Openbucks’ Network Links Gift Cards to an Array of Online Merchants

A startup called Openbucks this week introduced a service that lets consumers use merchants’ gift cards to buy goods online from other merchants. The Redwood City, Calif.-based company, which has been working for five months with gift cards issued by the Subway sandwich-shop chain, claims its “gift card payment network” extends what have been closed-loop cards to an array of stores beyond those belonging to the issuer. “We connect offline to online,” says Marc Rochman, the founder and chief executive of Openbucks.

Rochman says the company, which for now is concentrating on game publishers that sell their wares online, has agreements with 25 merchants accounting for 300 million active users and about 1,000 games. On the issuing side, in addition to Subway, Openbucks expects CVS Caremark and the Circle K convenience-store chain to go live in a few days, with gasoline retailers Citgo and Hess Corp. and sporting-goods merchant Sports Authority to become operational on the network within 60 days.

Online merchants pay a fee to Openbucks for each gift card transaction. Rochman will not disclose the fee but says it is “competitive” with the 15%-to-30% cost game publishers assume on alternative payments. Issuing merchants collect an undisclosed portion of this fee to compensate for costs involved in opening accounts, printing cards, and processing transactions. “Retailers are going to make a profit on the transaction,” says Rochman, whose background includes prepaid payments and card production. Issuers also benefit from additional foot traffic, he says, resulting from users whose online usage forces them to return often to the store to load more value.

Studies Openbucks has done with Subway indicate 45% of users are making “frequent” visits to Subway shops to reload their cards, Rochman says. The amount of each load is four to five times higher than the average load for those using the cards only at Subway, he says. While gift cards have historically been non-reloadable, major chains like Subway have issued enough reloadable cards to raise the proportion of reloadable plastic to 28% of all gift cards, according to research by Mercator Advisory Group, Maynard, Mass.

Online merchants, Rochman adds, benefit from getting access to the teen and unbanked market without the costs of issuing their own cards. “We enable consumers who don’t have access to traditional forms of payment,” Rochman says. “This is purely incremental revenue for [game publishers].” Game merchants that have signed up so far include Bigpoint, Meez, Parallel Kingdom, and World Golf Tour.

To use Openbucks, a consumer at checkout selects the gift card option. In a two-step process, the cardholder first redeems credit on his card with the issuing merchant in a shopping cart created by Openbucks, which then immediately transfers that credit to the game publisher. The cardholder’s receipt, displayed onscreen, indicates both phases of the transaction.

Ben Jackson, an analyst who follows the prepaid card business at Mercator, says the service could benefit issuing retailers by helping to more rapidly reduce gift card liabilities on their books. It also lets issuers rack up transactions without having to provide benefits or services. But he cautions that merchants will have to take a sharp pencil to their card operations to figure out whether Openbucks makes sense for them. “Closed-loop issuers would have to negotiate very carefully to make this work out,” he says.

For example, merchants may have to tie up capital to ensure funds are available to back transactions at unrelated online stores, Jackson says, while the revenue share may not be enough to compensate for costs involved in stocking the cards in gift-card malls and processing transactions. Also, extending what are by definition closed-loop cards to a wider array of merchants could attract attention from regulators, he says.

At the same time, the service could generate unprofitable transactions. “If I have to process tons of micro-payments for online games, that could raise my costs,” Jackson warns.

But Rochman, who conceived the idea behind Openbucks when he grew wary of letting his teenage children use his credit card to buy songs on Apple Inc.’s iTunes online store, is already laying plans for online markets beyond games and other digital goods. Next, he says, Openbucks is looking to enable gift card transactions for online subscriptions and utility-bill payments.