By Ann Train
Revolutionary changes in the payments industry have rippled into the prepaid gift card segment as digital-savvy consumers and business owners seek more efficient routes to commerce. The convergence of digital and physical commerce, online and in-store, has not only created new layers of complexity, but also forged a new realm of opportunities.
Mercator Advisory Group predicted closed-loop, store-branded prepaid card loads in the United States will continue at a compound annual growth rate (CAGR) of 3 percent through 2018, when total loads could reach $371 billion. Open-loop, network-branded prepaid card loads are expected to accelerate much faster at 7 percent CAGR over the same period and total $343 billion in 2018.
Several market forces are expected to drive these foreseeable surges. "One is the digital market, which is growing very quickly, and that's to be expected," said Ben Jackson, Director of Mercator's Prepaid Advisory Service. "More people are shopping online and using digital cards and mobile phones. That may be as much as 10 percent." He cited the rise of gift card exchanges as another contributor to commerce in this sector. Michael Hursta, Vice President of Prepaid Solutions for First Data Corp., confirmed that growth in the digital space has risen sharply among merchants who offer prepaid gift card programs. "Looking at trends from 2015 on our own client base, we see virtual now around the 10 percent mark in terms of total load activated on cards. That's significant, because we've been in single digits for quite some time."
American Express Co. is often credited for automating prepaid gifting with the launch of the gift check in 1988. Prior to that, manually processed paper gift certificates were the norm. In 1994, early adopters Blockbuster Inc. and Neiman Marcus popularized plastic gift cards, setting the stage for the widespread market distribution that would follow.
InComm, which started off as a long-distance phone card technology provider in 1992, would later become one of the nation's largest gift card distribution networks. Blackhawk Network Holdings Inc. introduced the retail gift card mall concept in Safeway Inc. stores in 2001. Today, many view the retail gift card distribution channel as a duopoly between these two companies.
"Incomm, more or less has drug, pharmacy and c-stores," said Walter Paulsen, payments industry consultant and startup executive. "Blackhawk has grocery and math. Online is a big challenge, but through acquisition … Blackhawk is really trying to build a portfolio of category-leading, stored-value distribution and marketing businesses in retail, online and B2B channels."
Signaling what may lie ahead in this promising payment segment, Blackhawk and Incomm have both invested heavily in the business-to-business (B2B) incentive and digital card segments, as well as the online distribution and exchange of gift cards.
In January 2016, Blackhawk acquired OmniCard LLC, adding prepaid business incentive and reward programs; it also strengthened its core offerings with the purchase of GiftCards.com LLC. Now local merchants can participate in its GiftLocal program and deliver virtual gift cards via email or mobile app.
Incomm has also bolstered its business incentive program. "More and more rewards programs utilize gift cards as a reward or incentive," said Mike Fletcher, General Manager of InComm Digital Solutions. "By offering open- and closed-loop products in digital and physical formats through a single platform, we provide incentive program managers a wide range of choice and flexibility."
Steady growth in the primary gift card market has led to a spillover secondary market, estimated to be valued at between $500 million and $1 billion, according to the latest estimates. In the secondary market of gift card exchanges, consumers are able to dispose of their unwanted gift cards at a discount in exchange for cards they want. While exchanges have been around for a while, consumer uptake has been incremental.
An inherent challenge until recently for smaller merchants was the operational magnitude of participating in this market. In response, TouchSuite developed a gift card exchange program for small to midsize merchants. Merchants using its Firefly POS system and auto-sync payments interface can touch a button onscreen to accept more than 100 top-brand gift cards from customers as currency in their stores.
Its system converts the gift card to cash, based on the card's current resale value, and funds merchants using clearing house methodology. Payments are not limited to gift cards. "Let's say the transaction is $120, but your gift card was only worth $80, leaving a $40 balance," said Farshad Tafazzoli, Chief Information Officer at TouchSuite. "Then you can pay for that $40 balance any way you want, with cash, credit, debit or another gift card."
Touchsuite said that since launching the program in 2015, merchants have seen higher customer conversion rates and increases in average ticket size. "What we're finding with merchants is that once they educate somebody, they're getting new people walking in the door," said Sam Zietz, founder and Chief Executive Officer of TouchSuite. "They're able to tell friends they went to Sally's Dress Shop and paid for merchandise using a Starbucks card."
Blackhawk research confirmed that 51 percent of consumers today have unused gift cards, and upon learning about gift card exchanges, 55 percent said they would use them to buy or sell gift cards.
Jackson pointed out that in the overall exchange market people are buying the cards because they want to shop there. "And the card, because it's being sold by somebody who already has it, it's not being sold at a discount to the retailer," he said. "Somebody paid $50 or $100 for that card and that money went into the retailer's coffers."
But there are caveats with the secondary market. Once the card enters the open market, brand image and consumer satisfaction are no longer under merchant control. Potential fraud and risk of escheatment due to legal differences between gift cards, which by law must have a five-year minimum expiration date, and store refund or incentive cards, which can expire at any time, place consumers at risk should an exchange site fail to vet cards properly, which does happen.
One trade organization that has long supported retailers in promoting closed-loop gift cards is the Retail Gift Card Association, which as of March 20, 2016, will welcome non-retail members to join in its consumer outreach and government education initiatives. The RGCA represents over 80 retail members from national big-box stores to those with smaller footprints.
Mirroring the payments industry, the RGCA has a focus on technology. "The mobile redemption and purchase of gift cards is changing a lot of things from the retailer side," said Timm Walsh, Vice President of Corporate Sales at Regal Entertainment Group and RGCA Board Chair. "You must have the right technology and systems to be able to accept those seamlessly."
Walsh likened the transition to the airline industry deployment of mobile boarding pass systems. "You have to be able to optically scan the phone and accept the variants related to phone size, clarity, etcetera," he said. He maintains that for the time being plastic is still king in the gift card world, mainly due to its availability, convenience and customization aspects.
According to Walsh, when mobile payments reach mass consumer adoption, mobile gifting at the nation's retailers will follow suit. He believes it will fill a valuable niche in last-minute and cross-country gift giving.
That said, merchants who once thought of the digital domain as a distribution channel for physical gift cards via a website are beginning to look at delivering them as electronic gift cards. "What we're seeing is that more merchants are now in a position to accept virtual cards at the point-of-sale in store, as opposed to just having them online, and that's causing a shift," Hursta said.
POS technology today supports the switch. "Through our Clover device we do provide an interface that allows consumers to purchase digital gift cards directly through a tablet point-of-sale experience," Hursta said. With digital programs, merchants also have a mechanism for tracking interactions, whereas cardholder anonymity with most physical products in the past prevented merchants from creating an open dialogue with customers.
The transition from physical to digit incentive and rewards products in business-to-consumer (B2C) and business-to-business (B2B) environments could be a boon to ISOs and merchant level salespeople (MLSs) selling these types of products to merchants and businesses.
"That's a very different type of dynamic," Hursta said. "When you have a card that costs essentially nothing to deliver to someone, it gives you the ability to reach them in a more personalized fashion, so you can send the right type of offer to the right consumer at the right time."
Walsh noted that people sometimes forget that a gift card truly is a loyalty card. "It creates brand awareness, brand loyalty, and it's building from a channel that over the past couple of years has taken a direction of its own when you wrap it into loyalty programs," he said.
San Francisco-based CardFree went digital from the start in building an end-to-end mobile commerce platform that supports preordering, payment, loyalty and rewards programs. Its mobile payment and loyalty apps are in use at such quick service restaurants as Dunkin' Donuts, Taco Bell, Sonic and Checkers. CardFree plans to expand into the convenience store, casual dining and small merchant segments in the future.
CardFree noted that what makes its platform unique is its patented technology that allows users to build master accounts for each merchant. CardFree manages payment preferences and various forms of stored value, so that when a customer approaches the merchant, the individual’s rewards, discounts and payments can be applied in one seamless transaction. This is normally a multistage process. Customers can also set thresholds that trigger automatic reloads on stored-value cards.
"When you couple loyalty with a stored value card, like Dunkin' or Starbucks does, you typically will see an increase in total spend or check," said Alan Paul, CardFree Analyst and Strategy Lead. "People who use a mobile stored-value card tend to spend more at the point-of-sale than those who either don't use a stored-value card or actually use a physical card. We've seen that in the Starbucks' use case."
As the millennial generation grabs the reins in determining how commerce will be conducted, self-giving and gamification are expected to play a greater role in attracting and retaining customers. According to First Data research, 45 percent of consumers purchased gift cards for themselves in 2015, more than double the number who did so in 2013.
The RGCA found that 73 percent of shoppers who purchase gift cards for others also shop for themselves, with or without gift cards, in the stores where they purchased the cards. Also worth noting, of the mobile-activated consumers surveyed by First Data in 2015, 64 percent said they would prefer to use one app to store gift cards on mobile devices, making mobile wallets like Gyft a potentially viable virtual alternative to the physical gift card mall.
Teri Llach, Chief Marketing Officer at Blackhawk, added, "From an online and mobile perspective, we're seeing a lot of interest in the e-gift or e-code product within a mobile or online setting, and those are used in a lot of cases for self-use as well as gifting."
To help merchants link with mobile self-gifters, Mobeam Inc. developed a patented light-based beaming technology that enables POS laser scanners to read barcodes from mobile wallets containing payment apps, loyalty cards, membership cards, gift cards, tickets, vouchers and coupons. It recently integrated a "For Me" engine with its Beepn'Go app, so users can tap into personalized offers while on the go.
Hoping to make waves in the gamification-to-purchase gifting segment, Canada-based Vouchr said it is focused on redefining the market with a "highly engaging, gamified and social gifting solution for emerging mobile payment technologies." According to Vouchr, its platform enables users to gift most anything at any merchant location in the world, and that's down to the stock-keeping unit level, an alphanumeric code used to track items and parts.
For some merchants, perhaps the biggest challenge of all –whether the gift card program is digital, physical or both – is how to manage the details once the program is up and running. A number of integrated POS systems automate processes and provide advanced analytics to dissect program effectiveness in real time.
Paytronix Systems Inc. worked to resolve a number of merchant issues with its proprietary guest engagement platform, which is deployed in over 250 restaurant and retail chains. It recently upgraded its gift card program to support virtual gift and mobile offerings, but more importantly, merchants are now able to automate reconciliation of gift card activity at the POS across multiple locations and third-party gift card channels.
For ISOs and MLSs, the decision to integrate one platform over another could boil down to which technologies and features their merchants are most likely to adopt and use day to day.
Hursta recommends that ISOs and MLSs ask potential vendors such questions as, How well do the cards work? Does the gift card program have the flexibility to process both physical and digital cards? Does it provide easy redemption at the POS and offer tracking to analyze how well the program is operating?
But once activated, set and forget is not an option. "Think about these products as a year-round solution," Hursta said. "It's not just about the holidays. December is becoming a less important month compared to the other 11, so marketing the program year round and doing it in store, even through your digital program, I think is key."
To be effective, merchants must constantly remind customers while they're inside the store that a digital gift card program is available. Whether customers choose to enroll on the spot while shopping or later from home, it's an opportunity not to be missed. 
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