By all measures 2003 was a breakout year for gift cards. The number of Americans who bought them doubled, to 97 million, and what they paid for them rose by half, to $43 billion.
Though retailer gift cards paved the way, banks have followed them into this booming market. All of the larger bank card issuers are looking for ways to offer competing products.
Last year Charter One sold a half million MasterCard gift cards, 16 times as many as in 2002 and triple its expectations. Corporations bought 50,000 of its cards, or one in six.
But a storm has been brewing over gift card fees and expiration dates. As the 2003 holiday season approached, Sen. Charles Schumer's office reported that on 18 of the 32 retailer gift cards it checked, six months to two years of inactivity invoked "dormancy" fees of $1 to $2.50, and that many cards with no fees had expiration dates.
"There may be a Grinch inside that gift card," Sen. Schumer quipped.
Several states, including California and Massachusetts, have enacted statutes regulating retail gift cards' fees and life cycles, and the New York Post reported March 16 that at least 68 such measures were pending in state legislatures.
The state laws are focused on retailers' products, but Sen. Schumer's interest on the federal level could stifle growth of bank programs.
Dormancy fees and expiration dates for retail gift cards may be legitimate causes for concern, but the media and legislators are overlooking the big difference between retailers' gift cards and their bank-issued counterparts.
Retailer Cards
Retailers offer gift cards to gain customer loyalty and to guarantee future sales. Two out of every three users spend more than the card's value - and 15% of average value is never spent. The float on the card's value is another plus for the retailer.
Retailer gift cards do not have an up-front fee but usually do have a dormancy fee or an expiration date.
The value of expired retail gift cards totaled over $4 billion in 2002. They are rarely personalized. Only a minority of retailers will replace a lost or stolen card, and most require proof of purchase.
Consumers can check the balance on their retail gift cards at the store's customer service department. Some retailers provide this service online or by phone. None of the programs we examined let the user trade in a gift card's balance for cash at the store. (The exception is California, where a statute requires retailers to provide a "cash out" option.)
A Better Product
Though retailer gift cards can be used only at stores owned by the issuer, bank gift cards are accepted by as many as 30 million merchants in more than 150 countries. For example, if a store accepts Visa, MasterCard, American Express, or Discover, it will accept gift cards issued by them.
Bank gift cards can also be used for e-commerce, and many allow cash withdrawals from more than 900,000 ATMs worldwide.
Unlike retailer products, bank-issued gift cards can be personalized by embossing the recipient's name on the card and encoding it on the magnetic stripe. All Visa gift cards are personalized and branded "Visa Gift Card," while personalization is a MasterCard option.
Bank gift cards are account-based products. The issuer and cardholder can track balances and transactions by calling the issuer's customer service number, logging on to its Web site, or using an interactive voice response center.
Bank gift cards are usually sold with an up-front fee to cover marketing, selling, and service costs. Though all bank card products expire, their value does not.
Bank cards are routinely replaced every two or three years, for security and life-cycle management. Owners of bank-issued gift cards can get new ones for $5 to $7.50, which covers card replacement, customer servicing, and data management costs.
Banks usually charge an account maintenance fee similar to the monthly fee associated with any financial instrument. However, the issuing institution usually waives this fee for 6 to 12 months. Because 84% of users spend the card's entire value within six months, fewer than one in six customers is charged.
Big Potential
Many users see bank-issued gift cards as a great alternative to checks and cash. Their widespread acceptance makes them ideal "travel card" products.
American Express, the largest issuer of travelers checks, now issues a prepaid travel card in direct competition with them. The company understands that it is better to cannibalize your own products than wait for the competition to do so.
Parents see gift cards as a way to provide spending money for kids who are on vacation or away at school. For the unbanked or underbanked, a gift card is a self-budgeting tool that provides more convenience, security, and prestige than cash.
Consumers can add to the value of bank-issued cards through channels including branches, ATMs, and the Internet. Banks will eventually be able to offer more benefits, including loyalty points based on existing programs. For example, the Visa Extra program that allows a cardholder to accumulate points from multiple credit and debit products can readily be extended to prepaid products, further strengthening the issuer-customer relationship.
The market for retail gift cards will continue to grow. But bank-issued gift cards - with their added benefits and protections - will take off and eventually overtake their retail cousins.
Bank-issued cards will develop into an array of products that will be cobranded, reloadable, and provide loyalty features similar to those available to credit and debit cardholders. Gift cards will be another way for financial institutions to extend their share of wallet and deepen the customer relationship.
