Consumers are showing growing interest in making purchases with "virtual" gift cards, according to internal research from prepaid card companies.
These virtual cards are used mostly online because issuers provide only account numbers but no plastic to swipe at the point of sale. As such, companies are investing more effort to develop partnerships with merchants that will accept them, and extend the usefulness of prepaid cards.
Giftango Corp., perhaps the first company to introduce virtual gift cards in 2005, on July 28 announced partnerships with 35 well-known merchants, including Amazon.com Inc., J.C. Penney Co. Inc. and Nike Inc., to provide electronic cards for their customers.
CashStar Inc. over the past year has expanded its virtual card client base to include Home Depot Inc. and CVS Pharmacy.
And Kohlberg Kravis Roberts & Co.'s First Data Corp. is behind Cold Stone Creamery's new Facebook application, which enables people to give each other codes to redeem funds at the ice cream parlor chain's 1,400 U.S. locations.
Based on Giftango's internal research, more than 70% of consumers choose to purchase a virtual gift card from merchants offering that option.
CashStar is experiencing similar results. The company saw increased sales in virtual cards in the weeks leading up to Mother's Day and Father's Day.
Merchants are quickly embracing virtual prepaid cards, said Adil Moussa, an analyst with Aite Group. Merchants initially showed interest in the product "once a catchy name" — virtual — caught on and research could show "the costs and benefits" of accepting them, he said.
David Nelson, Giftango's chief executive, said virtual cards are "still evolving," and several companies are vying for market share in the growing space.
"It's kind of like the Wild West right now," Nelson said.
Mobile functionality and social networking websites such as Facebook are playing a role in the evolution of virtual gift cards.
In May, the Atlanta prepaid card marketer InComm Inc. acquired GroupCard, which has developed a Facebook application that lets several people contribute to the purchase of a gift card from a retailer's Facebook page or website.
InComm's acquisition is part of a plan to help it "evolve the payments space" through technology, Brian Parlotto, InComm senior vice president of consumer products and international, said then.
Social networking "is one of the biggest buzz spaces right now across the entire [payments] industry," Parlotto said.
David Stone, CashStar's CEO, is a bit apprehensive about the effect social networking will have on the virtual gift card market.
CashStar is developing social networking-based products, but Stone said he believes the merits of "social e-commerce" are debatable because of privacy concerns associated with the popular websites. The Portland, Maine, company, however, will seek to adapt to consumers' and merchants' needs and wants, he said.
Mobile could be another channel for virtual cards.
CashStar is developing a mobile application to let people convert rewards to digital gift cards that could be displayed on smartphones, Stone said. It is developing the application for an unnamed bank.
Giftango, of Portland, Ore., is focused on what "the next step will be, and that's transitioning from e-mail to mobile," Nelson said. "We have a lot products ready to go in the mobile segment, but right now we're staying focused on what's out there today."
The current e-mail-based factor is doing well, Nelson and Stone agreed.
Convenience and personalization are helping to drive sales, Nelson said. Consumers can buy the cards online and send them by e-mail. Senders can also upload their own images and add personal messages, while recipients may redeem cards online or print them out to redeem at the retailer.
"There is a 'cool factor' there, and people are getting more familiar with" buying and using virtual cards, Nelson said.