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Perspective: The Evolution of Gift Card Strategy

Merchants are at an inflection point in the management of their payment acceptance structures. The enactment of the Dodd-Frank Wall Street Reform and Consumer Protection Act and its Durbin Amendment (Section 1075) provision, which regulates debit card interchange fees, has led retailers to re-evaluate the cost of payment acceptance at their point of sale (POS) locations.

Merchants are sensitive to the impact payment costs have on their operating margins. Retailers whose average debit card transaction is less than $11 did not find the interchange fee relief they were anticipating from this legislation. Yet they are also under considerable pressure to address the expanding sales opportunities presented through mobile, e-commerce, and social media distribution channels. This has become an imperative within many retail industries as consumers are intensifying their use of digital products. Retailers are looking to effectively manage the costs of payment acceptance through these channels. But many are wary of investing in accepting payment products that do not have a proven track record of success. What retailers do not realize, is that they may have the answer to their payments problems within their grasp.

The Evolution of Gift Card Strategy

Gift cards are now an accepted part of many retailers’ payment structure. For most retailers, their gift cards have a significantly lower cost of acceptance than that of credit and debit cards. As the major associations establish new fee schedules in response to external pressures, the acceptance costs between these products may grow larger. Yet few have been able to derive all the value they can from these gift card products.

Oftentimes, it is useful to draw a roadmap of the Evolution of Gift Card Strategy in order to explain the growth potential in gift cards. While there are many paths that retailers can take on this evolutionary journey, the milestones identified below can serve as guides for this process.

Stage 1: Simple Payment Tool

This first stage of the Evolution of Gift Card Strategy appears to be the most difficult for many merchants to transcend. Within this stage, the retailer views its gift card program as simply another form of payment tender accepted at the point of sale. Some of these retailers may have recognized that acceptance of a closed-loop gift card is generally less expensive than a credit card and value the cost savings associated with their use. Others may still be struggling with this realization. Common criticisms from merchants operating such programs are expressed as, “Gift card programs are expensive. We question their value.” It is not unusual for these merchants to focus on reducing the cost of operating their prepaid programs. Gift card activations within this category generally grow below industry average rates as their competitors’ programs are further evolved.

Stage 2: Gift Card as a Product

Retailers operating in this stage have successfully moved beyond the recognition that gift cards are a cost of payment acceptance to be managed. They have positioned their gift cards as a product that is merchandised like other products, so a retailer’s marketing department may have more involvement in the management of their gift cards. The ability to drive incremental sales at retail locations is a strong motivating factor for retailers operating within this stage. Merchants are interested in building brand relevance for their gift cards through product differentiation. This stage is commonly reflected in the efforts by casual dining restaurants to sell their gift cards through third-party gift card mall operators.

Stage 3: Gift Card as a Program

As retailers approach stage 3, they begin to see the value and revenue-generating opportunity that a comprehensive business-to-consumer (B2C) and business-to-business (B2B) approach to gift cards may offer them. The brand relevance established in Stage 2 has allowed them to generate more B2B revenue streams. Retailers have in place online registration processes for their gift cards, which gather consumer spending metrics. They have found success in encouraging customers to participate in online registration through the use of rewards and promotions. Those that link their customer loyalty strategy to their gift card programs find that online reload programs can gain traction during this stage, if those rewards are aligned with customer needs and wants. Customers begin to appreciate the value of the rewards they’ve earned, which in turn strengthens the relationship between the customer and retailer. Consumer willingness to change behavior and reload gift cards to maximize their reward program benefits provides a path to the last stage of gift card strategy evolution.

Stage 4: Spending Card as the Cornerstone of a Unified Retail Experience

The framework built in the first three stages is important for success in a unified retail environment. In the last stage of development, gift cards evolve into a multichannel spending card that becomes the cornerstone of retailer’s payment and loyalty strategy. The rapid emergence of the omnichannel shopper and their everyday use of mobile, online, and social media channels present an undeniable opportunity to leverage these customer touch points. It will be significantly easier for merchants to influence spending card usage through rewards delivered on a mobile wallet. The direct relationship built with cusomers in Stage 3 can be enhanced through marketing and loyalty strategies focused on achieving higher penetration and utilization of the spending card within their customer base. These efforts, though, must be unified across the physical store, mobile, online, and social media channels to be successful.

Connecting to the omni-channel shopper has become an immediate need for most retailers. We will see diverse strategies from U.S. merchants in order to successfully build consumer purchasing behavior through these channels. The ones that succeed, no doubt, will understand the relationship between consumers and retailers has to be beneficial for both the consumer and retailer. Positioning the lower cost of acceptance spending card as the cornerstone of this unified retail experience will make this transition possible for many merchants.