Banks Remain Closed To 'Open' Gift Cards

  Thus far, banks have had a difficult time coming up with a consistent view on branded prepaid gift card programs.
  "Constant growth" is the phrase Patrice Silvesprini uses to describe KeyBank's MasterCard-branded gift card program. "We see growth each month in our sales and experience a 20% spike around the holidays," says Silvesprini, special card project manager for Cleveland-based Key Bank, declining to provide sales figures.
  KeyBank's chief Ohio rival, Fifth Third Bank, however, thus far has shied away from offering gift cards. "We are considering a gift card program, but there are regulatory-issues considerations over the best method for distribution that has kept us at bay," says a spokesperson for the Cincinnati-based bank.
  Those comments provide a snapshot of banks' mixed feelings about prepaid cards that carry such major network brands as Visa, MasterCard, American Express and Discover. Such cards can be used at millions of merchant locations. Some banks view them as a popular item with reasonable income potential. Others are opting not to sell the cards, citing concerns over regulations that vary from one state to another, weak demand and marginal profitability.
  Christmas 2005, some predicted, would be the breakout season for these network-branded gift cards, which are promoted to consumers as more valuable than proprietary store gift cards because they can be used more widely.
  So what happened?
  "It's truly hard to say what's going on out there because there is such limited information," says Tim Sloane, an analyst with the Mercator Advisory Group.
  Officials at Visa, MasterCard and AmEx all say their gift card sales continue to grow but decline to provide data to back up the claim. The banks selling these so-called "open-loop" gift cards similarly are reluctant to share sales figures.
  Analysts such as Sloane have been persuaded by the major card organizations that network-branded card programs will grow. For instance, Mercator estimates that sales of "closed-loop" cards-those only good at the merchant that sells them-totaled $47.1 billion in 2004, while "open" card sales amounted to only $1.4 billion. But by 2008, Mercator predicts a much bigger share for the network-branded cards, with "open" card sales projected at $24.8 billion and store cards at $97.7 billion.
  While the lack of hard data makes it difficult to assess whether the network-branded cards met expectations during the holidays, a survey of nine major retail banks by Prepaid Trends, a Cards&Payments sister publication, found that four are not selling prepaid cards directly to consumers. All four rank in the top 10 in terms of debit cards issued that are tied to demand deposit accounts. Besides Fifth Third, they include J.P. Morgan Chase & Co., Citibank and Bank of America.
  BofA used to sell gift cards to consumers, including through its Web site. The bank stopped selling its general-purpose, Visa-branded card last March and its teen-oriented Visa Buxx card in November.
  A BofA spokesperson says it stopped selling Visa-branded gift cards because they did not "generate cross sales to deepen customer relations." ("Pulling Back on Prepaid," May 2005) But a bank executive, speaking at the rcent Stored Value Summit in Miami organized by the Institute for International Research, provided a bit more insight into the bank's thinking.
  "The biggest challenge from an issuing side is profitability," said John Gruce, BofA senior vice president of prepaid card payment products. "It's easy to see the growth opportunities, but the challenge for us is to make money."
  Gruce noted that growing familiarity with gift cards has cut into profits because consumers are more likely to spend the full amount loaded. The amount unspent, known as "breakage," often can be converted by the issuer into income after a period of time, although there is a bewildering variety of state-by-state rules ("A Mishmash of State Prepaid Card Laws," March).
  "In a gift card program, a big part of the profit is breakage," Gruce said. "We're all for informing consumers, but it's pressing the margins."
  Gruce did not provide details on the change in breakage rates. But another industry executive at the event estimated that it has fallen from roughly 15% to 7% in the last few years.
  Apart from breakage, the issuing bank can make money by charging fees when the consumer buys the card, typically in the range of $2 to $5, and, in the case of reloadable cards, when more value is added. The bank also earns interest on funds loaded on the card until the money is spent, and interchange fees from merchants when the card is used to make purchases. An issuing bank nets about 1.4% in interchange fees, or only 70 cents on a $50 gift card.
  Those revenues must cover the bank's cost to produce and market the card, plus fraud losses and legal expenses. While BofA declined to comment on its fraud experience, sources say the bank saw significant fraud when selling gift cards online, as fraudsters bought the cards with credit cards that turned out to be stolen. And with different laws in each state regarding fees, expiration dates and what happens to value left on cards, legal fees can mount.
  Gruce said BofA for now is content selling nonreloadable prepaid cards in quantity to corporate clients that use them as rewards and incentives for customers and employees. The organization purchasing the cards pays an initial fee, and after that there are no fees charged to the cardholder.
  There are pros and cons to "open" prepaid cards. Consumers, it is argued, would prefer to give a card that can be used at millions of locations, and not just at a single retailer, as would be the case with a Best Buy or Barnes & Noble gift card. On the other hand, the retailer gift cards are sold at face value with no additional fees attached.
  While some experts believe banks should try to get their cards into high-traffic stores, others caution banks against going that route. Along with the greater sales, the issuer may experience more problems with fraud, says Jeff Lewis, senior vice president of the payment solutions group for Milwaukee-based Metavante Corp., which processes gift cards for financial institutions.
  Despite such warnings, several national grocery and drug-store chains are beginning to sell bank-branded cards on J-hooks next to the store-branded cards.
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