The Phenomenal Ride of Gift Cards 
How the New Rules Could Impact Gifting

The Prepaid Press June 15, 2010
By Arlene Hauben

Gift card sales have soared during the last decade, despite objections about ambiguous fees and expiration dates.  Soon the Final Gift Card Rule, which amends FDIC Regulation E to implement the gift card provisions of the Credit CARD Act, will change the landscape.  The new federal regulations, effective August 22, are expected to make issuers, marketers, and merchants uneasy about redesigning gift cards to meet compliance.   

But need they worry about sales? Let's take a brief look at how the gift card got to be one of the most popular products at the mall. 

Crazy for Gift Cards

Most prepaid veterans give credit to prepaid phone cards for setting the stage for retail gift cards. Jennifer Pate, an economist at Loyola Marymount University, credits the Mobil Oil Company with producing the first retail gift card that recorded value on a magnetic strip in 1995. The card was used for gas fill-ups.

Though the history of paper gift certificates goes as far back as the 1930s and 40s, the modern day market for gift cards began to rapidly rise around the turn of the century -- that is the 21st century. Gift card sales grew from $19 billion in 1999 to $37 billion in 2002, in a parallel trend with deluxe� goods and designer labels.   

With the advent of gift card mall� in 2000 or so, sales of gift cards started to build up.  The third-party gift card market brought together leading brand gift cards in supermarkets, drug stores, and convenience stores.  Today, shoppers order both physical and virtual gift cards online, many through social media like Facebook. 

Starbucks revealed its first card in 2001 and went on to create one of the most successful gift card loyalty programs in the world. Around one in seven transactions at the company's US stores is now made with a Starbucks card.

Financial institutions that issue open-loop prepaid cards (network branded cards issued by Visa, MasterCard, Discover, Amex, etc.) came late to the game and had to play catch up. Open-loop prepaid cards came with upfront activation fees, account maintenance fees and dormancy fees, which will change under the CARD Act.  However, these open-loop cards offer consumers the flexibility of network access to millions of locations wherever the network branded cards are accepted, as well as reloadable options.

The big box discount stores, such as Wal-Mart and Target, continue to sell the most popular type of gift card, which researchers tie to a recession era trend when recipients use the cards for necessary items rather than treats.�  

According to a study from The Hartman Group (April 2009) on Gift Card Buying Trends, one-quarter (25%) of consumers (or 45% of gift card purchasers) purchased a discount store gift card within the past year. Discount store gift card sales were also strong over the 2008 November/December holiday season, as they were purchased by one fifth (20%) of consumers. 

Gift card sales in the past 11 years continued its run into the billions, fluctuating negligibly each year but remaining pretty impressive, particularly during the annual holiday season, the fourth quarter of each year. 

According to National Retail Federation (NRF) Gift Card Surveys for the five years from 4th quarter 2004 through the same period 2008, sales ranged from $17.34 billion to $24.9 billion. While movement was steadily upward, sales took a small dive in 2008, when the economic recession started, showing a decrease in sales of about $2 billion. 

Mercator Advisory Group reported that the 2007 dollar value load on all prepaid incentives, (open and closed, Consumer & Employee/Partner) amounted to $17.6 billion, a 22.7% increase from 2006 ($13.9 billion). Research indicated that the growth of closed-loop cards in the prepaid space was continuing at a modest pace, while open-loop applications were growing rapidly. 

Bankruptcies during the recession that started in 2008 did not hurt gift card sales as much as expected, but helped boost the sale of open-loop gift cards.  The shift occurred because consumers felt safer buying Visa, MasterCard, and American Express. 

The 2009 holiday gift card sales prediction from Mercator Advisory Group reported that dollars loaded on closed loop (private label) gift cards would increase slightly in the holiday season (fourth quarter), compared to the 2008 holiday shopping season. At the same time, the research group predicted that dollar loads on open loop (network branded) gift cards would rise by as much as 50% over the same quarter in 2008.  The forecast was $11.8 billion. The estimate for closed loop in-store gift cards was $63.4 billion in dollar loads. 

But by 2009, research from the Mercator Advisory Group indicated that some consumers were becoming more hesitant to purchase gift cards with fees and/or expiration dates. Over one-third (34%) did not want to buy gift cards with extra fees, compared to one-quarter (25%) six months prior. On a similar note, significantly more consumers are currently hesitant to buy gift cards with an expiration date compared to the previous six month period (41% vs. 31%, respectively), probably due to increased consumer awareness. Among consumers who didn't purchase a gift card, extra fees and/or expiration dates may have deterred nearly half of them from making the purchase.

Many retailers saw the handwriting on the wall and started to change fee rules voluntarily. Closed loop gift cards changed their entire business model by themselves,� said Joan Travelstead, Senior VP of Business Development at National Gift Card. 

Open loop issuers also started to ease up on fees. American Express ended its monthly gift card inactivity fees in September 2009.   

But the Federal Reserve Board wanted to speed up the industry wide process by mandating rules on gift cards.  The long-anticipated regulation is issued under Regulation E to implement the gift card provisions in the Credit Card Accountability Responsibility and Disclosure Act (Credit CARD Act�) of 2009. 

Final Gift Card Rule

Under the Final Gift Card Rule, the main points place restrictions on dormancy, inactivity, or service fees. Also, gift cards typically cannot expire in fewer than five years. That means their value cannot be lost due to fees.  Terms and conditions must be clearly disclosed prior to purchase. 

The biggest complaint about fees is being addressed.  Under the Final Rule, so-called dormancy fees, inactivity, and service fees -- including recurring maintenance fees and fees for reloading, checking your balance, using an ATM and more -- cannot be charged unless: 

The gift card hasn't been used for at least one year.

No more than one of these fees is charged each month.

The consumer is provided with clear and conspicuous� explanations about the fees. 

The Federal Reserve requires that these disclosures be provided to the consumer before the card is purchased. Along with providing details about fees, issuers must also include a toll-free phone number (and a Web site, if one is available) that cardholders can use to learn about card fees or request replacement cards. 

The rules do not apply to some types of cards: 

Prepaid cards for long-distance telephone services, wireless telephone service and voice over Internet protocol (VoIP) access time.

Reloadable cards that are not marketed or labeled as gift cards or gift certificates, including payroll cards and flexible-spending account cards.

Cards not available to the general public.

Loyalty, award or promotional gift cards, which include rebate cards. 

Ideas for the 2010 Season

The biggest point of the final rule is the restrictions on fees, which have to be disclosed at the front end� said Gaurav Gupta, Director at Novantas. Though there is not yet enough clarity about disclosure, clearly issuers will have to go through some operational changes and must face the costs of making adjustments to packaging.

Consumers may have to pay higher fees upfront to make up for the revenue that companies will lose by not being able to charge inactivity and other fees after the card is purchased, according to Harrine Freeman, CEO, H.E. Freeman Enterprises.

The costs incurred to change packaging will end up being passed on to the consumer through higher initial fees,� said Travelstead. Open loop issuers will want to make up for lost revenues from breakage.

For those still wanting to charge fees, there are enough exemptions to the law to drive a truck through,� remarked Rick Grossman, Learning Express Toy Store.  This seems to be a sounds good law with no meat on it. It's a paper tiger.

Yet consumers will take comfort in knowing that the terms, conditions, and pricing on the cards are fully disclosed. Our consumer research shows that to date most consumers are unaware or confused about the changes, said Craig Fuller, CEO at TransCard.

Loyalty and incentive cards, although they are exempt, will also have to be repackaged. Travelstead explained that National Gift Card will have to change how they market their gift cards for fundraising and loyalty marketing clients. They will have to specify rebate or reward� card and the back of the card has to have the expiration date and the fees along with a card carrier that contains the terms and conditions of the card. 

With that in mind, here are some suggestions for the 2010 season:

Plan ahead and budget for changes in packaging.

If an increase in fees is on the agenda, do it gradually so the customers don't bail.

Make full disclosures in terms, conditions, and pricing.  Use clear language. 

Loyalty and incentive cards also have to be repackaged to denote rebate� cards.

Be aware of federal enforcement measures. 

Few Surprises

Mercator Advisory Group is currently working on its gift card survey for 2010. Ben Jackson, Senior Analyst at Mercator Advisory Group, said that the reasons to buy gift cards are still the same and that probably both sales and volume loads are increasing. People may be buying smaller gift cards or might even be buying bigger gift cards to treat Mother who has no money, Jackson predicted. On balance, however, gift cards continue to increase in sales.

Social trends lend themselves to buying gift cards because family members tend to live away from each other and a gift card is the easiest gift to send. Gift cards help people get what they want and the sender can even personalize the gift card by suggesting what to use it for,� noted Jackson. 

As Congress continues to reform the financial services industry, there will be plenty more new rulings, but few surprises.  No matter what happens, people still keep going to the mall, partly to shop and partly for fun. The way prepaid gift cards are marketed may change, but human nature will stay pretty much the  same.
 

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