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Gifting, budgeting drive gift card boom

Demand strong as consumers, businesses find new uses for prepaid cards

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Editor's note: This story has been updated. See the 2013 gift card survey and accompanying chart.

Despite its reputation for being a thoughtless gift, few recipients would turn around and re-gift a gift card this holiday season, and many consumers are even looking to the cards as budgeting tools for themselves.  

Gift cards are one of the strongest segments of the retail market, and a CreditCards.com/Bankrate.com survey of 63 major gift card issuers shows that the industry continues to evolve, with some retailers banking that consumers will use the cards as a continuous source of cash.  (See our 2012 gift card survey chart.)

One of the biggest strengths of gift cards is that everybody seems to love them. Those who purchase the cards like the fact that they're convenient and don't require as much thought about gift selection, while recipients like the fact that gift cards let them buy what they want, says Michael Hursta, vice president of prepaid services for First Data Corp. Gift cards are also preferable to cash because consumers are more likely to use extra cash to pay for regular monthly expenses, while they'll use a gift card to buy something they covet instead of what they need, Hursta adds.

Gifting, budgeting drive gift card boom

A $100 billion market, according to the research firm CEB TowerGroup, the gift card industry has not been immune to the struggling economy, however, but experts expect it to continue to grow as consumers and businesses find new uses for the cards.

What the survey found
As the gift card market evolves, many consumers are now buying gift cards for themselves, using them as budgeting tools to better control their spending, says Hursta. Thirty-two of the cards surveyed target that segment of the market, giving customers the ability to reload more money onto the cards so they can continue to use them. Some cards, however, have special stipulations. For example, Dillard's only allows customers to reload cards if the card has a balance. Other brands, such as Nordstrom, Staples and Office Depot, only allow customers to reload their cards in the stores.

There are two major categories of gift cards. Open-loop gift cards are issued by banks or credit card companies and consumers can redeem them anywhere. Closed-loop, or merchant-branded, cards are those that can only be used to buy goods from the issuing retailer. Some consumers prefer to give open-loop cards because the gift recipient has more shopping options, while others prefer to give closed-loop cards because they're deemed to be more personal. For example, a Starbucks lover is likely to appreciate the sentiment behind a Starbucks card.

Historically, closed-loop cards have fewer fees associated with them. That continues to be the case this year. Only one of the brands offering closed-loop cards -- Pilot Travel Center -- imposes dormancy or maintenance fees. However, six of the eight  open-loop brands surveyed charge dormancy or maintenance fees that range from $2.50 to $3 per month after 12 consecutive months of inactivity.

Only two of the closed-loop cards -- Staples and Toys R Us -- charge a purchasing fee. And, three gas station brands -- Shell, Chevron/Texaco and Exxon -- charge purchasing fees if you order the cards online, but not if you buy the gift cards at the pump. All open-loop brands surveyed charge purchasing fees, but the terms and amounts vary. For example, American Express charges between $2.95 and $6.95 depending on the type of card purchased, and Chase Visa charges $3.50 for gift cards bought in branches, but not for gift cards bought online.

While it's easier today than in the past to find a gift card with low or no fees, it's harder to find gift card brands that will replace a lost or stolen card. Of the brands surveyed, 20 would not replace a lost or stolen card, and of the brands that will issue a replacement, there are typically restrictions. For example, Starbucks will only replace a card if the user has created a Starbucks account and registered the card with the company to track its usage, and eBay will only replace unused cards with a proof of purchase.

Some consumers prefer the convenience of electronic gift cards. As happened last year, half -- 32 -- of the brands offered e-cards. One additional brand -- JetBlue Airways -- offers an e-card during the holidays but not during the rest of the year. Even more brands provide customers with the ability to manage their accounts digitally. Fifty-three of the 63 cards surveyed allow customers to check their balance online.

Not all gift card buyers the same
One of the reasons behind the strength of the gift card market is that gift cards appeal to different types of consumers, says Hursta. Some use the cards as a budgeting tool. Others, like Mary Rogers, a real estate agent in Fort Washington, Md., are gift card enthusiasts who like buying and receiving the cards as gifts. "I like to buy gift cards for my friends who have everything or are picky, and I like to receive them for the same reasons," Rogers says. Convenience shoppers and those who are looking for last-minute gifts make up other segments of the market.

Gift cards have also continued to become more consumer friendly. Years ago, consumer advocates complained about gift cards losing value either because of fees or low redemption rates, in which consumers would receive gift cards with funds loaded on them but would not use the cards before they expired. This is less of a worry today, says Brian Riley, senior research director with CEB TowerGroup, as gift card rules issued in 2009 regulate their fees, expiration dates and other attributes of prepaid and gift cards.

The recession has had an impact on the industry, analysts say. Sales of some closed-loop gift cards dipped in recent years, particularly those for restaurants and high-end stores, says CEB TowerGroup's Riley. In surveys conducted by First Data Corp., some consumers have also said they would be buying fewer gift cards this year because they have less money to spend in general, Hursta adds.

While there has been much excitement in the industry about electronic and mobile gift cards, the potential growth should be kept in perspective, says Riley. While many retailers offer them, digital gift cards won't overtake plastic gift cards in our lifetime, but their popularity is likely to grow as the mobile payments market grows, Riley adds.

The business case for gift cards
Consumers aren't the only ones fueling the growth of the gift card market. Companies regularly give gift cards to employees to reward and recognize work efforts, and many firms use them as a customer incentive, for example, offering a branded gift card to customers that spend above a certain threshold.  When it comes to motivating employees, managers, "can give somebody an award such as a Starbucks card or a Best Buy card for doing something that the company wants to recognize," says Leo Jakobson, executive editor with Incentive magazine.

In fact, according to the Incentive Research Foundation, the incentive and loyalty gift card market is worth $22.7 billion, says the foundation's president, Melissa Van Dyke. Not only do companies like the fact that gift cards can be given for a multitude of reasons, but "they view [gift cards] as easy to administer and they believe it's their employees' preference to receive them," Van Dyke adds.  

With so many uses for gift cards, it's unlikely that their popularity will wane because they're so practical, analysts say. "Both the buyer and the receiver get a benefit out of them," Hursta says.

See related: Mobile gift cards: the 'cooler' gift card, When good gift cards go bad, 7 tips for making the most of digital gift cards

Updated: November 18, 2013


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