Online retailers harness the power of (virtual) gift cards
By Lauri Giesen
With the sale of plastic gift cards skyrocketing in the physical world, it
was only a matter of a very short time before such cards—or at least their virtual
equivalent—would take off in the Internet space as well. And Internet retailers
have found the same thing that traditional shopkeepers have found: gift givers
love the ease of giving gift certificates or cards, and recipients want to use
them in as many places as possible—be those in stores or online.
In fact, books and music retailer Borders Group Inc. loves online gift certificates
so much that it wouldn’t agree to move its e-commerce business to an Amazon.com
Inc.-operated platform three years ago until Amazon agreed to allow Borders
to continue to accept online gift certificates, even though it was the height
of the dot-com frenzy and Borders was eager to get a site that could better
serve its customers. “We had been operating our own gift card program online
and we weren’t going to give it up when we switched platforms; it was that important
to us,” explains a Borders spokesperson. Today, Amazon supports several gift
card programs.
Other priorities
Despite some retailers’ enthusiasm for gift cards and their widespread use
in the offline world, a study of online housewares retailers by Jupiter Research
shows that more retailers sell gift cards online than redeem them, meaning they
are selling online certificates that can be used only in stores. The Jupiter
study by analyst Patti Freeman Evans lists Crate & Barrel, Williams-Sonoma
and Bed, Bath and Beyond as retailers that sell, but do not redeem, gift coupons
online.
“So many retailers have held back from accepting gift cards online,” says
Michael Ahern, CEO of GiftCertificates.com, a web site that sells gift cards
online for hundreds of retailers, restaurants, hotels, airlines and theatres,
“because they have priorities in features they want to add to their sites and
gift card acceptance is not as high as you think it would be.”
In fact, that has been exactly the case at Art.com, which accepts gift certificates,
but in a cumbersome two-step process that requires the certificate holder to
call in first to establish credit to an account in the amount of the certificate.
“It’s been on our list for a while, but every time we go to implement it, some
other project takes priority,” says Nicole Benedict, Art.com customer experience
manager. “We are an Internet company and have a lot of technology-based programs
that we constantly need to implement and upgrade.”
Missing the market
Nonetheless, like Borders, some retailers are fans of online gift certificates
and say very little effort is required to accept online gift cards. Kevin Frain,
CFO of BarnesNoble.com, says redeeming gift cards online is actually easier
than selling cards online. “Developing the technology to link our databases
so that we could accept our gift cards at our online stores was not difficult
at all,” Frain says. “The harder part was the challenge of selling the cards.
We were not set up to print and ship the cards online and we had a lot of work
to do to get that operation running.” BarnesNoble.com accepts both plastic and
virtual gift cards.
Analysts and consultants point out that retailers who don’t accept gift cards
online are missing the market. Offline sales of cards doubled in only one year,
as twice as many Americans purchased a plastic gift card in 2003 as in 2002,
according to a study commissioned by ValueLink, a division of First Data Corp.
and one of the largest third-party providers of gift card services to retailers.
ValueLink estimates that 97 million people, or 45% of the adult population,
purchased a gift card in 2003. And they are not buying just one or two cards—consumers
who buy such cards purchased an average of 5.6 cards last year.
In a separate study, Stored Value Systems, another large third-party provider
of gift card services to retailers, found that 68% of Americans gave or received
a gift card last year. Stored Value Systems, a subsidiary of Brentwood, Tenn.-based
Comdata Corp., also learned in a November 2003 survey that holiday shoppers
planned to purchase an average of $183 in gift cards with an average value of
$38 per card.
Yet another survey, this one by payment processor Paymentech, reports that
50% of consumers expected to give a gift card this past holiday season. Consultants
Retail Forward Inc. reported that households received an average of 2.7 cards
with the value of all cards reaching $150.
Further emphasizing the importance of cards, Paymentech reports that 60% of
gift card recipients spend more than the face value of the card, and the average
spend is 40% higher than face value.
While gift cards are more common in the physical world than on the Internet,
the Internet still plays an important role. ValueLink reports that 79% of card
purchasers bought their cards in stores and 6% purchased them on the Internet.
4% purchased their cards via telephone and the remaining 11% couldn’t remember
where they bought them.
In addition, for the first time last year, sales of virtual gift certificates
exceeded sales of gift cards at GiftCertificates.com. “More than half our sales
this year were for e-mail certificates,” Ahern says. “That reflects the fact
that customers are becoming more accustomed to using all types of gift coupons
online and the world is finally ready for the virtual certificates.”
While some retailers question the security and risk exposure of accepting
cards online, BarnesNoble.com’s Frain says fraud has not been an issue. “In
the last 16 months that we’ve had this program, we have not had many fraud issues
to speak of. Any risk exposure we face is limited to the amount retained on
the card as compared to credit cards where the sky is the limit when it comes
to exposure,” he says.
Furthermore, since gift cards function more like cash, in that it is assumed
whoever has possession of the card is the rightful owner, there is little effort
by most retailers to verify the identity of the user the way they check out
credit card users. Generally, consumers who purchase or receive such cards know
that if they lose the card and someone else redeems it, they are out the value.
However, most issuers do allow consumers to report lost or stolen cards. If
the value has not already been redeemed, they can stop the card and some retailers
will reissue the card with the remaining value. And with virtual certificates,
there is the password for extra protection.
Last-minute desperation
When looking at security issues related to virtual gift cards, however, more
effort needs to be made to verify the identification of the customer at the
time the gift card or certificate is purchased than when it is redeemed, according
to Ahern of GiftCertificates.com. “There are some fraudsters who will use stolen
credit cards to buy gift certificates and then they have good clean certificates
to make their purchases on,” he says. “The time to catch them is when they buy
the gift card.”
GiftCertificates.com approaches the market in several ways. First, it sells
online proprietary gift cards for nearly 300 retailers that recipients can use
at those sites or stores. It also has its own Supercertificate that gift givers
can buy for friends whose tastes they are unsure of. Recipients then go to GiftCertificates.com
and exchange the Supercertificate for a proprietary gift card from the retailer
of their choice. GiftCertificates.com also sells proprietary virtual gift certificates
for some retailers.
In spite of the popularity of virtual certificates at places like GiftCertificates.com,
few expect real gift cards will ever go away. BarnesNoble.com, for instance,
still sells more plastic gift cards than virtual certificates. “A lot of gift
givers still like sending the physical cards because they can be packaged to
look nice,” Frain says. But he note: “As we got closer to Christmas, the online
certificate sales started to pick up with the last-minute-shoppers who didn’t
have time to wait for the card to be delivered.”
As for the retailers themselves, most issuers of gift cards are still the
larger and mid-sized chains. Many of the very large retailers with sophisticated
IT and marketing staffs have developed their own card programs and integrated
links. Other large and most of the mid-sized retailers use either Stored Value
Systems or ValueLink, the two largest outsourcers, to develop and operate their
gift card redemption services for them, says Bruce Cundiff, payment and transactions
analyst in Jupiter Research. These outsourcers typically charge retailers on
a per-transaction basis, the price determined by the retailer’s volume and the
services required.
Creating the impulse buy
But even these outsourced arrangements have eluded the very small retailers—those
with a couple of sales outlets and a web page. More recently, a number of major
payments processors and credit card acquirers have started to resell the services
of companies such as Stored Vale Systems and ValueLink to their payments customers.
These processors can then spread the costs of purchasing cards and processing
transactions over a number of retailers, giving the small retailers volume and
the resulting cost efficiencies that they could not get on their own.
Retailers sometimes take unusual steps to redeem gift certificates online.
Art.com, an online seller of prints and posters and customized framing services,
has had a hybrid gift certificate solution involving both paper and digital
certificates that it has offered for the past three years.
But customers hoping to redeem either type of certificate cannot do so directly
online. Rather, they must first call the firm’s customer service department
and read the certificate number to a customer service rep. A credit is then
made to an account in their name. When they then go to make a purchase, that
credit is applied to the purchase.
Art.com is working to integrate its databases so that owners of both paper
certificates and digital certificates will be able to type their certificate
numbers directly onto the Internet at checkout to get immediate credit. That
offering is expected to be ready sometime this spring.
While Art.com won’t reveal the percentage of total sales that come from gift
certificates, Benedict says, total certificate redemption “has been growing
in line with our overall business growth.” Still, she says gift certificates
are important to her company’s sales efforts. “Our business lends itself to
personal tastes and preferences,” she says. “It is hard to pick out artwork
as a gift for someone else. Gift certificates allow recipients to choose work
that fits their tastes.”
Beyond operational issues, retailers need to consider how they promote the
gift card redemption option if they want to use them to spur sales. “There is
not as much impulse spending with online sales as there is in the stores, so
online retailers have to work harder if they are going to benefit from gift
cards,” Jupiter’s Evans says. “A lot of retailers wait until the customer checks
out before they even let them know that they accept gift cards. Then, it is
too late. Retailers need to do more to promote the gift cards on their sales
pages and not just at checkout.”
Lauri Giesen is a Libertyville, Ill.-based freelance business writer.
They work the same online and offline—but
they’re different
In the online world, gift card redemption can take two forms: the acceptance
at an Internet site of the same plastic cards that customers use in physical
stores and virtual gift certificates that are usually e-mailed to recipients
and can be used only for online purchases.
Gift cards are popular with large retail chains that want to integrate online
and store sales efforts as much as possible. With these gift cards, retailers
sell the pieces of plastic at their stores and online. The value of the card
is not retained in the card itself, but rather in a central database that can
be accessed both by swiping the card in a point-of-sale device in a store and
by inputting a number at Internet checkout. In either case the amount of the
purchase is deducted from the amount stored in the database. Analysts say that
with a well-integrated program, a customer should be able to use a $100 gift
card to make a $40 purchase in a chain’s store in the morning, make a $30 purchase
from the same chain’s Internet site in the afternoon and still have $30 to spend
at either place later on.
The concept is similar with virtual gift certificates, except there is no
plastic card or paper certificate. Shortly after a gift buyer purchases a virtual
certificate online, the recipient gets an e-mail message with a certificate
number and a password. When the recipient goes to make a purchase at the retail
location that issued the certificate, he or she types in the certificate number
and password and the value is applied. In most cases, retailers can reissue
the certificate if the recipient accidentally deletes the e-mail message. E-mail
certificates are popular with last-minute shoppers because the recipient can
receive the certificate the same day, whereas it typically takes several days
to process and mail a gift card.
Prior to the introduction of the plastic gift cards about ten years ago, many
retailers issued paper gift certificates. But with these certificates, the value
was actually held in the paper. If the customer lost a certificate, for example,
the value was gone. And when a customer redeemed some of the value from a certificate,
the retailer had to either give cash back for the remaining value or issue a
whole new certificate for a lesser amount. With the plastic cards, the value
sits in the computer database and is drawn down as the card is used. Many of
the cards can also be reloaded with additional value once the original value
is diminished.
With paper certificates, it would be nearly impossible for an Internet retailer
to accept the certificates short of having the customer mail them in. And even
then, the retailer would have to withhold the goods until receiving the certificate
or risk losing a portion of the value of the goods, making the redeeming of
paper certificates too cumbersome or risky for Internet retailers. “But with
gift cards, the value is held in a central database so all a retailer that wants
to integrate its gift card program has to do is link the card database to all
of the sales operations it supports,” says Bruce Cundiff, payment and transactions
analyst for Jupiter Research.
