One of the biggest changes in the payments landscape during the past decade is the use of prepaid gift cards, especially during the coming holiday period. According to the National Retail Federation, $28 billion changed hands via prepaid gift cards during the holidays last year, almost $300 per U.S. household.

Assuming a $50 average load per card, the $28 billion holiday spending translates into more than 500 million individual cards. At a conservative $2 per card in revenues, that's $1 billion at stake during the holiday period alone.

It seems that banks and credit unions would be ideally suited to cash in on this interest. Yet, a recent Marketing Workshop survey revealed that only 1% of gift card purchases during the past year were at banks. Granted, it's difficult to compete with card sales at the end-retailer, but nearly a third of buyers used other channels, a significant revenue opportunity.

Here's a card-purchase breakdown from the last holiday period, according to the National Federation of Retailers (research conducted by BIGresearch, 10 Jan 2007).

• 75%—bought at the store where cards will ultimately be used
• 17%—other brick-and-mortar locations
• 13%—purchased online, retailer-direct
• 4%—third-party website

The directories at Visa and MasterCard (see list below) list only 19 financial institutions offering prepaid cards online. An additional 30 financial institutions sell cards thorough Visa's online site here.

Why such low FI sales?
Back to the original question, why aren't banks more heavily invested in gift card sales (see list of sellers below)? Part of the explanation has to do with the general unwillingness to take on the added fraud exposure, especially from online sales. However, financial institutions can mitigate much of that by offering the cards to established customers only.

Another reason is the lack of merchandising expertise. Bank branches and websites are generally not set up to merchandise spur-of-the-moment products. That weakness can be overcome online with tight integration into the online banking area. If banks had a "gift card" tab available in online banking, I believe it would become the primary option for many customers in the market for a gift card.  

Financial institution opportunities
Even though brick-and-mortar sales dominate with an 85% share of transactions, physical  locations by no means have a lock on the business. I recently purchased several store cards at a third-party location (Safeway). While it was convenient and free, I wasn't at all sure that the Safeway clerk actually activated the cards, a significant drawback in the buying experience. 

It's tempting to think banks could recreate the success of other retailers by selling cards in branch. But without the retail POS systems needed by card wholesalers to plug the bank into their card-selling networks, it can be costly to equip bank branches with a card-selling system. Add to that the expense of training tellers, educating customers, and potentially backing up the teller queue on Christmas eve.  

So the better opportunity for most financial institutions is online sales. You already have the traffic; the technology expense can be centralized in one fulfillment location (or outsourced); and it's easier to educate customers online. Online Resources is one established bank-tech vendor with a turnkey, multi-card solution, CardHQ, introduced last year.

Banks and credit unions could become players in this market if they did some or all of the following:

1. Expand from Visa/MC/AmEx used by 12% of buyers, to store cards, used by 90% of the market (see list of card types below).  
2. Provide written activation guarantees with each card.
3. Allow users to check balances online or through text messaging.  
4. Keep prices competitive. Safeway charged ZERO for the Nordstrom card I purchased there, apparently content with the commissions received from the retailer. Because of the activation guarantee, banks could charge a few dollars per card, especially if the card is packaged in an attractive envelope or box that reinforces the guarantee and the bank's brand (see #5).
5. Use online banking to promote the cards. 
6. Offer a variety of packaging alternatives and/or personalization to improve the cards appeal as a gift. Starbucks, the granddaddy of prepaid cards, is offering a $25 package in its stores that includes a personalized $20 card and a gift box. The package is bought in-store, but the personalization is fulfilled online.  

Card types
Here's the list of most common card types purchased (offline and online):

• 38%—department store 
  
• 27%—restaurant
• 18%—book store 
  
• 16%—electronics store
• 15%—discount store
  
• 12%—Visa/MC/AmEx
  
• 11%—coffee shop
  
• 11%—home improvement 
  
• 9%—clothing  
  
• 7%—grocery store
  
• 6%—gas station
  
• 5%—salon/spa
  
• 5%—sporting goods
  
• 4%—home decor/housewares
  
• 3%—craft store
  
• 3%—online merchant
  
• 2%—office supply
  
• 2%—catalog
  
• 2%—shoe store
  
• 10%—other 

Companies Offering MasterCard or Visa Gift Cards Online

MasterCard

BankFirst
Western Union Prepaid Card

H&R Block Bank
H&R Block Emerald Prepaid MasterCard

HSBC
HSBC Prepaid MasterCard GiftCard

Keybank
Best Present Holiday Bonus & Incentive Card

MetaBank
AccountNow Vantage Debit MasterCard

NetSpend
All-Access MasterCard Prepaid Card

Washington Mutual
Washington Mutual Prepaid MasterCard Gift Card

Visa

BCU (customers only)
Available to BCU members only
Financial Institution

Comerica (customers only)
Phone: (800) 955-4212
Available to Comerica customers only
Financial Institution

DeluxeCard
Phone: (866) 874-9029
Retailer/Other

Desert Schools FCU (customers only)
Phone: (800) 456-9171
Available to Desert Schools FCU members only
Financial Institution

First National Bank of Omaha
Financial Institution

GiftCards.com
Phone: (877) 944-3822
Retailer/Other

iCARD
Phone: (636) 536-6897
Retailer/Other

IDT Gift2go
Phone: (800) 995-3065
Retailer/Other

M&I Bank
Financial Institution

National City
Phone: 877-990-GIFT (4438)
Financial Institution

Navy Federal Credit Union (customers only)
Available to Navy Federal Credit Union members only 
Financial Institution

PNC Bank (customers only)
Available to PNC Bank customers only
Financial Institution

SunTrust
Phone: (800) 318-0210
Financial Institution

U.S. Bank
Financial Institution

Wells Fargo (customers only)
Financial Institution

West Suburban Bank
Financial Institution

Source: Visa, 3 Nov 2007.

Who'd have guessed banks would become a popular source of holiday gifts, other than good old-fashioned greenbacks of course?

Now that niche audiences can be targeted with online promotions during the holidays, many financial institutions are marketing financial products packaged as gifts. Prepaid Visa/MasterCards are the hottest item, but there's also potential in other areas. 

Gift cards
The second most popular gift item this year, after apparel, is expected to be prepaid cash cards. While the majority of the $20+ billion purchased will be direct from retailers, hundreds of banks and credit unions, such as Boeing Employees Credit Union (BECU) have joined the fray (see email below). If marketed right, financial institutions could gain a significant share of total sales. See our previous post here about integrating gift cards into online banking for more information.

Credit reports
Equifax is taking advantage of the giving season to market credit reports and/or FICO score gift certificates. The cost is $20 for a three-bureau credit report, $15 for the FICO score and explanation, or $30 for both (see email below). An even better gift would be a year of credit monitoring.

Investment accounts
For years, ShareBuilder has marketed "the gift of stock" during the holidays. This year, many of its partners, such as National City Bank, are offering a $50 gift card as a bonus for new accounts (see screenshot below). That way grandma and grandpa can give junior something that's good for him, an investment account for the future AND something he'll actually like, $50 to spend at the mall.

Piggy bank 2.0
For the younger set, ING Direct has for a year been selling The Savings Machine, a toy bank/calculator/ATM machine. And judging from the note on its website,* it's proving to be a popular Deal of the Month with a lower $17.95 price tag which includes free shipping (see inset). Several years ago, ING Direct reported nearly a million dollars in sales from its online merchandise store <shop.ingdirect.com>, an inexpensive way to get its name on the street.

*Note by the "Savings Machine" product page today: All orders placed from 4 Dec to 11 Dec will be shipped out the week of 11 Dec due to the large amount of backorders.

Gift cards are hot, accounting for nearly 5% of holiday spending last year. How can banks leverage this interest?

There are two broad categories to consider:

1. Prepaid MasterCard/Visa
2. Single-merchant gift cards

Most discussions in the industry are centered around prepaid MasterCard/Visas, but we think there is a significant opportunity in the second category: merchant cards. Here are ways for financial institutions to jump onto the gift-card bandwagon:

Easy (requires little investment, primarily customer education):

• Purchase education: Provide consumer education on the pros and cons of merchant gift-card purchases and urge customers to charge the cards to your credit or debit cards. Emphasize built-in protections such as fraud guarantees, tracking, and so on.
• Purchase incentives: If your systems allow it, add an incentive such as a 1% rebate, sweepstakes entry, or purchase protection.
• Directory: Publish a list of stores that are selling gift cards and/or create an online directory where cards can be purchased online.

Harder (requires programming, employee training, and more)

• Integrate gift-card account-access into online banking: Using account-aggregation technology, such as that offered by Yodlee, CashEdge and others, link to the merchant's gift-card account-management area such as <starbucks.com/card>. The integrated view would provide a secure and easy way for customers to manage their gift card accounts.
• Offer automated reloading via your debit/credit card: When gift-card account balances get low, offer to automatically reload from your credit/debit card. Reloading could be manual or automated, e.g., "Add $25 to my Starbucks card whenever it dips below $5."
• Send low-balance alerts when gift-card accounts dip below a set amount.
• Resell merchant cards via shopping cart such as The Card Cafe <cardcafe.com> (see screenshot below)

Hardest (requires customer training, sales, and website programming)

• Issue gift cards on behalf of merchants
• Sponsor your own gift card network with a stored-value card that can be used at multiple sources. For example, the Northampton Chamber of Commerce <northamptonchamber.com> markets a gift card that can be used at 50 local merchants (see inset). The card, which can be purchased, reloaded, and tracked online is powered by Swipe It Technology <swipeit.com> which offers turnkey gift and loyalty packages beginning at $299, plus a $12 monthly fee and $0.23 transaction charge. Other vendors include eCardSystems <ecardsystems.com>, Valutec <valutecardsolutions.com> and Value Gift Card <valuegiftcard.com>.

The business case
There is a surprisingly good business case for integrating gift cards into your online banking service with not one but three potential revenue streams:

1. Interchange from loading/reloading: Provided customers load the card via debit/credit, you can earn 1.5%+ on the load, for a $50 card, that's $0.75 per load
2. NSF/OD income: Every debit card purchase increases the chance of an NSF/OD item; assuming one of every 300 cards loaded results in an NSF/OD fee, the profit per load is $0.10 ($30/300).
3. Merchant commissions: Selling cards at your website could earn $5 or more per card sold.

The program also brings in the usual intangibles: new customer accounts, positive PR, branding benefits, retention and so on.

--JB

Illinois-based West Suburban Bank <westsuburbanbank.com>, which offers an array of prepaid card services through its subsidiary, Prepaid Solutions USA <prepaidsolutions.com> is promoting payroll cards to employers.

The powercash card website, powered by FundXpress <portal.fxfn.com/c2wsbli>, includes a surcharge-free ATM finder that points to nearby machines within Allpoint's 32,000 ATM network <allpointnetwork.com> (click on inset for closeup).

Analysis
The surcharge-free ATM is an important benefit for payroll card clients, because it allows them to point their employees to ATMs where they can withdraw their paychecks without an additional charge.

--JB

The U.S. Treasury’s U.S. Money Laundering Threat Assessment, published last December, says that many types of stored-value cards have the potential to become major avenues for money laundering, suggesting—although not saying explicitly—that stringent anti-money laundering regulations are in the offing for the card products.

Industry groups are preparing what amount to pre-emptive negotiations to keep the issue off the floor of Congress, hopefully minimizing potential regulations that could, in the view of many in the industry, cripple the business case for what bankers and other payments executives consider several promising new revenue streams. But prepaid-card executives are declining to speak publicly about the issue, hoping to keep public discussion about stored-valued cards “positive.”

Continue reading "Money Laundering Creates Problems for Stored-value Cards" »

The potential of cellphone-based mobile payments to eventually squeeze banks out of their central role in payments can already be seen in East Asia, says Andrei Hagiu, a principal at Market Platform Dynamics, and by ignoring it, American banks have nothing to lose but their business.

Hong Kong’s Octopus prepaid debit card (see inset) is one example: Issued by Hong Kong’s subway system and several other transportation companies—with no bank involved—Octopus cards drive about $2.2 billion in annual payments volume.

Continue reading "Mobile Payments: Japan Leads the Pack" »

In the coming year, low-value payments and prepaid cards will be increasingly mentioned in the same breath, especially in conjunction with off-line, contactless methods, says Gwenn Bezard, partner in Aite Group.

Pilots, and even some deployments of contactless payment cards, will be making a significant appearance, if only because banks are pushing them. The main sticking point from the merchant perspective, Bezard says, will be the cost of interchange, but he expects some banks to offer breaks on fees, if only to give the venue a running start. He is optimistic that big merchants will follow Starbucks’ model and offer rechargeable, merchant-specific stored-value cards as a means of gaining market share and promoting customer loyalty.

Continue reading "Low Value Payments & Stored Value Cards" »

When it comes to stored value cards, Starbucks is the one to watch. It's most recent innovation: a Mother's Day "card" with a place on the plastic where you can jot a quick note to mom (see close-up below).

Don't you wish you would have thought of that?

The Starbucks stored value card, first introduced in 2001, is just now being positioned as a collectible. Stores in the Northwestern United States and in Japan are selling a sealed $10 prepaid card carrying the likeness of popular Mariner baseball player Ichiro Suzuki. The cards are also sold online at Starbucks.com.

Analysis
We believe stored value gift and travel cards are a natural for online banking. They provide an interesting retail element unavailable with most banking products.

The Starbucks email (click on the thumbnail above) is a good example. What bank product would have worked so well in a Mother's Day promo?

In additio to their marketing benefits, prepaid cards command fees and can be profitable; no small matter in the United States, the land of free online banking and bill pay. 

Ironically, Bank of America recently dropped out of the retail prepaid card business, most likely due to increased state rules and regulations on dormant account fees, one of the primary profit drivers for banks.

Don't let BofA's move worry you. Just be thankful there are now 12 million more potential customers for the rest of the industry to share.

--JB

United States Postal Service is dabbling in stored value again with a two-city trial of prepaid cash cards called LibertyCash that can be redeemed only in participating postal stations. The cards were designed with collectors in mind. USPS produced 5,000 $50 cards celebrating the SF 49er’s 50th anniversary; 10,000 $20 cards depicting the space shuttle Endeavor; and 15,000 $5 cards honoring POW/MIAs. Cards expire in August, so unless you live in the trial cities of Boulder or San Jose you’ll probably never use the cards. The USPS stands to pocket approximately $500,000 if the cards sell out. Peanuts compared to its primary stored value product, the postage stamp, which generates $25-50 million in unused stored value “profits” each year. This is the second foray into stored value plastic for the post office. They have been co-marketing a prepaid phone card with American Express for more than a year. To purchase cards call USPS at 800.782.6724. Leo Campbell is Manager Electronic Commerce Services, 202.268.4399.