Issuers Try a Marketing Play To Promote Gift Card Sales

  The open-loop gift card industry is galloping into all kinds of new territory. In fact, banks and third-party marketers are using a variety of promotions to help hasten card sales.
  Steak lovers and supporters of America's beef cattle industry, for example, now can load a "Beef Bucks" Visa gift card with $25 to $500 (for a $4 purchase fee). Although the cards are promoted as a way to buy beef through restaurants, stores or home-delivery services, they can be used to purchase anything anywhere Visa cards are accepted. By comparison, closed-loop cards typically can be used only at locations operated by the merchant whose name appears on the card.
  "It's just been going up and up and up," Nancy Montross, executive secretary of the non-profit South Dakota Beef Bucks Inc., says of sales of the Beef Bucks cards. First Dakota National Bank issues the cards.
  Open-loop card sales reached $1.42 billion in 2004 but are expected to escalate to $24.77 billion by 2008, estimates Tim Sloane, an analyst with Mercator Advisory Group Inc. of Waltham, Mass. "It's pretty fantastic growth," he observes.
  More local and regional banks are getting into the open-loop card market, even though some larger issuers have discontinued the offerings ("Banks Remain Closed to 'Open' Gift Cards, April"). Sloane contends about 35% of local and regional banks now issue the cards, while 85% of large national banks do.
  "It really is primarily to build relationships with existing customers as well as prospective customers," acknowledges Roger Piskos, senior vice president of electronic banking services with Cleveland-based National City Bank. "We do make some money. It's not a loss. But the aim is to deepen relationships with our customers."
  Banks frequently say customer requests are driving their decisions to introduce open-loop gift card programs. "We're offering the product because the customers are demanding it," says R. Scott McCormack, second vice president of self-service banking at First National Bank of Omaha.
  Still, the prospect of a razor-thin profit margin, combined with varying and often nettlesome state regulatory provisions, has caused some large banks-including Bank of America, JPMorgan Chase, and Citibank-to stop selling open-loop gift cards to consumers.
  Other banks, though, are selling open-loop gift cards at branches or on Web sites. They also often sell by telephone to corporate customers, who seem to be lapping them up to give to employees, customers and partners as gifts or as incentives and rewards.
  "It's fairly easy to sell compared with other banking products, and it's a hot product," says Gary Palmer of eFunds Prepaid Solutions (formerly WildCard Systems), a provider of electronic payment services based in Scottsdale, Ariz.
  Most banks have found that online marketing of the cards lags way behind in-person sales at branch banks. National City, for instance, sells about 65% of its cards at its more than 1,200 branches spread across seven states. It sells another 30% in bulk to corporate customers, according to Piskos, with just 5% vended online.
  Banks primarily view gift cards as a product for impulse buying. Though someone planning ahead to purchase a gift might buy a card online, it usually takes close to a week for the card to arrive by mail to its destination. If customers need gift cards at the last minute, they can walk into a bank, mall or other venue where open-loop cards usually are sold and walk out with a card.
  SALES DILEMMA
  For many financial institutions, it has not been profitable to sell the cards over Web sites, says Cliff Mason, group executive for prepaid services at TSYS, a processor of open-loop prepaid cards. "On the Internet you're not necessarily targeting or working with existing customers," he says. "So it's not a long-lasting relationship with the bank."
  Yet some banks find that by offering customized features on the card, they can do brisk business online.
  First National Bank of Omaha officials believe allowing customers to personalize open-loop gift cards enhances their popularity. By going on the bank's Web site, a customer can order a gift card, have a personal photo placed on the plastic and choose from a number of different design features.
  "It gives the consumer more choice in the design process," says McCormack. "The consumer enjoys that. The gift-giving experience is so much better when you can personalize it."
  First National charges $5.95 above card value on its Web site, regardless of whether the card is personalized with photograph or design features. The fee for corporate gift cards depends upon the number ordered and how fast the customer would like to receive the cards.
  Sloane says because of the low profit margins of open-loop gift card programs, even banks that do considerable advertising often promote the cards by latching on to existing marketing resources, such as statements and in-branch signage, that is relatively inexpensive or free. Most banks, he adds, are not very aggressive in their marketing of the cards.
  While some banks do radio and billboard advertising to promote the cards, the major brands, such as Visa and American Express, occasionally will sponsor larger national ad campaigns. "They look at it as market development," says Sloane. "They say that anything that helps build up the market for issuing banks is good."
  At times the cards are marketed in conjunction with special promotional campaigns, such as a company's employee-incentive program, according to TSYS's Mason. Ford Motor Co., for instance, might want a sizeable number of cards to give away in an employee-recognition campaign.
  FEE CONCERNS
  Some potential customers might be turned off by the fees that issuers usually assess for gift cards, which generally range from $2 to $5 (though some banks waive the fees for their customers). Mason says, however, the unbanked generally do not seem to mind paying the fee, as they see the cards as a convenience that is less costly than check-cashing services. Because cards sometimes can be reloaded, extra fees might be charged for reloading services. Those fees typically are pegged at about $3, according to Sloane.
  Palmer explains that banks view the gift card business as a good way to get customers involved in other financial services, as they often will use the plastic to help sell other products such as loans. "The characteristics of a gift card obviously can't compare to debit or credit cards profit-wise," says Palmer. "But it gets more entrenched in a customer's psyche, and so it builds customer relations."
  Open-loop gift cards might catch on with some consumers and businesses. But if most consumers continue to prefer getting proprietary store gift cards because they are free, the potential growth for open-loop card may be limited.
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