Though the economy may be struggling, a CreditCards.com/Bankrate.com survey of gift card issuers shows that the gift card industry continues to innovate, with digital gifting offerings breathing new life into an already strong segment of the retail market.
Gift cards remain one of the most popular gifts among consumers. In fact, the gift card market is growing at least as fast as the general consumer spending market, says Michael Hursta, vice president of payments transaction company First Data Prepaid Services. A $91 billion market, the gift card industry is expected to reach $100 billion in sales by 2012, according to the research firm TowerGroup. But the biggest area of growth and excitement is the digital arena, as gift card issuers increasingly look to ways for consumers to send gift cards via email, mobile devices and even social media sites.
What the survey found
We surveyed 63 gift cards from major brands (see gift card comparison table). More than half -- 32 -- have e-cards available. For many issuers in the survey, this was the first year that they had explored digital gifting For example, American Express, Best Buy, Gap and Pizza Hut all offered e-gift cards for the first time. Many issuers also embraced technology as a way for customers to manage their gift card accounts, with 55 brands letting consumers check their balances on the Web.
Gift cards are divided into two major categories. Open-loop gift cards are those issued by banks or credit card companies and are redeemable by any retailer. Closed-loop, or merchant-branded, gift cards are those issued by retailers for use exclusively with that retailer. Typically, closed-loop cards have fewer fees associated with them than their open-loop counterparts, and this year is no exception. In fact, in this year's survey, only two closed-loop cards -- those by HEB grocery store and Pilot Travel Center -- bear dormancy or maintenance fees.
When it comes to purchase fees, banks are more likely to charge them than retailers, though Toys R Us does charge a $1.95 purchase fee when a physical card is bought online. American Express, Discover, Harris Bank MasterCard, KeyBank MasterCard, U.S. Bank Visa and Wells Fargo Visa all have purchase fees attached to their cards. Chevron/Texaco and Exxon charge purchase fees for their cards, as well.
Some bank-issued gift cards are becoming more consumer-friendly. Fifth Third Bank and Key Bank both eliminated dormancy and maintenance fees this year. Other bank-issued gift cards without dormancy and maintenance fees are Wells Fargo Visa, Harris Bank MasterCard and American Express. Discover, Chase Visa and U.S. Bank Visa all continue to charge maintenance or dormancy fees.
If you're not planning to use your gift card right away, you're in luck, since most of the gift cards included in the survey have no expiration dates. A number of cards issued by banks -- Fifth Third Bank MasterCard, Harris Bank MasterCard, Chase Visa, U.S. Bank Visa and Wells Fargo Visa -- do give consumers a deadline by which the cards must be used.
All eyes on digital Though plastic gift cards overwhelmingly make up the gift card market, digital gifting is clearly the rising star of the industry. There have been 6 million e-gift card purchases in the past six months, according to David Stone, chief executive officer at CashStar, a company that provides digital gift card solutions for such brands as Starbucks, Staples and The Home Depot. Not only that, but for the first time, more than 50 percent of retailers offer digital gift cards as an option, Stone adds.
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"There are two reasons why consumers don't use gift cards today -- we don't have time to go to the store or wait for the plastic to be shipped and they're not personal enough," says Stone. But the digital age changes that. Not only can consumers buy and have an e-gift card sent instantly from a Web browser or mobile phone, but they can personalize the message with photos and video, creating an individualized gifting experience.
Digital gift cards come in three varieties:
Email gifting is the most widespread, accounting for about 95 percent of the digital gifting market, Stone says, with recipients receiving the gift card in their email box.
Mobile gifting lets consumers use a smartphone app to send a gift card or have a gift card sent to a mobile phone. This year, Target and Starbucks each added mobile gift cards.
Social gifting lets consumers send gift cards via social media sites. For example, Amazon.com lets customers send friends gift cards by posting the cards on their Facebook walls. "Social gifting is growing at a rate of about 400 percent," Stone says.
While digital offerings give consumers new options in gifting, they're unlikely to overtake their plastic counterparts in the near future, experts say. For one thing, many people still want a physical product and some consumers perceive more value in attractively designed cards. Likewise, some are still uncomfortable with the technology. "I think we're still several years away from virtual cards becoming the majority, but they're still going to be for the next several years the fastest-growing segment," Hursta says.
Though First Data found that consumers have been increasing the amount of money loaded onto gift cards, digital gifting may in the long run lead consumers to spend smaller amounts, Hursta points out. The ease with which digital gifting is done may lead consumers to send them more often, but consumers won't have more money to allot to those extra gifts.
Embracing the challenges While the immediate future for gift cards looks bright, the industry has its challenges. Mobile gifting utilizes bar code technology and "there's still an adoption process going on with retailers to update their point-of-sale systems to read the bar codes," says Rebekka Rea, executive director of the Retail Gift Card Association (RGCA).
Fraud is another concern. For example, there have been scams in which counterfeit and fraudulent gift cards have been sold on some Web sites or stolen credit cards have been used to purchase gift cards that are then re-sold. In fact, to address fraud, the RGCA and "several companies and associations have come together to form the Prepaid Anti-Fraud Forum," Rea says.
Though gift card issuers have put in place changes mandated by the Credit CARD Act of 2009, such as the elimination of dormancy fees for the first 12 months after a gift card is purchased, other regulatory challenges remain, Rea says. For example, there are calls to collect more information from gift card buyers, a move that the industry staunchly opposes. "We're creating jobs, we're bringing forward innovation that stimulates consumer spending. So why do you want to kill a growth industry?" Rea says.
Despite the challenges, retailers are still happy with the popularity of gift cards and its promising future. Consumers, including Torrence Wimbish, of Bowie, Md., are also happy because "gift cards have that convenience factor," Wimbish says.
All in all, the state of the industry is strong, Rea says. "We're excited about the new products that are coming out and we're helping out the economy."
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