JPMorgan Chase & Co. is working with CashStar Inc. to launch a digital gifting and incentive platform for using rewards points to buy merchants' proprietary gift cards through an Apple Inc. iPhone application.

Users download the free Chase GiftShelf application, which was created in-house by JPMorgan Chase, on to their iPhone and sign in using their online banking credentials. They then may pay for the gift card using their Chase Ultimate Rewards points or with a Chase credit card. Users receive the card's digital image with a barcode that clerks would scan at the point of sale to redeem the value in the card account.

Cardholders also may redeem the gift card value online by entering the card's numeric code, and they may use the app to send the digital card image to someone else via text message or e-mail, along with an optional personalized message.

JPMorgan Chase will continue its GiftShelf pilot test through the first two quarters of 2011, by which time the bank said it should be able to add more retailers to the redemption choices, CashStar's chief executive, David Stone, said in an interview Dec. 9. Through working with CashStar, JPMorgan Chase's app connects to 18 retailers and restaurants, including Home Depot Inc. and Papa John's Pizza, in the initial phase. CashStar has 88 merchant partners, Stone said.

CashStar, of Portland, Maine, said it is also discussing potential partnerships with other financial institutions, Stone said.

CashStar declined to reveal how it and JPMorgan Chase generate revenue from the gift card initiative. The JPMorgan Chase app was announced Dec. 8.

The app "enables retailers to extend their digital gift card offering to consumers with a very easy to use mobile option," Stone said.

CashStar eventually plans to support smartphones running Google Inc.'s Android software.

The app, which CashStar calls the first of its kind, illustrates how smartphones are changing the gifting market, said Ben Jackson, senior analyst at Mercator Advisory Group. "Mobile technology is making it possible to do things companies haven't tried before," he said.

Jackson said he believes such an app is a "good deal" for everyone involved. The app could help JPMorgan Chase drive its customers to use their credit cards more to increase volume for its card program, he said. Merchants will get more traffic to their physical and online locations with the hope that consumers spend more than the gift card amount. And consumers likely will view the app as an easy redemption method and will not be left wondering what their points are worth, Jackson said.

"All of that assumes that the consumer likes this option and is spending enough to make the margins worthwhile for the retailer," he said.

No independent industry data exists to support the notion that offerings of "virtual" gift cards are on the rise, but internal research from prepaid companies suggests consumers more often are opting for the product's convenience instead of plastic, observers said. Indeed, e-gifting should contribute about $3 billion in prepaid load volume by 2012, TowerGroup recently estimated based on anecdotal evidence.

Stone said he believes mobile smartphone apps will help change gifting's future.

"As adoption of mobile applications increase, we're going to see a lot more mobile innovation in this gifting and rewards space," he said.