E-Gift Cards Breathe Life Into Closed-Loop Market

    Are You Prepared?

    Prepaid Press Edition: April 1, 2011 Rivka Gewirtz Little

    To mark its 40th birthday in March, Starbucks launched an incentive program that randomly offered $40 e-gift cards to users that checked into a Starbucks location on Foursquare and unlocked a so-called Tribute Badge. The program is a prime example of a trend in tying together e-gifting or digital cards with social networking tools that analysts believe will finally reinvigorate the ailing closed-loop gift card market.

    In recent years, the open loop gift card market has grown swiftly while its closed loop counterpart has been stagnant. Last year, the Mercator Advisory group said the closed loop card market would grow at a compound annual rate of 26.7 percent over three years, but over the past few years that segment has seen only about 1 to 2 percent growth annually.

    It will take time, but digital cards are likely to change that. “Virtual or digital e-gifting is by far the most promising, up-and-coming channel opportunity and has gained the

    biggest momentum over the past year,” said Rebekka Rea, executive director of the Retail Gift Card Association (RGCA).

    CashStar, which offers a hosted digital card program that includes a fully outsourced back-end payments/management system for more than 100 retail brands from The Gap and Starbucks to Home Depot, said retailers are learning the e-card gospel quickly. “As much as 50 percent of sales will be through digital instead of plastic,” said David Stone, CEO of CashStar, calling this the physical-to-digital “conversion rate.” Starbucks alone expects to move 10 percent of its gift cards to digital within one year, he said. Digital cards are generally purchased online through a retailer’s website or gift card mall, and then sent to the recipient via email. Increasingly, these cards are being both bought and sent through social media networks such as Facebook or even by mobile phone – and this flexibility is expected to drive growth.

    Traditional E-Gifting … If There is Such a Thing

    CashStar began working on digital card programs and systems about three-and-a-half years ago. The company was incubated by Coupons Inc., which is known for pioneering digital coupons. Executives figured the same kind of transition that happened for coupons could occur for gift card programs, said Stone. The most obvious first step for CashStar’s customers was to begin selling retail gift cards online and have them delivered by email – a system that is now considered “traditional” considering all of the new business models that are arising. With these e-gift cards, users would click on the website of Williams Sonoma, for example, then click on the option for gift cards, and then for electronic cards. At that point, the user is transferred to the CashStar system

    (which still appears to be branded by the retail customer). The user would then choose a denomination and a recipient, pay with a credit or debit card and then hit send. Recipients need only open their email to receive the card, which they can print or use to record the account number manually.

    Because these cards are delivered by email, they can also include voice and photo or even video greetings along with them. “If you’re sending an e-card to your husband who is overseas fighting, he can click it, see the picture, hear the message and get the gift card,” said Rea, referring to multimedia use as the “wow factor” in digital cards. But email delivery is only the first step in the digital card evolution. “Most of the retailers start with an e-card and delivery through email address,” said Stone. Then they move on to mashups – otherwise known as tying together digital cards with social networking tools.

    Finally, a Way to Make Money in Prepaid on Facebook

    The rise of virtual currency games on Facebook, such as Farmville, made it obvious to retailers and card providers that users liked to deliver gifts to their friends online. If users enjoyed delivering virtual farm acres to their friends’ Facebook walls, why wouldn’t they want to send an e-card for an actual latte? So, the first step was for retailers that had already invested in e-card programs to add a Facebook tab to the bottom of their sales page. That meant when users clicked on the Williams Sonoma e-gift card category, they could buy the very same e-card they would have otherwise, but now they could click on the Facebook delivery tab to have that greeting show up on the walls of their friends and families.

    On the flip side, a number of retailers that have started fan pages on Facebook use these outlets to offer incentives with e-cards. For example, users that join the Starbucks fan page might be offered a joining incentive of an e-gift card. At this point, cards bought through actual social network fan pages tend to be smaller in denomination, since consumers may not feel totally safe using their credit cards on Facebook, said Daniel Horne, a professor at Providence College, who studies the gift card market and adoption trends.

    If Gift Cards Can Go Viral, Why Not Mobile?

    As mobile payments begin to take hold among consumers, it would only make sense that digital gift cards would make their way into the so-called mobile wallet.

    eMarketer predicts that mobile transactions will total nearly $1 trillion by 2014 while the Yankee Group estimates the worldwide transaction value of mobile payments will move from $162 billion last year to $984 billion by 2014. This includes transactions from mobile banking, international and domestic remittance, contactless cards, mobile coupons and near-field communications. As consumers rely increasingly on these forms of payment, the idea of buying and sending a gift card via a mobile device will seem commonplace.

    For now, there are a few ways to offer mobile cards. As one option, retailers can simply add another delivery option to their regular e-gift card programs so that cards can be bought online and delivered to cell phones instead of email. Another option is the evolution of iPhone and Android apps that enable users to buy so-called m-cards through the application on the device and then have them directly delivered to a friend’s phone or tablet.

    In either scenario, major retailers, such as Target, are beginning to implement mobile wallet applications at their POS sites, so that machines can read barcodes directly from a mobile phone at the check out counter. Otherwise, checkout employees must engage in the lengthy process of keying in a code manually, which could delay mass uptake of the technology.

    That’s not stopping retailers. This past Valentine’s Day saw a slew of mobile gift card marketing campaigns designed by Transaction Wireless for companies, including Applebee’s, American Eagle, AMC Theatres, Blockbuster, Bass Pro Shops and SpaFinder. CashStar, which offers an iPhone application for m-card sales, is seeing enough success with the programs that it is also offering mobile-based incentive plans for its clients. One such program lets users download rewards points or airline miles onto their mobile devices to be converted into e-gift cards.

    Where Will the Mobile and Virtual Gift Card Challenges Lie?

    Media buzz and vendor excitement would make one believe e-gift cards and mobile cards are in full bloom, but actually there is plenty of consumer confusion that must be overcome.

    Part of the problem is a lack of cohesive messaging around the products. “We need to come up with a best practices or industry standard for definition,” said Rea. “The term m-card is

    thrown around, some people still say digital card, others say e-card. That can be confusing for consumers.” That’s especially a challenge at a time when retailers are still trying to convince consumers they can trust in online payments and cards that one can’t hold in their hands.

    Mobile cards face an even greater adoption barrier.

    “The vertical that is the most challenging with mobile redemption would be the service industry because customers don’t want to hand over their $400 phone to a server to take back into the kitchen for their transaction,” said Rea. “Also not many brands want to take on the liability of holding someone’s $400 phone.” As restaurants begin to add mobile payment systems for scanning or table-side payment systems, this will begin to change, but “that’s still a ways away for massive adoption,” Rea explained.

    Adoption May be Slow, but it Will Surely Come

    All of this is not to say that retailers shouldn’t jump in. “We have to start taking the necessary steps for consumer adoption. Consumers won’t buy them until they are out there. Unfortunately for the companies bringing them out there first, there won’t necessarily be a bleeding edge advantage. Somebody has to take one for the team,” said Horne.

    Still in the long run, digital gift cards will be similar to physical cards when it comes to evolution of mass adoption. “When I first started studying gift cards, people didn’t give them in the immediate family, and now that’s changed,” said Horne, explaining how gift cards finally lost the stigma of lacking intimacy. Adoption will also grow as the target market for these cards gets older. At this point, digital cards and social networking are seen as a play for the young and tech savvy – but that won’t last.

    “If you’re looking at a mobile tech savvy group as your target market, you’re talking about people under the age of 35, they’re not as heavy a gift giver as somebody who is 40,” said Horne. “But as the bubble comes through, eventually everyone who is 35 now will be 70 and at that point everyone over the age of 70 will be buying on the Internet.”

    For those trying to understand the tides of change, it’s not likely that e-cards will replace physical gift cards anytime soon. There will always be something valuable in presenting a wrapped gift card in person, Horne explained. The ultimate goal for gift card providers at this point is to begin integrating the digital option into their overall gift card programs so that they’re well prepared for uptake at whatever rate it occurs. •