Study Says Gift Cards To Surge

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The popularity of prepaid gift cards purchased in lieu of gift certificates is projected to continue to surge.

Introduced in 1996, gift card dollar volume grew 50% from 2002 to 2003, totaling close to $45 billion in sales in 2003. Now TowerGroup is projecting significant growth for gift cards through 2007, to more than $90 billion in sales, even though there have been recent negative press reports about expiration periods on cards and fees for reactivating them.

TowerGroup noted in its new research that not all gift cards are alike.

"The position many legislators have taken on the gift card issue, as well as the majority of negative stories appearing in the press, has failed to distinguish the substantial differences between retailer-issued and bank-issued gift card products," said John Gould, director of the Consumer Lending & Bank Cards practice at TowerGroup and author of the research. "These differences must be better communicated, so that the industry, the public and governing bodies all understand both the value proposition and business model each of these distinct products brings to the table."

Among the findings of the research:

* A closer look at the two types of gift cards currently on the market shows that they are very different products, offered by different types of organizations and with different business models and objectives. Gift cards issued by retailers are designed to be a loyalty product and to "presell" merchandise.

* Bank-issued gift cards are, however, financial instruments. And as with all financial products, the issuer earns income on fees. Bank-issued gift cards, introduced in late 2002, really hit the market in 2003 for the first time. These products have greater versatility than retailer gift cards, and of the two gift card categories, are poised for the greater percentage growth over the next five years.

* When it comes to measuring bank gift cards against retail gift cards, possibly the greatest difference is that financial institutions have global acceptance at over 30-million merchants and that all the rights and protection afforded to credit cards are applicable to their prepaid products. These include charge-back rights, dispute management and "zero liability" protection if a card is lost or stolen. These are rights typically not afforded consumers purchasing or receiving retailer-issued gift cards.

* The residual value of bank-issued cards never expires.

Because bank-issued gift cards are financial instruments and should be treated as such, TowerGroup said it believes it is not appropriate to place restrictions on their fees. Issuing financial institutions bear significant costs for marketing, selling and servicing gift card accounts.

And in providing "zero liability" for lost or stolen cards, institutions protect consumers by absorbing the cost of fraud.

Finally, while individual cards may expire, the account itself does not-allowing consumers flexibility to maintain an account over time. Without charging fees to help support these benefits, institutions simply could not afford to offer the product.

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