The Green Sheet Online Edition
July 26, 2010 • Issue 10:07:02
Gift cards: Value multiplier for merchants
If you remember the popular comic strip B.C. set in prehistoric times, payments were made with clams. It was an example of the barter system - an economy based on the trading of one good for another.
Barter predominated in the early history of civilization. Wampum and cowries - types of sea shells - were important bartering goods in agrarian societies. Greece, which had a rudimentary banking system around 4000 BC, took deposits and lent money.
Gold bars and rings in Egypt and Mesopotamia began to do the trick around 3000 BC. The Lydian Lion coin presumably was the first coin to be minted, around 650 BC.
Coincidentally, the Chinese began making coins at about the same time, although the two cultures had yet to overlap. The Romans had an early form of the check in 1 BC. China, as you might guess, created paper money in the 10th century AD.
In 1914, the Western Union Co. offered a paper-based "charge" card. In the early 1920s, gasoline could be purchased on credit. You could get a dog tag called a Charga-Plate in the early 1930s from many large retailers.
In 1950, Diners Club allowed cardholders to pay multiple merchants with the same card. In 1959, American Express Co. was the first to offer an embossed, plastic charge card. In 1958 and 1966, the VISA card and the Mastercard were born, respectively. Electronic check cards - "debit" cards - appeared in the late 1980s. And here we are. Whew!
Gift certificates showed up in the 1930s, but only in 1994 did upscale department store Neiman Marcus offer the Express card, the first electronic gift card.
It was not well marketed, so the first mass-marketed electronic gift card to succeed is attributed to the Mobil GO Card, used to purchase gas, launched in 1995 by the Mobil Oil Corp.
Also in 1995, Blockbuster Inc. began to display gift certificate cards at the POS for customers to purchase on impulse.
The prepaid exchange
Stop just about anyone on the street and ask them to reveal the contents of his or her wallet. You are likely to find a major, network-branded card or two from Visa Inc., MasterCard Worldwide or AmEx, a debit card from the person's bank, a store credit card or two and usually a stored- value gift card.
For certain people, many more cards would be present; for the unbanked, many fewer. But the two will more than likely have one thing in common: they will both be carrying gift cards. And that's where this thread goes.
I am looking at the $25 iTunes gift card on my desk. It was given to me by my wife two weeks ago for our wedding anniversary. Not a tie (was business casual the greatest achievement of the early 21st century?), no pictures of our children, not even tools - my usual fave.
No, she gave me the gift of downloadable music for my iPhone - tunes that she and I can share, but I get to make the choice of music, at my leisure. Perfect.
Could she have given me a Visa credit card? Maybe, but it would include the hassle of the credit underwriting process and other paperwork.
And, anyway, we already have one. A debit card? Why have two? A check? So I could a) make a trip to the bank to deposit it, b) wait for the check to clear; and c) then go to the iTunes store to use my credit/debit card. Cash? Same process. Barter? Hardly.
I don't have to spend the gift card all at once. I can research my purchases so I can spend it down to 1 cent if I want. And the balance will stay put until I am ready to add to it or someone gives me another iTunes card.
The gift card bargain
In the history of merchant retail sales, how often has the following occurred? The customer comes to the store wanting to find the perfect gift.
Now, if the person knows in advance exactly what the gift recipient wants, it's a no-brainer. If the customer knows what a person likes, it is easier to make a thoughtful choice.
But if the person only knows what the gift receiver is interested in (cooking, antiques, fabric, etc.) or a particular store that the person has expressed interest in, then a gift card purchase becomes a life saver.
Merchants need to be tuned in to the idea of the "gift" economy and the indecisive giver. We train our resellers on the Gift Card Trifecta so merchants understand the value of offering gift card programs.
The first component of the Trifecta is that it is a revenue stream the merchant controls. All of the other forms of payment mentioned above are accepted by a merchant's competitors. But the balance on a gift card has to be spent at the merchant's place of business or not spent at all.
Second, the merchant's current customers become an unpaid salesforce who go out and bring in new customers. Look at it this way: a current customer who likes a particular merchant and is aware of the merchant's gift card program will think of someone he or she believes would like to shop at that merchant as well. The customer buys a gift card and gives it to a family member, friend, business associate, whatever, and presto - new customer for the merchant.
Finally, gift cards are the best "hand-to-hand" advertising a merchant can invest in. Gift cards are often passed along from individual to individual. Therefore, the potential is great that a single gift card sale can bring multiple new customers to a business.
A good trade
So if a merchant can obtain and retain new customers via gift cards, why wouldn't the merchant do it? And if the relative cost to accept that form of payment were less than credit or debit cards, why wouldn't the merchant want to encourage customers to use them?
In that sense, having a customer purchase a gift card with a credit card limits the interchange/discount to one transaction for a card that multiplies value beyond that one purchase.
All of the subsequent transactions with the gift card would be at a fixed cost, with no variation. Plus, the merchant receives the payment upfront, and in the bank it goes.
The merchant can list the balance as a liability and achieve some accounting benefits. And since that is the merchant's card in circulation, the cardholder is directed to that merchant to use the balance.
The value of gift card programs to merchants is therefore much more than that first time a gift card is purchased at the POS. It's a clam that keeps on giving.
In my next article I will discuss the differences and features of open-loop and closed-loop gift cards, including the effect of the Credit Card Accountability, Responsibility and Disclosure Act of 2009 and the recent financial reform legislation.
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Thom Aldredge is President of World Gift Card, a turnkey gift and loyalty card program provider based in Plano, Texas. He is a spokesperson for the gift card industry and serves on the Electronic Transactions Association Government Relations Committee. Call Thom at 888-745-4112 or e-mail him at firstname.lastname@example.org.
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