February 4, 2004, 12:00 AM

The e-certificate

Retailers are discovering the power of cross-channel gift certificates.

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.

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