Banking and financial services would seem to be a natural extension for retailers and some have enjoyed considerable success. However, others are still wrestling with issues like return on investment and the need to differentiate themselves from traditional banking sources.

The gift card is rapidly expanding from the US into Europe with growth in the UK at the forefront. The advantages for retailers are great, not only does the scheme attract new customers who generally spend 40 per cent more than the face value of the card, at the same time the retailers are taking cash in advance of it being redeemed. There are cultural differences within Europe that create vastly different attitudes towards prepaid cards, but experts believe the European market in gift cards could reach 25 per cent of the worldwide market by 2010.

Major stores like Debenhams in the UK or electronics retailer Best Buy in the US are still doing the bulk of the card business. But this new style of merchandising that requires little investment for double-digit returns, is being embraced by every retailer from petrol stations and tattoo parlours to supermarkets.
“There’s always been a good market in paper vouchers,” said Bruce Bower, senior vice president, international for Blackhawk, the gift card subsidiary of Safeway Stores, alluding to the nearly extinct paper-based gift certificates.
“Pre-selling revenue is a good thing. You’re taking cash in advance of it being redeemed and leveraging some new channels by having one person give another person revenue in your company. The difficulty was customer service. Vouchers were live and couldn’t be merchandised out in the open as a customer concept. All that has changed,” he said.
Gaetano Gianetto, president of Epipoli, a Milan-based research and development firm, agreed. “This can be a very innovative service for retailers. It’s not just about selling Coca-Cola or Pampers. It’s about selling higher margin services like airline tickets or facial products without the upfront investment.”
These changes have been highly lucrative for both third-party suppliers of pre-paid cards and for retailers. The gift card market, once thought to be nearing maturity, is running between US$70-US$80 billion in the US and could reach about US$90 billion in 2007, according to several observers, who noted that European gift card revenues could reach the same number over the next several years.

Fundamental shift
In southern and central Europe the use of prepaid phone cards is very high. This could drive growth in gift cards in Europe, which could represent 25 per cent of the worldwide market by 2010, he said.
Gift card numbers are hard to track due to reporting and accounting issues. “It doesn’t show up as an individual line item and retailers are loathe to put out numbers because it might attract attention to legal questions surrounding unredeemed gift cards. However, US$74 billion seems to be the best guess at this point,” noted Dan Horne, associate professor, Providence College, who is also director of research and a member of the board of directors of Giftex, a UK-based card information and analysis firm.
Technology such as value-added, content-rich cards are driving growth. “There are cards with DVDs that you can put on your computer. You could load it with content like instructional cooking videos from famous chefs. It doesn’t add to the cost only the value. The big financial incentive for retailers is that people generally buy 140 per cent of the face value of the gift card purchased. “They also tend to buy higher margin goods because they are less price sensitive. It’s a fundamental shift in how people buy gifts,” he said.
This was underscored in a study conducted by Horne in January that found that respondents planned to purchase one-third more cards this year than last. “Convenience is a part of it. But a gift card gives people the opportunity to go shopping – America’s new favourite pastime. It’s a ticket to consume,” he said.
This propensity to shop is showing up at a variety of retailers. According to one published report, Starbuck’s customers activated US$287 million in gift cards during one quarter, up 30 per cent from a year ago. Additionally, the company has US$410 million in unredeemed gift cards in circulation. As of last February, Target had an estimated US$338 million in gift cards that had been sold but not yet redeemed, according to a recent report in the Financial Times. Many of these cards end up at online auction sites.

Gift card programmes
While retail penetration is highest in the US, Europe and Asia are high on the third-party radar. The UK, led by such chains as Debenhams and ASDA, already have strong gift card programmes, as does Zara in Spain. However, Blackhawk, which already supplies cards to about 63,000 stores in the US and Canada is expanding into Germany, France and Australia this year.
However, the growth of gift cards is not just about retailers having their own brands in their own stores but leveraging their brand with other retailers in so-called “gift card malls” which can offer consumers a choice of cards from a dozen different retailers in one location. Studies have shown that one out of every seven cards is now sold in a gift card mall and that number is growing rapidly.
It has been estimated that retailers collect six per cent of the face value of other retail cards sold in their own stores. “When you put it in a third-party environment like a supermarket, people make it a part of their weekly travel route. Redemption rates have also been very high, particularly in grocery. It’s almost become a substitute for money,” according to Bower.
Handling gift cards of competing retailers may be more problematic in Europe due to higher incidence of hypermarkets. “However, we believe that if you look at the business as a new retail category and think about the economics like return on investment and revenue and profit per square foot, it’s the type of programme you will want to have,” Bower noted. “The net impact on store performance is very positive.”
He conceded that Europe would take longer to develop than the US because card programmes have to be customised to each market. “Within Europe there are vastly different attitudes toward prepaid cards […]. For example, Germany has far fewer gift cards than France and France has fewer than the UK. It has a lot to do with cultural differences as well as different states of POS technology that can enable gift card programmes. Right now, we’re focusing on western Europe where the economic opportunity is larger and the state of technology is better. But we will be looking at eastern Europe.”
Meanwhile, growth in the UK remains brisk, according to Greg Sheppard, marketing manager, First Data International, UK-based payment solutions provider. ”Debenhams is probably the best when it comes to gift cards. They use it as a tool to bring in new customers and increase the spend. ASDA has a range of different designs and some very innovative packaging for events ranging from Mother’s Day to Christmas,” he said. Carrefour, Intermarché, Karlstadt, IKEA and Zara also have very active gift card programmes.
As noted, many believe the future hinges on value-added card programmes. One example of this is the alliance between Coinstar and CVS drug stores in the US. Instead of a voucher, consumers can convert the counted change to a CVS gift card and avoid paying the coin-counting fee, he said.
At ASDA, which does not have a loyalty card programme in the UK, consumers can load their change from purchases on to a gift card and use it as a Christmas club account. The chain is also using the card as an employee incentive, pumping it up with bonuses for their own staff members.

Fraud
Fraud is one of the few problems with gift cards. “At first, people were lifting them because they thought they were live. That ended quickly, but we still spend a lot of time on fraud protection and we’ve hired staff to deal with it,” said Bower. For example, Blackhawk conducts velocity tests that look for the same pattern of shop across multiple retailers looking for fraudulent patterns. But as technology evolves so does fraud and we have to be responsible to that.”
The most common fraud has to do with theft of credit card numbers which are then used to purchase gift cards, many of which end up on auction sites like eBay for pennies on the dollar. The National Retail Federation, Washington, D.C. has estimated that about 62 per cent of gift card losses are due to dishonest employees, while 13 per cent is due to counterfeit cards and another 13 per cent to stolen cards. In addition to online auction sites, pawnshops have become big purveyors of gift cards, according to observers, noting that these shops typically pay out 25 to 30 cents on the dollar for cards.