West Coast Bank is one of a handful of banks making it more affordable for mom-and-pop coffee shops, restaurants, and hardware stores to sell gift cards.
The Lake Oswego, Ore., community bank began marketing gift cards to its small-business customers on behalf of First Data Merchant Services, a unit of Denver's First Data Corp. In return for the referrals, First Data will provide West Coast's customers with store-branded cards at a lower price than it normally charges, though officials would not say by how much.
West Coast is one of a handful of institutions that has such an agreement with First Data to target small businesses.
Robert Sznewajs, the president and chief executive officer of West Coast Bank's $1.72 billion-asset parent, West Coast Bancorp, said the arrangement helps small businesses benefit from the fast-growing gift-card market, which is dominated by large retailers, such as Starbucks or Best Buy, that can afford the usually hefty administration costs.
"Regardless of their size, any store now has the ability to offer propriety gift cards, which have become very popular," he said. "This enables them to increase their name recognition, as well as customer loyalty, and when someone gets a gift card for, say, $50, they often spend $100."
TowerGroup, a Needham, Mass., subsidiary of MasterCard International, said the market for gift cards has skyrocketed over the last several years. Since 1999 gift card sales have nearly quadrupled, to $72 billion last year.
Mr. Sznewajs said West Coast will not get a referral fee or share any of First Data's revenue, but the bank will benefit, because offering a value-added product will lure in more commercial customers.
Also, larger businesses tend to take out more loans, hold more deposits, and use more bank services, he said. "The more the merchants' volume of sales go up, the more they thrive as businesses, which of course benefits us."
John C. Gould, the director of TowerGroup's consumer lending and bank cards practice, said First Data's marketing arrangements are unique in that banks pitch specific cards for specific retailers. Other banks have offered "open-loop" gift cards through Visa or MasterCard that customers can use at multiple stores.
Community banks rarely enter the gift-card business. About a dozen large banking companies, including Bank of America Corp. and U.S. Bancorp, dominate the market.
But Mr. Gould said it makes sense for a community bank to try this, because small-business customers are their bread and butter. "As banks continue to compete for small-business customers - which is a profitable market segment - this is a great tool."
Mr. Sznewajs said West Coast's customers can customize the card or select from stock designs, which further reduce the start-up costs. The customers can process the cards using conventional credit and debit card terminals that they probably already have, he said.
The program also provides detailed daily and monthly reports, promotional materials, and 24-hour customer support.
The Federal Deposit Insurance Corp. has proposed counting gift-card purchase funds as deposits, but West Coast will not have to worry about that issue. It will not actually fund these cards, so it would not have to set aside capital to cover them.
