Issuers Gearing up For the Holidays

  As the maples turn red and gold and the air picks up a little snap, banks are readying their inventory of gift cards. The holiday season is by far the busiest time of the year for the sale of branded, open-loop cards.
  And those banks offering what is still a relatively new product expect this will be the biggest holiday season ever. "We are expecting our volumes will grow from last year because knowledge of the product is increasing," says Kathy Yee, senior vice president of card services for Wells Fargo & Co.
  While some consumers shy away from prepaid cards carrying the Visa or MasterCard brands because they carry fees, others believe they are worth a few dollars more than store gift cards, which usually are free. "It's convenient, it's safe, it has zero liability," says Marcia Blunt, vice president at Provi-dent Bank in New Jersey.
  Blunt says the bank's 76 branches sold more than 5,000 cards in the six weeks leading up to Christmas last year. This year the bank expects it could double that number, she says.
  Some banks say their branches will be more fully stocked with cards this year. Last year an unexpected last-minute dash for cards left some branches with no cards to sell.
  "This year we are sending many more cards to the branches than we did last year," says Roger Piskos, senior vice president at Cleveland-based National City Bank, which has more than 1,200 branches in seven states. Piskos expects to see double-digit growth in the sale of the bank's Visa-branded gift cards this holiday season.
  Visa USA's Steve Diamond, who says gift card sales were up 80% in 2005, expects the sizable growth in gift card sales to continue.
  A MasterCard executive agrees. "We have pretty high expectations for this holiday season," says Ron Hynes, MasterCard senior business leader for prepaid, Americas.
  Tim Sloane, director of debit practice at Mercator Advisory Group, predicts growth as well. He projects open-loop gift card sales will total $2.14 billion in 2006, up 60% from $1.34 billion last year. Sales of closed-loop gift cards will reach $53.4 billion this year, up nearly 3% from $51.9 billion last year. While store card sales dwarf those of branded gift cards, Sloane says branded cards are getting consumers' attention.
  "Consumers continue to become more comfortable with branded gift cards as well as with seasonal gift cards," Sloane says. "They find their convenience a powerful incentive. It's going to be a hotter year than last year, which was a pretty hot year."
  Small businesses helped boost sales of branded gift cards last year, as they purchased the cards for employees and business partners. Steven Camp, a banking attorney with the Dallas law firm of Gardere Wynne Sewell and a former corporate counsel for Bank One, says open-loop gift cards have an advantage over store cards because the recipient is not restricted to a single retailer.
  And that may be especially attractive to employers who buy the cards in bulk as holiday gifts and do not know the personal shopping habits of all their employees. "Unless you really know the [recipient], it's difficult to guess where that person really might want to shop," says Camp.
  Camp adds that even some recipients well known to the holiday card purchaser, such as his own teenage children, often have shifting shopping habits. One month they like The Gap, the next The Limited. Open-loop gift cards can accommodate those whims.
  On the other hand, says Bruce Cundiff, a senior analyst with Javelin Strategy & Research, some holiday shoppers believe buying a card from a particular merchant exhibits more thought than a more generic open-loop card. And, of course, a $50 Best Buy card costs only $50, whereas a bank-issued card is likely to be a few dollars more.
  Despite the expected holiday boom, some banks are not selling gift cards. Besides Citi and Chase, that includes Fifth Third Bank, which has 1,100 branches in 10 states, primarily in the Midwest.
  "It's certainly something we've looked at, and we constantly are monitoring it," says Fifth Third spokesperson Stephanie Honan. "But it's just not a priority at this time."
  OUT OF MARKET
  Bank of America stopped selling gift cards to consumers last year, but it still provides Visa-branded prepaid cards in bulk to corporate customers. BofA executives say the retail gift card business was not sufficiently profitable, with revenue streams limited to gift card fees, float on unspent funds and the "breakage" on money never spent and eventually taken by the bank in the form of dormancy fees. But expenses include card production and marketing, customer service, card fraud and the considerable hassle of dealing with state gift card laws that have not yet been decisively overridden by federal regulations.
  Even some banks enthused about their programs say they offer the cards not as a profit maker but to serve existing customers and attract new ones. "It fits in with our strategic initiatives," says Wells Fargo's Yee. That includes being a customer's total payment provider and attracting more customers to Wells Fargo.
  BRANCH ATTRACTION
  Columbia Bank, a community bank in Maryland with 20 full-service branches, offers its customers holiday gift cards but not with a lot of seasonal brio. "We don't place a whole lot of emphasis on them," says Debbie Saraullo, Columbia director of marketing. "It's more of a convenience to our customers."
  Piskos says National City's profit margins on gift cards are thin but adds that the holiday card enhances customer service and attracts noncustomers who might become customers. Some other banks, including Provident Bank in Baltimore offer the cards only to customers.
  Some banks introduce special holiday-season designs. This winter National City is promoting a new card with a wintry, pine cone motif. "It's become a kind of an annual tradition to have one new design each holiday season," Piskos says. "It creates a little bit of excitement."
  Many banks allow customers to personalize the cards with the recipient's name or a message on the card, such as "Happy Holidays." Usually these cards are available only when the cards are purchased online. National City assesses customers as much as $8.95 for putting the recipient's name on a card. Wells Fargo does not charge for personalization.
  Almost all banks sell cards both via the Web and at branches.
  Banks typically charge a fee for each card purchased, up to $5 or $6 per card. Some banks cut fees on large bulk orders, but most have a standard fee regardless of quantity. Some charge noncustomers a higher fee than bank customers.
  Many banks also charge a monthly maintenance fee if a gift card is not used within a specified period of time. Wells Fargo charges $2.50 per month, starting with the 13th month after purchase. National City Bank charges $2.50 beginning with the seventh month. Usually those fees do not come into play. Mercator says full value of 70% of the cards is used up within three weeks.
  Cards generally are offered in amounts ranging from $25 to $500. Mercator says the average denomination is about $100.
  Recognizing that 2006 is likely to be a big year for gift card sales, many banks are promoting the cards heavily. Among the marketing channels used are statements, ATMs, floor and counter signage in branches, billboards, and radio advertisements.
  Visa is contemplating running radio ads in some markets, as it did last year, Diamond says. And Visa's Web site lists its member banks that offer the cards, by ZIP code.
  With a "fantastic" gift card season approaching, says Javelin's Cundiff, banks will be more active than ever in marketing the cards to holiday shoppers, both consumers and businesses alike.
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