By Walter Paulsen
Since their introduction in 1997 at a single Blockbuster Inc. video store location in Florida, gift cards have been an unstoppable force in the retail landscape. Gift cards have changed the way U.S. consumers shop. And gift card providers have pocketed billions of dollars in revenue annually.
But with the onset of 2010 and a new decade, there are signs the plastic gift card wave crested about the same time as the mortgage market. Prepaid as a category has room for growth and innovation, and consumers will want payment alternatives to cash that are convenient and secure. But changes - big changes - are coming.
Despite the half-century dominance of plastic for electronic payments, the format has never been perfect. For starters, cards are made from a petroleum-derived product, so their use is environmentally unfriendly. Second, credit cards used by consumers for many years can be produced economically, but plastic is a relatively expensive format for stored-value, especially for third-party distribution, where several cards may be printed for every one that sells.
Card production facilities experience frequent seasonal bottlenecks, as well, with companies procrastinating in the summer and then jamming in large orders in the fall. So production runs full bore in the late summer and fall and sits relatively idle much of the rest of the year. Print runs need to be large, and customization is expensive.
Finally, from the consumer perspective, one or two credit cards are easy to carry. But the bulk of all that plastic adds up, and people don't want to carry more than a few cards. Other than disposable, single-use phone cards, nonplastic formats haven't caught on with consumers, so all the cards are the same size and thickness.
There are no clear winners in the new format game, but there are losers, and much of the game remains to be played. Below is a current scorecard and a look ahead about how the future might evolve.
Plastic will continue to be the dominant format for many years, especially for credit cards, but its reign is no longer unchallenged. In stored-value, look for more environmentally friendly cards that are biodegradable, and also new features (holograms, different shapes, scented cards et cetera) as plastic manufacturers try to convert cards from simple payment devices to sophisticated marketing tools.
While biometric means of identification always look great in futuristic movies, with retinal, voice, thermal and other kinds of scans, payments based on unique biological attributes have never caught on in mass settings. Pay By Touch spent hundreds of millions of dollars trying to establish a payment protocol based on human fingerprints, but it never expanded beyond a handful of locations.
Retail implementation was difficult, even in test settings, and consumer concerns about Big Brother knowing more than it should doomed the promising concept. The crater left by Pay By Touch created a toxic environment around the category, so even entrepreneurs who may have a better idea will be starved for funds. Biometric payments are at least a decade in the future. Look for niche success, but not mainstream retail or consumer acceptance.
Smart cards, chip cards, as well as cards with near field communication (NFC) capabilities, are examples of solutions in search of a problem. NFC-enabled, contactless cards have gotten wide distribution and acceptance across a broad range of retailers, but consumers simply refuse to use the technology beyond token penetration.
Consumers are fine swiping a card, scanning a bar code and entering a PIN, but tapping a card on a new form of reader is neither intuitive nor helpful. NFC companies have partnered with mobile phone manufacturers and networks to position themselves as an integral part of whatever comes next, but their odds for success are long.
Virtual cards, which are usually distributed via e-mail, gained considerable momentum in 2009, and growth will accelerate in 2010. CVS Caremark Corp., The Home Depot USA Inc. and The Container Store Inc. stores all have robust offerings.
AMC Entertainment Inc. and Bass Pro Shops Outdoors Online LLC have announced future launches. A number of companies have developed their own digital offerings, but specialized "virtual gifting" companies like CashStar Inc. and Transaction Wireless have raised money and are aggressively pursuing retailers with sophisticated products.
Silicon Valley-based startup Interactive Gift Corp., providers of GroupCard, partnered with Safeway Inc.'s Blackhawk Network on a deal to bring Apple Inc.'s iTunes' virtual cards to social networking site Facebook. Retailers are eager to work with companies that can turn Facebook or Twitter fans into loyal customers. Virtual cards offer great benefits around "give one, get one" promotions. Marketers are working to find the best ways to use the capabilities of virtual companies to increase retail traffic and spending.
Blackhawk is flexing its grocery distribution muscles to sign exclusive deals that extend to online distribution of virtual cards, using the lightly trafficked Gift Card Mall Web site as a starting point and offering virtual cards from Sears Brands LLC, Lands' End, Build-a-Bear Workshop Inc. and Bass Pro.
Retailers are determined to keep their options open, but it's in Blackhawk's DNA to push for exclusive deals, and it will use its dominant market share of the massive grocery sector to maximum advantage.
Blackhawk rival Incomm has consolidated its leading position in pharmacy and convenience stores, and has also been at the forefront of plastic cards for digital products and virtual gifts. There is no clear category leader for the next generation but a lot of activity as companies ink deals and pick partners for the next wave of growth.
After years of being a graveyard for banking and payment applications, the mobile payments sphere is heating up. Major banks, retailers and payment companies, processors, and legions of entrepreneurs are trying to crack the code for the best way to use phones as virtual wallets for a range of payments, including for closed-loop gift cards.
Dozens of companies are pushing mobile commerce applications, while companies like mFoundry, Wildcard Network Inc., and Giiv inc. have their own approaches to driving different aspects of mobile gifting. Until recently, virtual cards delivered via e-mail were seen as the next wave. But mobile gifting platforms might leapfrog virtual card companies that are tied to a single delivery channel or format. Expect a flurry of innovation and creativity as companies work to crack the code on mobile gifting.
Plastic will not die quickly or quietly, but seeds that have been planted for alternative forms of digital payment will grow quickly in 2010 and thereafter.
The amount of time consumers spend in social networks and on mobile devices will create opportunities for massive disruption of established players and accelerate new forms of distribution.
Looking at recent history in the space, Stored Value Solutions and First Data Corp.'s ValueLink LLC were well positioned to dominate third-party gift card distribution, but aggressive startups like Incomm and Blackhawk took the lead and never looked back.
Will Blackhawk and Incomm extend their dominance of retail to Internet, social media and mobile gifting, or will new companies be faster, better and more clever about how to attack the market?
Will wireless carriers like Verizon Wireless and AT&T crush startups and control mobile gifting? Will Facebook take over virtual gifts, or will Zong, Zynga Game Network Inc. and a host of other startups succeed?
I'll make no predictions, other than to observe that the most successful online retailers, including Amazon.com Inc., Zappos.com Inc. and eBay Inc., not to mention Dell Inc. and Apple, are not companies steeped in the brick-and-mortar business mindset.
The future course of prepaid and digital gifting is yet to be written, but expect new authors to write the most interesting and lucrative chapters.
Walter Paulsen is Senior Vice President of Business Development and Retail for Giiv Inc., a mobile and social gifting company. He was previously President of CardFact, and prior to that a founding Vice President at Blackhawk Network. Walter can be reached at firstname.lastname@example.org or www.linkedin.com/in/walterpaulsen.
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