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The Green Sheet Online Edition

September 27, 2010 • Issue 10:09:02

Suit the gift card to the merchant

By Thom Aldredge

sellingprepaidSo far we have looked at the difference between closed- and open-loop gift card programs. We've explored the use of gift cards as an alternative form of payment, and we've examined the recent federal legislation regarding the payment card industry and its effect on closed- and open-loop gift card programs. We will now turn to the merchants' use of such programs and the various benefits.

In my previous article ("Legislative fallout for gift card providers," The Green Sheet, Aug, 23, 2010, issue 10:08:02), I examined the human desire to give and how gift cards have facilitated that generosity to a degree we may not have expected. Gift card programs also represent an opportunity for merchants to engage in the same act with their customers through promotions, discounts and specials. Recognition of good customers has always been an important aspect of marketing. A gift, in whatever form, is always gladly accepted.

Card type tied to use

Closed-loop gift card programs differ from open-loop programs in many ways, but the most important difference lies in the ultimate use of the value on the card. The balance on a closed-loop card either gets spent at the location(s) of the issuer, or it does not get spent. Network-branded, open-loop cards can be used at any location that accepts the brand, such as Visa Inc. or MasterCard Worldwide.

So, in that sense, the merchant should use closed-loop cards to bring the bearers of those cards back to a desired location and use open-loop cards to bestow gratitude upon deserving recipients who may feel an obligation to reciprocate by using the card balance at a specific location.

Merchants manage their own closed-loop programs to their benefit. Merchants, for the most part, buy the open-loop cards and, depending upon the structure of their relationships to gift card vendors, either sell them or give them away. Due to the limitations of the USA Patriot Act, other anti-terrorism legislation, and new payments industry and banking regulation, documentation requirements have become more stringent for both closed-loop and open-loop card programs.

Currently, closed-loop cards are relatively easy for merchants to distribute, as they can be sold to anyone and can be used by anyone due to their anonymous nature. Open-loop cards often require documentation of the purchaser for the card to be sold or distributed. To offer open-loop cards, merchants normally must provide extensive information about their operation and purpose.

Closed-loop cards represent a low per-card investment for merchants and can be used more freely to entice new customers, reward existing ones and to carve out a presence in the community. The cards are reloadable and help the merchant maintain the program in perpetuity; customers have the opportunity to return and re-use the closed-loop cards. Open-loop cards are more expensive, based on their acquisition fees and reporting, and have a more meaningful application in direct rewards to known individuals.

Some, but not all, open-loop cards are reloadable. The reload does not necessarily occur with the merchant that issued the card. A closed-loop card could be mailed to a list of prospective customers unknown to the merchant and contain a small amount of value to attract new business. An open-loop card could be bestowed as a gift to a merchant's top 10 customers. In both instances, the gifting begets new or renewed interest in that merchant.

Card program specifics

In another sense, closed-loop cards can be offered in a more open context, and open-loop cards can be useful in a more restrictive sense. Some card programs are designed to encourage groups (associations) of merchants to come together to share a card. A franchise operation is a common form of such programs, although chambers of commerce, business associations and retailers at tourist destinations are just a few other examples of how groups can use closed-loop programs in an "open" way.

Open-loop cards can be narrowed down to an offering such as a shopping mall card, with the beneficiaries being the merchants found in a specific mall. Unlike closed-loop cards in this scenario, all of the merchants in the mall can accept the branded, open-loop cards, but there are restrictions (in many cases) to their use with only those mall merchants.

Closed-loop card programs can help merchants benefit nonprofit groups by allowing a discounted purchase of the cards that are then sold at face value. Merchants might also return a percentage of any sale from one of those cards. In return, merchants have sales forces in the nonprofit organizations driving business their way through the resale of the cards and can track how well the programs brought customers in. Open-loop card programs can be offered at discounts and at nonprofits auctions.

Advantages of card diversity

The idea is that different gift card types apply in different types of situations. Merchants can certainly take advantage of both programs to attract, accommodate and reward the customer base. As the payments industry changes, and the types of payment that a merchant will accept are affected by law, preference and consumer sentiment, gift cards will continue to play a larger role in merchants' overall plans.

Adapting to, and inventing new strategies for, the use of gift cards will prove to be beneficial both from a revenue perspective as well as a public relations perspective. ISOs equipped to offer merchants both the closed-loop and open-loop gift card programs will reap the benefits of increased interest, ongoing opportunity and additional residual or override income.

In my next article, I will address whether state laws pertaining to gift card expiration, fee structure and escheatment (unclaimed property) clash with the treatment of gift cards by the Credit Card Accountability, Responsibility and Disclosure Act of 2009. end of article

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 thom@worldgiftcard.com

The Green Sheet Inc. is now a proud affiliate of Bankcard Life, a premier community that provides industry-leading training and resources for payment professionals. Click here for more information.

Notice to readers: These are archived articles. Contact names or information may be out of date. We regret any inconvenience.

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