billion in 2008), "it's still losing market share in comparison with other form payments," Moussa said.

"Debit cards, for example, have been growing very, very fast," he added. "Credit is still going to be gaining some market share. And open-loop gift cards are going to be gaining tons of market share."

The peak has passed

In the Aite analysis entitled Private Label Prepaid Card Vendors: An Evaluation, Moussa reported that the number of private-label gift card transactions processed in the United States rose from 810 million in 2001 to 2.43 billion in 2007. But that growth has leveled off. By 2011, Aite predicts that number to rise to only 2.45 billion.

Aite employed other metrics to reach that same conclusion. The number of closed-loop gift cards sold in the United States in 2002 was 352 million. That number jumped to 707 million the next year. In 2007, the number stood at 904 million. But Aite believes that figure will decrease to 902 million by 2011.

Additionally, Aite measured the average number of private-label gift cards purchased in the United States per year. In 2001, that average stood at 4.1 cards. By 2005, the number had peaked at 5.7. But it has been a downward trend since, with Aite estimating 4.2 cards per consumer will be purchased in 2009.

Negative factors

According to Moussa, the biggest factors at play in the private-label gift card's slow decline are the depressed economy, the subsequent shift in consumer behavior and the growing competition from network-branded prepaid cards.

The contraction in the U.S. economy has forced many retailers to close up shop, which has caused a shrinkage in the gift card market. "It's quite a rough time for a lot of the large stores that are closing," Moussa said. "Some of the stores are just closing the whole thing. And that really reduces the volume of transactions."

As a consequence of the recession, consumers have less disposable income. Therefore, they seek out bargains, which has forced retailers to offer big discounts to attract buyers to their stores. "I've seen stores that are just putting new offerings straight onto the sales rack," Moussa said. "So why would you buy a gift card when you can buy something for 75 percent off? ... People would jump on that versus buying a gift card." Finally, Moussa argues that open-loop, network-branded prepaid cards offer consumers more flexibility and choice than do the closed-loop variety. As an example, Moussa cited the Discover Financial Services Current prepaid card for teens. "It offers a lot of really good chances for teens," he said. "You can load money to it. Parents can do it.

"You can spend in any store you want instead of being stuck with one card that you can use in only one store."

Moussa believes the decline in private-label gift cards will affect gift card processors to a greater degree than retailers. Moussa estimates closed-loop gift cards account for only 8 to 10 percent of large retailers' overall transaction volume annually. But, for some processors, processing closed-loop gift cards is their "bread and butter," he said.

"So any store that closes means less gift cards, less transactions for them, less volume, less money coming in," Moussa added.

The loyal approach

To counter the expected decline in closed-loop gift card usage, Moussa suggests that adding loyalty functionality to gift cards is crucial. "Merchants really want two things," he said. "They want new customers to come in, and they want the customers that come in to come in more often."

To do that, loyalty features would allow merchants to target consumers with special offers and promotions to get them to shop at their stores. One strategy is to load $10 onto consumers' gift cards. "You want to draw somebody in the store first and hope that they spend that money and that they spend even more," Moussa said. "And if they like it, they'll come back.

"I think loyalty is always in the forethoughts of retailers. It's easier. It costs a lot less money to keep somebody with you than to acquire a completely new customer. So, most retailers are trying to come up with different loyalty programs that keep interest for consumers to stick around."

Moussa stresses that closed-loop gift card programs must "move to loyalty. It really has to in order to get that second wind."

For more stories from SellingPrepaid E-Magazine, as well as breaking news and forums devoted to the prepaid sphere, please visit greensheet.com. end of article

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