February 2012

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ift cards are big business. In fact, depending on which research report you purchase, or which news source you rely on, the U.S. gift card market stands at between $35 billion and $90 billion. One of the reasons estimates vary so considerably is that gift cards are part of the prepaid card realm, which a number of other financial instruments like payroll cards and phone cards. Without careful scrutiny, the lines drawn between prepaid card offerings can become blurry. Like other prepaid options, gift cards are purchased with a monetary value already loaded on the card. Unlike the general category of prepaid cards, which could be used as a gift (just as almost anything a consumer purchases could be used as a gift), this report focuses on gift cards: those cards which are not only marketed as gift giving options, but those that consumers purchase with the intention of giving a gift to another person.

Consumers certainly know that gift cards are available. In a 2004 Valuelink survey, storedvalue/ gift cards reached a consumer awareness level of 94% compared to 71% in 2001 (Credit Card Management, December 2004.) According to the 2005 Deloitte Consumer Holiday Survey, consumers planned to make gift cards the top gift purchase in 2004. The survey concluded that, for the first time since their inception, gift cards would replace apparel as the gift purchase of choice. According to the study, during the 2004 holiday season, 64 percent of consumers said they intended to buy gift cards, up from 60 percent in 2003.

According to an October 2005 ValueLink survey, major retailers currently account for 70 per cent of gift card sales; restaurants accounted for 12 percent of gift card purchases, up from 5 percent in 2003, food stores are generating 6 percent of gift card sales; and entertainment-based stores are generating 5 percent.

According to the 2005 Deloitte Consumer Holiday Survey:

• Eighty percent of respondents received at least one gift card to a store such as an apparel or food store.
• Thirty-three percent of respondents received at least one gift card to a restaurant/fast food establishment.
• Fourteen percent of respondents received at least one gift card to a mall or shopping center.
• Ten percent of respondents received at least one gift card that could be used at a variety of stores/establishments (e.g., an American Express gift card.)
• Five percent of respondents received at least one gift card for a personal service, such as a manicure.
• Five percent of respondents received at least one gift card for an Internet site - (e.g., eBay, Amazon.)

Simply put, consumers love the convenience of gift cards - gift cards can increasingly be found at almost any retail outlet, convenience store, many restaurants, and, more recently, the Internet. Not only can they be found, but they can be found in kiosks - gift card "malls" that exist at the front of store counters or as free-standing store displays - and on online exchanges. Once found, they can be spent almost anywhere, too. Closed loop cards (discussed below) are redeemable at a specific retailer; open looped cards are redeemable anywhere the card association, be it Visa, MasterCard, or American Express, is accepted. For many people, gift cards also allow the recipient to pick and choose the gift that fits best, or to allow the purchaser to give something of value when a decision about what the recipient would like cannot be made.

Clearly, consumers have embraced gift cards. However, the issues surrounding gift card success, though driven by consumer acceptance, involves deeper competitive, efficiency, and profit-driven issues.

Gift cards are recognized as a valuable sales tool by retailers for their ability to increase sales, create brand awareness and reduce fraud, while potentially acting as a vehicle for in-store credit. Gift cards also offer merchants an additional data mining option. Gift certificates and cards offer retailers, online and offline, many benefits, not least the ability to mine customer data for both gift card purchasers and recipients. New opportunities for customer 'list growth' are available to retailers that sell gift cards and use the associated information to devise targeted promotions. For example, a retailer can sell gift cards at a cash till, with a specific code on the reverse that customers can use to spend or register the card at a Web site for a discount, to gain vital customer intelligence in addition to short-term value from the gift card's redemption. (Imaging Resource, October 2005.)

As "stored value" cards, gift cards differ from traditional gift certificates in important ways. When a consumer spends $25 from a $50 gift card, for example, the card automatically updates the balance. This is more efficient than the retailer reissuing another gift certificate to the consumer for the balance.

Due to improved technology, some retailers are also able to reissue a lost gift card if consumers have kept the original purchase receipt. Some retailers also encourage gift card recipients to register their card through the store's Web site, which enables them to check their balance online and receive a new card if they lose or misplace the original card.

Gift cards are perceived as very convenient for consumers. At holiday time, convenience may be an added plus for consumers, many of whom must deal with long lines and shops bursting with people while shopping, as well as time planning for the holidays.

Amount of Time (hours) Spent Holiday Shopping/Gift Wrapping, 2004 0-5 hours 40% 5-10 hours 29% 10-15 hours 31% Source: MasterCard Prepaid Gift Card Survey Quantitative Research Report, 2005

So, too, must many of them spend a fair amount of time wrapping gifts. As the chart above indicates, 40% of consumers spend ten or more hours wrapping their holiday gifts. Time spent wrapping gifts becomes more pronounced for women, 49% of whom spend 10 or more hours doing so.

Those between 35 and 49 years of age spend the most time wrapping gifts. A prepaid gift card might give people more time this holiday season; six in 10 (59%) who spend 10 plus hours shopping and wrapping are interested in using a prepaid gift card to cut that time down, according to the MasterCard survey.

Gift cards are also perceived as assisting the consumer with his or her budget. How Often Do Consumers Surpass Gift-giving Budgets? 8% 14% 49% 29% Never Almost never Sometimes Always Source: MasterCard Prepaid Gift Card Survey Quantitative Research Report, 2005

Twenty-nine percent of consumers report "always" going over their holiday budgets, and 78% report doing so at least some of the time.

Men are significantly more likely to never (11%) and/or almost never (17%) surpass their gift-giving budget. In contrast, women are significantly more likely (37%) to always surpass their gift-giving budget.

Likelihood of Staying Within Holiday Budget If Shopping with Prepaid Gift Cards Much less likely 4% Somewhat less likely 13% Somewhat more likely 55% Much more likely 28% Source: MasterCard Prepaid Gift Card Survey Quantitative Research Report, 2005

According to the MasterCard survey, respondents perceive that gift cards will help them reign in their holiday spending.

Store gift cards (or "closed loop" gift cards) are issued by a specific store or store chain, and can only be used there. This type of gift card is ideal if you know your gift recipient likes to shop there. Store gift cards usually don't charge an up-front purchase fee, nor have an expiration date. The cards also are less likely to have servicing or dormancy fees, and can be purchased right in the store or, if they have one, from the store Web site.

National gift cards (or "open loop" gift cards) look similar to store gift cards, and their appearance might promote a specific mall, product or service. However, the fronts of such cards also display the logos of major payment systems, such as American Express, Discover, MasterCard or Visa. Unlike store gift cards, which can only be used at a single chain or retailer, most national gift cards can be used anywhere that a credit card with the same logo is accepted. A few national gift cards are designed for limited usage - such as the Be My Guest card from American Express, useable only at restaurants. National gift cards issuers usually charge a fee for the card. Network-branded, prepaid debit cards are not designed to be sold only as gift cards. According to ATM & Debit News, most can also be used as a convenience card to replace cash and checks, such as for use as travel cards, money-transfer cards or as payroll and benefits cards (May 2005.)

A Mercator Advisory Group study reported that closed-loop gift cards lead all other prepaid debit card categories in terms of spending (ATM & Debit News, May 2005.) Industry experts estimate that bank-issued gift cards represent between 5 and 15 percent of the gift card market. For example, 85% of the gift cards that were given and/or received last holiday season were store gift cards, according to the MasterCard Prepaid Gift Card Survey Quantitative Research Report.

2004 Holiday Gift Card/Gift Certificates Received, by Type: Store, National, Restaurant (%) Store bought gift card/ certificate (Barnes & Noble, Best Buy) 85 Prepaid gift card from MasterCard, Visa, Discover, or American Express 14 Restaurant gift card/certificate 36 Other 5 Source: MasterCard Prepaid Gift Card Survey Quantitative Research Report, 2005

While store gift cards are viewed primarily as a loyalty product to increase sales, bank-issued gift cards are issued, well, by banks, so they are financial instruments with associated protections such as chargeback rights, dispute management, and zero liability if a card is lost or stolen. Research firm Tower Group indicated in a 2004 report that it expected bank-issued gift cards to eventually overtake retailers' gift cards in terms of sales volume. The report attributed growth in part to plans by Visa and Mastercard to expand their offers over multiple channels, and to American Express' plans to begin offering its cards in grocery and drug stores and in shopping malls. This conclusion is bolstered by a Dove Consulting report indicating that only 21% of financial institutions offer prepaid gift cards, but that 68% intended to offer the cards by November 2006 (Credit Union Journal, November 2004.) In 2004, the company sold approximately 4 million gift cards in the U.S., and sales grew 300% percent between 2003 and 2004. Visa USA reports similar growth, with more than 500 Visa members now issuing Visa-branded prepaid cards and volume 12 times the level of just three years ago (Cardline, May 2005.) However, in the view of Packaged Facts, bank gift cards have a long road to travel in order to overtake store gift cards, in the wake of the ongoing consumer reaction to gift card fees.

There are currently a number of variants to the strict open loop/closed loop dichotomy. For example, Home Depot gifts cards are sold by a number of retailers, and are only redeemable at Home Depot. New York Transit issues a gift card that can be redeemed at several merchants, and American Express Co. issues a gift card that can only be bought, and redeemed, at Dell Inc., the online computer retailer (CardLine, August 2005)

Although store gift cards enjoy a commanding lead in the marketplace, store gift cards and prepaid cards from credit card companies (43% vs. 42%) are equally as desirable as gifts, according to the MasterCard Prepaid Gift Card Survey Quantitative Research Report. The appeal is attributed primarily to the cards' flexibility: consumers are not locked into a specific retailer, but rather can redeem their gift card almost anywhere.

Adults age 18-34 are significantly more likely (50%) to want a store bought gift card, whereas adults age 50 and over are significantly more likely (23%) to want a restaurant gift card.

Moreover, according to a Collective Dynamics survey, consumers appreciate the extra features of bank-issued gift cards, such as card personalization.

Bank gift cards are also redeemed faster than their store gift card counterparts. According to the 2005 Deloitte Consumer Holiday Survey, bank cards purchased during the 2004 holiday season were the type most likely to have been used by the end of January, with nearly three-quarters (74 percent) of these cards have already been fully or partially redeemed. Banks also gain an opportunity to cross- or up-sell products to their gift card customers. With 84 percent of bank-issued gift cards being bought in-person furthermore, versus 61 percent of retail gift cards, banks gain an opportunity to cross- or up-sell products to this additional consumer footfall, according to Collective Dynamics (August 2005).

Consumers also put more money on bank gift cards. According to the 2005 Deloitte Consumer Holiday Survey, the highest dollar amount received was nearly $78 for a bank card.

Although there is the potential to cross sell customers, it doesn't always work out that way. Bank of America, the leading check card issuer in the U.S., which also has a thriving prepaid program targeted primarily at the Hispanic community, stopped selling Visa-branded gift cards direct to consumers in March 2005. The company has reported that gift cards did not fit into its overall prepaid strategy of building relationships, citing gift cards as a transactional product. The company reported that although some gift card customers were repeat buyers, they rarely signed up for other products. The sales tended to peak twice a year - between November 15 and December 31, and when schools let out in late May. Moreover, the gift card was not an effective cross-selling tool. Regulation and litigation related to gift-card fees affected the bank's decision (American Banker, March 2005.) The company will continue to sell gift cards in bulk to commercial customers and will continue its co-randed Visa gift card partnership with Simon Property Group (Chain Store Age, May 2005.)

B of A never sold the cards at its branches. Sales of the cards had improved by more than 75% over the past year. The company was one of the first big banking companies to offer gift cards; it launched five in 2001 (American Banker, March 2005.)

Banks normally charge fees associated with their gift cards. Retailers, on the other hand, often do not charge upfront or dormancy fees for their cards, and those that do, usually waive these rules in states that have passed gift card laws - as such, store gift cards are generally viewed as the better value proposition. Gift card fees and disclosures have been the two main points of contention between banks and regulators, who want to ensure that recipients are aware of fee structures or potential devaluing of a card over time. Also at issue is the insurability of open looped cards. For a full assessment of these important issues, please see our Legal chapter.

American Express's gift card program has shown exceptional performance since its inception. In 2004, the company sold approximately 4 million gift cards in the U.S., and sales grew 300% percent between 2003 and 2004. Bank-issued gifts cards, which can also be used at multiple merchants, grew by only 17% in the same period, indicating that American Express' growth is far outpacing the industry.

While industry figures showed that credit, charge and debit card products had demonstrated steady growth, these products combined only accounted for just over one-third of U.S. consumer payments, indicating that consumers still had many unmet payment needs. American Express researched to find out what these unmet payment needs were. The company found that, first, consumers want greater control over their spending, to use their payment product as a budgeting tool, and to ensure they do not spend more for something than they had intended. Second, customers wanted to compartmentalize their spending. The long-held industry assumption that consumers would continue to migrate all their spending to a single card was false; besides cash and traveler's checks, customers had, on average, eight different forms of credit, charge or debit cards in their wallets. Third, they want confidence that their funds will be replaced quickly and hassle-free if their card is lost or stolen, and in many cases they want the security of knowing that their card is not directly linked to their bank account. Prepaid cards addressed each of these consumer needs.

American Express initially chose to leverage its existing prepaid business by expanding its paper Travelers and Gift Checks into cards. Travel and gifting each represent two large spending categories where consumers view prepaid products as an attractive alternative to cash, and where company infrastructure already existed from decades of its paper check services. The company's TravelFunds Card, later renamed the Travelers Check Card, combines the security of a Travelers Check with the convenience features of a card. For a fee of $14.95, consumers load the amount of funds that they select onto the card. The card is embossed with the cardholder's name, is reloadable and accepted anywhere the American Express Credit Card is accepted.

Launched in a pilot phase in 2003, the Travelers Check Card started its full roll out in 2004. Although complete sales results were not available, the company did report that the average amount loaded on its Travelers Check Card was 12% higher than the average purchase of paper Travelers Checks, indicating that card was attracting high-spending customers.

AMEX launched its gift card program in 2002 with a marketing campaign touting its universal spend-where-you-want flexibility, thereby distinguishing it from store gift cards. The card comes in preset denominations of $25, $50, $100, $200 and $500, and consumers can personalize the card by embossing the recipient's name. The card costs $3.95 plus shipping and handing if purchased online, and, like the Travelers Check Card, is reloadable and accepted anywhere the American Express Credit Card is accepted.

Security benefits are a major reason for the success of American Express' prepaid cards. Just like its traditional paper Travelers Checks, cardholder funds can be replaced quickly and hassle-free if the card is lost or stolen, usually within 24 hours. Its refund network of more than 200,000 partner-supported locations dwarfs most, if not all, other companies. Moreover, because these prepaid cards are not linked to the cardholder's bank account, many consumers view them to be safer than both cash and debit cards.

Customer satisfaction scores for gift cards rank among the highest of all American Express Card products. And in a recent customer survey conducted by the company, 80% of gift card purchasers indicated that they intend to buy the product again. The company also reported that the average amount loaded on its gift cards is nearly 70% higher than the store-specific gift cards that they support.

Established selling relationships and infrastructure, along with already proven successes with prepaid cards have helped convince more than 400 banks to agree to sell American Express' Travelers Check and Gift Cards, including Fifth Third and Sun Trust. Many banks are finding it more cost effective to sell American Express' products than to issue their own prepaid cards. Past travel partners such as Continental, Hilton Hotels and Liberty Travel have recently made AMEX prepaid card products available to their customers. In addition, new agreements with Safeway Supermarkets and Rite Aid pharmacies have made AMEX gift cards available on their merchandise racks. Grocery stores have been lucrative for AMEX, with gift cards selling at four times the rate of bank sales.

American Express cites many benefits from prepaid gift cards. Like traditional paper Travelers Check, they benefit from the float on a prepaid card, and can maximize its yield by investing a large portion of its funds in longer-term, high-yield investments. The company collects additional revenue from purchasing and reload fees, and receives a high return on equity. Prepaid cards help deepen loyalty with sellers, merchants and existing customers, while helping introduce new customers as well.

The company reports that 22,000 locations are selling American Express' Travelers Check Cards and Gift Cards in the U.S. Some 3,200 U.S. bank branches sell both AMEX gift cards and AMEX Travel Cards. Another 1,550 sell just the gift card and more than 2,000 just the Travel Card. Even with this rapid expansion, the company still has only 7% penetration of customer-preferred retail locations in top markets, and gift card revenue is still modest relative to the rest of its card and paper Travelers Check businesses. Moving forward, American Express plans to negotiate the distribution of American Express-branded gift cards through more retailers and financial institutions.

Retailers selling the AMEX gift card include Duane Reade and Rite Aid drug stores and Safeway Kroger supermarkets, and Circle K convenience stores, and CVS pharmacies. By the end of the year American Express expects to have more than 40,000 in-person locations selling its gift card, including more than 10,000 bank branches, according to CardLine (May 2005). AMEX's gift cards are non-reloadable and are sold in denominations from $25 to $100 in person and up to $500 through phone or Internet sales. Travel Cards are reloadable, and consumers can load up to $2,750. Neither card expires.

CBL & Associates Properties, owner of Citadel Mall in West Ashley, S.C., and Northwoods Mall in North Charleston, S.C., began initiated a gift card program issued through American Express in late 2004. The cards and can be used at any CBL mall store that accepts American Express credit cards. They're available at the malls' customer service offices and Web sites. Established selling relationships and infrastructure, along with already proven successes with prepaid cards have helped convince more than 400 banks to agree to sell American Express' Travelers Check and Gift Cards, including Fifth Third and Sun Trust. Many banks are finding it more cost effective to sell American Express' products than to issue their own prepaid cards. Past travel partners such as Continental, Hilton Hotels and Liberty Travel have recently made AMEX prepaid card products available to their customers. In addition, new agreements with Safeway Supermarkets and Rite Aid pharmacies have made AMEX gift cards available on their merchandise racks. Grocery stores have been lucrative for AMEX, with gift cards selling at four times the rate of bank sales.

American Express cites many benefits from prepaid gift cards. Like traditional paper Travelers Check, they benefit from the float on a prepaid card, and can maximize its yield by investing a large portion of its funds in longer-term, high-yield investments. The company collects additional revenue from purchasing and reload fees, and receives a high return on equity. Prepaid cards help deepen loyalty with sellers, merchants and existing customers, while helping introduce new customers as well.

The company reports that 22,000 locations are selling American Express' Travelers Check Cards and Gift Cards in the U.S. Some 3,200 U.S. bank branches sell both AMEX gift cards and AMEX Travel Cards. Another 1,550 sell just the gift card and more than 2,000 just the Travel Card. Even with this rapid expansion, the company still has only 7% penetration of customer-preferred retail locations in top markets, and gift card revenue is still modest relative to the rest of its card and paper Travelers Check businesses. Moving forward, American Express plans to negotiate the distribution of American Express-branded gift cards through more retailers and financial institutions.

Retailers selling the AMEX gift card include Duane Reade and Rite Aid drug stores and Safeway Kroger supermarkets, and Circle K convenience stores, and CVS pharmacies. By the end of the year American Express expects to have more than 40,000 in-person locations selling its gift card, including more than 10,000 bank branches, according to CardLine (May 2005). AMEX's gift cards are non-reloadable and are sold in denominations from $25 to $100 in person and up to $500 through phone or Internet sales. Travel Cards are reloadable, and consumers can load up to $2,750. Neither card expires.

CBL & Associates Properties, owner of Citadel Mall in West Ashley, S.C., and Northwoods Mall in North Charleston, S.C., began initiated a gift card program issued through American Express in late 2004. The cards and can be used at any CBL mall store that accepts American Express credit cards. They're available at the malls' customer service offices and Web sites.

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