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.
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.
Getting poll results. Please wait...
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.
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