February 4, 2004, 12:00 AM

The e-certificate

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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.

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