Cover Story: Gift Cards Go Virtual

The gift card, the bedrock of the prepaid card world, is increasingly taking on a digital form, cutting costs for merchants and adding to convenience for mobile-phone-wielding customers. But hold the obituaries for plastic.

By Lauri Giesen

One of the fastest-growing payment cards isn’t really a plastic card at all. Virtual gift cards found a receptive customer base this past holiday season that is small but increasing rapidly.

And while industry executives and observers do not expect virtual gift cards to replace plastic gift cards any time soon, the digital versions could take some business away from plastic as well as bring a new customer base to the gift card purchasing fray.

Virtual cards are still largely thought of as a “last-minute” purchase. Givers who don’t have time to have a plastic card mailed to them or to get to a store to buy one can use their mobile phone or personal or laptop computer to quickly purchase and deliver a last-minute gift. Many customers even have bought and sent a card on the day of a major holiday when all the stores are closed.

But new features added to personalize virtual cards have broadened the cards’ appeal beyond the chronic procrastinators. Givers can use personalized photos and messages to make virtual gift card giving appear almost warm and fuzzy.

And some technophiles actually like the appeal of downloading gift cards to their mobile phones and then transmitting them to friends who can use their phones to store and redeem the value in a futuristic, cool manner.

“There is a certain segment of the population that virtual cards appeal to,” says Christopher Cunnane, senior analyst for Boston-based Aberdeen Group. “There is an ease of use, and customers find virtual cards easier to store. You don’t have to carry a wallet full of cards any more, you can store them on your PC or in your [digital] wallet.”

Cunnane expects more consumers to warm up to the idea that virtual cards are “green” in that they can cut back on the amount of plastic produced and discarded.

Promotions

The number of virtual cards is expected to grow. A survey of a broad sector of retailers by Aberdeen Group in late 2012 found that 21% offer a digital gift card that can be sent via e-mail, and 55% plan to implement such a digital gift card program in the next 12 to 18 months. About 15% of the retailers already offer a virtual gift card via mobile devices while 47% plan to offer one in the next 12 to 18 months.

Those numbers compare to 30% all retailers that offer plastic cards, with limited growth expected—another 12%, according to Aberdeen.

Consumer use of virtual cards is growing as well. Maynard, Mass.-based Mercator Advisory Group Inc. predicted at the end of 2012 that there would be about $330 million worth of virtual gift cards sold in the U.S. during the preceding November and December. Ben Jackson, a Mercator senior analyst, says the number could hit nearly $1 billion in 2013’s holiday season.

Jackson says 2012’s final volume rested in part on what some major players in the niche, including Dunkin’ Donuts, Starbucks, and Target, did to promote virtual gift cards.

Virtual still is a small portion of the total closed-loop gift card market as purchases were expected to hit about $43 billion over the two-month holiday period.

Digital gift cards take many routes to deliver value. In its simplest form, such a card begins when a customer goes to a Web site and uses a credit or debit card to buy one. Rather than mailing a plastic card, the retailer or processor e-mails a virtual card with a code number to the recipient. The recipient types in the code at checkout when making an online purchase.

In its most high-tech form, the buyer makes a card purchase either via mobile phone or PC. Then the gift card is sent to the recipient’s mobile phone via a text message. Upon clicking on the message, the recipient receives a personalized audio message from the sender along with a customized image.

The recipient redeems the gift card by bringing up its barcode on the mobile-phone screen and waving it over a barcode reader in a store.

Broad Range of Interest

Promoting the popularity of virtual gift cards are social media sites. Services such as Facebook now not only alert members that their “friends’” birthdays are coming up, but the sites also direct members to pages where they can buy virtual gift cards for them.

While many industry observers expected the first wave of merchants offering virtual gift cards to be either high-tech product providers or at least companies that appeal to young, hip, and affluent professionals, that has not always been the case. Among retail leaders in virtual gift cards are Target, Dunkin’ Donuts, and Applebee’s, which tend to appeal to a middle-income customer clientele.

Indeed, Tom Niedbalski, senior vice president of business development for San Diego-based Transaction Wireless Inc., a service provider for virtual gift cards, says he was surprised at the broad range of retailers interested in the cards.

“We have a lot of interest coming from segments I had not expected to see. For one thing, restaurants are leading the charge and that surprised me. I had thought the technical challenges with [point-of-sale] systems would prevent restaurants from being leaders, but that has not been the case,” Niedbalski says.

And while many retailers are moving into the digital gift card world because they want to look hip to their younger customers, there is a strong underlying business case for offering virtual cards. For one thing, they provide more information to the merchant than plastic cards.

“With virtual cards, there is a greater likelihood that you know who purchased these cards and who redeemed them,” says Michael Hursta, vice president of prepaid solutions for processor First Data Corp., a big gift card services provider. “This provides a great marketing opportunity to retailers who then have the e-mails and text numbers so that they can send out messages that include offers and rewards to people who both purchased and redeemed their gift cards. You don’t get that when someone purchases a plastic card in a store.”

No Slowdown

Another market leader is Transaction Wireless, which is working with nearly 200 different brands, about 150 of which are in the U.S.

Transaction Wireless’s programs take many forms. One retailer that has taken a more sophisticated approach is online movie-ticket seller Fandango, according to Niedbalski. Fandango allows customers to customize a plastic card, or they can send a personalized virtual card via e-mail or text message. The personalization feature allows senders to transmit images of the recipients’ favorite films on the virtual cards.

Senders can even have a photo of the recipient inserted into a virtual movie location. In that way they can appear to be standing with the cast of the Twilight sagas or on the set of The Hobbit. Niedbalski says his firm has the licensing rights to most of the top popular films.

Restaurant virtual cards, meanwhile, take their form and function from the restaurateur’s preferences and operational technology. “Every restaurant is different and it depends on the point-of-sale system that the restaurant has in place,” Niedbalski says.

In the case of some fast-food chains, such as Chipotle Mexican Grill or Applebee’s, virtual cards contain barcodes that a restaurant’s system can read directly off the recipient’s smart phone or off a paper printed out from a PC.

For formal dining, restaurants usually do not want customers handing their phones over to servers. Instead, customers show and read the gift card’s code to the server. The server then manually enters that code in a POS terminal, Niedbalski explains. Transaction Wireless works with each merchant to find out what type of barcode reader they already have so that the provider can customize the virtual barcode to match its reader.

Although Niedbalski declines to reveal numbers, he says his company has issued millions of virtual cards.

“We’ve had a lot of adoption. We added 30 new merchants to the program in the fourth quarter of last year and added between 70 and 80 new merchants in the third quarter. We’re not seeing any slowdown in 2013. We have six more merchants launching during the first week in January,” he says.

Dancing with Giftango

Atlanta-based prepaid card program manager InComm cited expansion into the virtual gift card world as a major reason for announcing plans in January to acquire Portland, Ore.-based Giftango Corp.

Although both companies had been involved in plastic and virtual cards, InComm’s strength had been more on the plastic side while Giftango was stronger on the virtual side, according to Jeff Baker, InComm executive vice president of mergers and acquisitions.

Baker says Giftango has a more robust platform for issuing e-gift cards, including offering features that InComm did not have, such as back-office management tools that provide transaction history and card balances. Giftango also brings to InComm the ability to offer gift card distribution and redemption through mobile phones.

Baker also says Giftango has a strong channel for offering gift cards for loyalty and incentive programs. Such programs include Chase Loyalty, where JPMorgan Chase & Co. customers can accrue loyalty points and then go online to request a plastic or virtual gift card as a reward.

While he declines to reveal numbers, Baker says InComm and Giftango combined will manage gift card programs for hundreds of major retailers and service providers. Among major clients Giftango brings to the table are Burger King, Subway, and Apple Inc.’s iTunes.

‘Keeps the Conversation Going’

San Francisco-based GoLocal Inc.’s Giftly service takes a completely different approach to virtual cards. It works by putting the value of the virtual gift card on any credit or debit card the recipient already possesses. The value can be redeemed at any merchant location that accepts American Express, Discover, MasterCard, or Visa cards.

With Giftly, the giver goes online or uses a mobile phone to buy a virtual gift card. The recipient then receives an electronic message that a gift card has been purchased for them for a specific retailer—it can be a national chain or a local merchant.

Then the recipient hits a link to go online at a Giftly site and register his or her credit or debit card number. The value is then transferred to the recipient’s card by Salt Lake City-based payments processor Fuze Network.

Although the purchaser states which retailer the card is intended for, the recipient could use the virtual card at any card-accepting merchant location.

“If I know you like to eat at a particular restaurant, I can send you a message that says ‘here is a gift card for that restaurant.’ If you choose to use it at another retail location instead, that is up to you,” explains Dan Kimerling, chief operations officer at Giftly.

Although he would not reveal total numbers, Kimerling says his company sold $125,000 in value just on Christmas Eve. He says more than 40,000 people have used the service.

Dave Wilkes, chief executive of Fuze Network, says the Giftly concept is successful because it allows any retailer to participate, not just the big chains that have the resources to offer gift card programs.

Another feature of the Giftly program is that recipients can go back to the Web site and send a virtual thank-you note, using personalized photos if they want. For example, someone could send a picture of himself eating at the restaurant for which a gift card was purchased as part of the note.

“This keeps the conversation going and enhances the emotional attachment to the gift,” Kimerling says.

Giftly promotes its service primarily through online search engines and mobile-app searches. The company currently is not working with any banks or credit unions to promote its service as an added feature for their cards, and Kimerling declines to comment on whether such promotions would be likely in the future.

Fuze’s Wilkes, however, says the program is a great enhancement for financial institutions. “It keeps the gift card programs riding on the rails of their cards rather than losing that business to proprietary retail programs,” he says.

Thematic Variations

In contrast to universal programs like Giftly’s, much of the attention on virtual gift cards goes to some large merchants heavily promoting digital offerings, notably Target Corp., Starbucks Corp., and Dunkin’ Donuts, a unit of Dunkin’ Brands Group Inc.

Minneapolis-based Target introduced plastic gift cards in 1999 and unveiled its Mobile GiftCard in 2010. It claims to be the first major retailer to offer mobile gift card functionality at all its stores.

Target added a unique twist to virtual gift cards in 2012’s holiday season when it allowed customers to buy them at the same display stands where it sells plastic gift cards. Customers scanned a QR code on the display to send a gift card to a recipient’s mobile-phone or e-mail account.

A Target spokesperson says digital card purchasers varied in their demographic profiles; however, they tended to be younger customers. Also, more males than females bought them. “Digital gift cards represent a small but growing portion of our overall gift card business,” the spokesperson says.

Target promoted its virtual card in various ways, including national and local advertising campaigns. The chain also included an infographic article about the card in its online magazine.

The eGifts service from Seattle-based Starbucks also allows customers to buy, transmit, and redeem gift cards via mobile phones as well as through the Internet. A spokesperson notes that eGift cards are popular among gift givers who want to send a card across the country as well as last-minute gift givers.

During 2012’s holiday season, nearly a third of Starbucks eGifts were sent using mobile applications, a share that jumped up to 40% on Christmas Day.

Canton, Mass.-based Dunkin’ Donuts enables customers using its app for Apple or Android mobile devices to send $2 to $100 in so-called mGifts to friends and family via e-mail, text message, or Facebook. Scott Hudler, vice president of global consumer engagement, won’t reveal numbers but says by e-mail that Dunkin’ Donuts virtual cards “have been popular with our guests.”

He adds that mGift cards have thematic and seasonal variations, such as a thank-you card with the image of a smiley face made out of coffee beans, as well as specific cards for Halloween, Hanukkah, and Christmas.

Technical Issues

Despite the appeal of digital gift cards, hurdles remain on their growth path.

“There is still the perception that gift cards aren’t really gifts. Even people who think plastic cards are okay often think virtual cards mean the giver didn’t think very much of them and the giver waited until the last minute to remember to send them a gift,” says Mercator’s Jackson.

That is an issue program developers are working to overcome through personalization.

“New features take away the perception that the customer did not care enough to purchase a specific gift,” says Niedbalski of Transaction Wireless. “If they took the time to select a personalized photo, use Photoshop to perfect it, download that photo, and record a personal message, it shows they care. There is an emotional tie with these cards you don’t get with plastic.”

Another factor slowing down growth is that many mid-size and small retailers don’t have the technological and marketing resources of their larger brethren. “There are still a lot of retailers that are interested in the idea but are not in a position to take advantage of it,” says First Data’s Hursta.

And especially with mobile cards, some technical issues associated with redemption have yet to worked out. Giftly’s Kimerling says not all retailers have the right barcode scanners or other equipment, and many don’t want to make an investment for mobile card programs. Retailers redeeming cards with the Giftly program can use the same POS equipment they use for physical credit and debit cards.

Even when retailers have the right equipment, there can be technical issues. “Some retailers I’ve talked to say that sometimes screen protectors that consumers purchase for their phones make it difficult to read the barcodes,” says Aberdeen Group’s Cunnane.

‘Wait-And-See Approach’

But some of the attributes of these programs may make up for those issues. The personalization factor is a big draw. While Cunnane says some merchants offer plastic cards online that can be customized with personal photos, those programs are much more costly for the retailer, which has to pass the added cost to the consumer. And there may be significant delays for a customized card.

By contrast, there is little cost associated with customized virtual cards and the personalization work can be done immediately.

Despite the benefits of digital cards, most industry observers don’t ever see them replacing plastic.

“I think they’ve created a new market rather than eaten into plastic’s market share,” says Jackson. “We’ll have plastic for a long time. There are still people who want to provide something the recipient can unwrap.”

Merchants agree. “We don’t see it as one versus another, but simply offering a mix of both,” says Hudler. “We’re committed to serving our busy, on-the-go guests and believe that virtual Dunkin’ Donuts cards and mGifts deliver speed and convenience to our guests. This is why we’re excited about the mobile-payment space, and why we’ll continue to look for more opportunities within it.”

How successful virtual gift cards become ultimately may rest on the shoulders of a handful of large retailers testing them, with others holding back until they assess the results.

“There are some retail leaders in the market that have taken the risk and are ahead of the curve,” says Hursta. “The others are taking a wait-and-see approach to see if consumers really accept this and if there is the demand.”

If Target, Starbucks, and some of their peers are right, the potential then could be significant.

Some E-Gift Card Factoids

(Based on First Data Corp./Market Strategies International survey of 2,071 consumers, September 2012)

68% of consumers prefer a traditional gift card, but …

… 46% of gift card recipients, and 71% of consumers ages 18-24, are interested in storing card information on a mobile device.

Among consumers considering e-gifting, 60% cite immediate delivery as their top reason for using the option; 52% cite the ability and convenience of e-mailing a gift card rather than mailing a physical gift card.

An estimated $43 billion in value was exchanged through physical and mobile closed-loop gift cards in the 2012 holiday season (November and December), according to Mercator Advisory Group.

Source: First Data 2012 Prepaid Consumer Insights Study