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The Green Sheet Online Edition

February 11, 2008 • Issue 08:02:01

Gift card muscle flex

By Maxwell Sinovoi
United Bank Card Inc.

Gift cards have long been my favorite value added solution. When you mention stored value, gift cards jump to the minds of most merchant level salespeople (MLSs). Gift cards store value very well and usually permanently. Name any other product that is purchased and then often goes unused. Go on, I dare you.

The Tower Group Inc. estimated Americans spent $97 billion in gift cards in 2007. Most likely, you received at least one card between your last birthday and the holiday season. And the holidays slightly edged out birthdays for the number one reason for gift card purchases. Mother's Day, Father's Day and graduations are also some of the biggest gift card selling days of the year.

Imagine what the initial group of merchants must have thought when they first heard of the gift card idea. MLSs gave them the bare facts: The cards are paid for upfront; 20% of consumers never use cards given to them; 50% use their cards only a few times within a year of purchase.

With such extremely favorable statistics, how many of your merchant customers would turn down offering gift cards? Not many, I believe. Gift cards can be one of the best things to ever happen to a merchant's cash flow. This is why I truly feel that gift cards are an underrated service. They can increase merchants' sales, while merchants may never have to exchange the value on the cards for merchandise.

Feeling the bulge

Gift cards can generate sizable profits for merchants. Most research shows that two-thirds of all holiday shoppers planned to give someone else a gift card this past holiday season. According to Comdata Corp.'s adult card study, the average amount for a gift card purchase is $45.

The Tower Group's research placed breakage, the industry's term for card value that was purchased and never redeemed, at $7.8 billion for 2007. Best Buy Co. Inc. had the highest amount of breakage at $16 million. A recent article in The New York Times stated $3.5 billion in gift cards went unclaimed during the 2007 holiday season alone.

There is also what retailers call up-spending: Most customers who use their gift cards often spend some of their own money to purchase merchandise that is more expensive than the value of their cards. Of those who receive cards, a whopping 51% spend more than the cards' initial values.

One of my favorite gift card facts is that merchants retain any unused balance, depending on state laws. For example, Vermont consumers can only cash out cards if the value is less than $1. (For more information, see "California chomps on gift card leftovers," Jan. 14, 2008, issue 08:01:01)

With the older relative of the gift card, the paper certificate, cash was given back if the purchase was under the value of the certificate. There are quite a few states that require the merchant to give back cash if the value on the card is under $5.

Gift cards are also far safer than gift certificates because they are harder to counterfeit. And if a box of gift cards gets lost or stolen, the merchant need not worry: Cards can only be activated at the POS terminal.

According to KeyCorp., switching from paper certificates to plastic can result in two to four times the average revenue growth because plastic cards are more visible and widely publicized. Additionally, carrying around a gift card that has a brand name on it gives merchants another opportunity to advertise.

Holding strong

Gift cards can do an amazing job of enhancing merchant retention. We all know the more value added services your merchant has, the lower your attrition.

Evidence has shown that merchants with gift card programs switch processors with 50% less frequency. And with recent law changes concerning gift cards, many merchants find it difficult to leave their current merchant service provider because gift cards with existing balances must be honored.

The real opportunity to offer gift cards is with your installed base of merchants. It's fairly cheap and easy to sell to merchants with whom you are already doing business; you can make a case that the value added service will increase their sales.

If they are satisfied with the products you've given to them thus far, chances are they'll take your suggestion and add gift cards to their sales floor. Some companies now offer basic cards in addition to customizable cards - designed with logos, pictures, lights, music and so forth.

Basic cards appeal to mom-and-pop merchants looking for the lowest cost to offer gift cards. These programs are great for merchants who aren't interested in purchasing a gift card package until completing a trial run.

Some MLSs offer the first bulk of basic cards for free to all merchants as bait. This helps get merchants hooked on the cards' revenue and benefits. Then MLSs steer them toward investing in gift card packages. This is when they mention that gift cards also capitalize on impulse purchases. Merchants who set up grab items at the POS are more likely to sell a gift card and a small item - maybe a stuffed animal, lip gloss or candy.

Online reporting and many new custom, interactive designs, such as cards that double as kaleidoscopes, have been added recently to give merchants more power and flexibility when choosing what gift cards to sell to their consumers.

If you don't sell gift cards to your merchants, others will. If that happens, your merchants will likely leave you and take their businesses to competitors with more enticing offers. Why take that chance?

Gift cards pack a punch in the payments industry, especially in the profit margin. end of article

Maxwell Sinovoi is the National Sales Manager of the Western United States with United Bank Card Inc. He can be reached by e-mail at msinovoi@unitedbankcard.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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