Open architecture - pitching other companies' products alongside or instead of one's own - has become standard practice for banks in lines like investment and insurance products.
A handful of banking companies are trying that approach with gift cards, an area where consumers have tended to favor retailers' products. The thinking at one of the latest to use this strategy is that volume and foot traffic will more than make up for proprietary gift card revenue it might forgo.
West Coast Bank in Lake Oswego, Ore., began offering merchant gift cards last week as well as prepaid phone, wireless, and cash cards provided by Coinstar Inc. of Bellevue, Wash. The merchant lineup includes Starbucks, Borders Books, and AMC Theatres.
"More than 90% of the gift card market is for retail-specific cards, because they have such good brand awareness," said Robert D. Sznewajs, the president and chief executive of the bank and its parent, the $2.3 billion-asset West Coast Bancorp. "Now customers don't have to go to the supermarket to get these cards; they can buy them here," with tellers immediately debiting their bank accounts.
Coinstar provides each West Coast branch a rack of cards that sell well in the bank's markets, as well as point of sale terminals for tellers to load the cards. West Coast gets a small commission (Mr. Sznewajs would not specify) on each sale from Coinstar.
He said that he expects any revenue generated from commissions to top what West Coast has generated from offering its own bank gift card over the last six months, which hasn't been much, he said.
First, customers will probably be more willing to buy gift cards - particularly for relatives in other parts of the country - from name retailers such as Home Depot than from a community bank like West Coast, which has little brand recognition outside of Oregon and Washington. Mr. Sznewajs also acknowledged that customers may have been put off by the fees and expiration dates of West Coast's own gift card.
Umpqua Bank of Portland, Ore., tried cash cards a few years ago, and has considered gift cards but is not pursuing either concept currently.
"We've looked at it, but our focus in terms of new developments of products has been around rewards," spokeswoman Lani Hayward said on Thursday. "We're working toward something integrating an extension to retailers through a rewards program."
The Umpqua Holdings Corp. unit in 2003 tried cash cards that could be used at any merchant but "our sales of them were not extraordinarily high," she said. It discontinued that product after about a year and a half.
The $14 billion-asset TCF Financial Corp. in Wayzata, Minn., is another company that offers merchant cards. Its lineup is provided by Blackhawk Network, an affiliate of Safeway Inc. in Pleasanton, Calif.
Jason Korstange, TCF's director of communications, says sales of its bank gift card have been brisk, though he would not specify. TCF started offering merchant gift cards in December 2005 to increase branch traffic, he said.
"We made a business decision not to charge fees, and I think the only reason other banks may have problems selling them is because they are charging for them," Mr. Korstange said. Smaller banks may think they need to charge fees to make money from the business, he said; TCF believes the popularity of the no-fee gift cards has brought in more customers to conduct other, more profitable business.
Ariana-Michele Moore, a senior analyst at Celent LLC in San Francisco, said the trend should catch on at banks, especially with more states considering tighter restrictions on bank gift cards, such as bans on fees.
Selling bank gift cards entails more work than merchant gift cards, Ms. Moore said. For example, the Patriot Act requires banks to obtain personal information from both the purchaser and the recipient of bank gift cards, whereas no information is needed to buy or use a merchant gift card. Moreover, the customer disclosures required for bank gift cards can take up three pages of small print; disclosures for merchant gift cards can fit on the back of the card.
"I expect to see more banks offer gift cards from retailers, because it's a great revenue opportunity, particularly if their own bank gift card programs become increasingly difficult to sustain," Ms. Moore said.
Dennis Moroney, a senior research analyst at MasterCard International's TowerGroup market research unit in Needham, Mass., says bank gift cards are still a viable market. In a 2005 report he projected that their sales would increase to $15.6 billion in 2008, versus $3 billion in 2003.
But the report said bank gift cards' future may be jeopardized by stricter state laws. Sales of merchant gift cards should top $57 billion in 2008, it said.
