Whether open and closed loop prepaid cards are a significant profit generator or just an important convenience customers expect to find in their c-store, virtual gift cards are changing the category for retailers.
By Marilyn Odesser-Torpey, Associate Editor
The prepaid category is changing. Of the amount of gift cards sold in terms of dollars loaded, 10% or less is virtual, so “it is a little too soon to be predicting the death of the plastic card,” according to Ben Jackson, senior analyst prepaid advisory service at Maynard, Mass.-based Mercator Advisory Group.
Between 2009 and 2012, virtual card sales hovered at about 2%, Jackson said. In 2013, the number jumped to between 5% and 10%, but even at 10% that’s still a very small part of the category.
Jackson suspects the reason for the spike in virtual card sales can be tied to better marketing and positioning of the products on Websites. But, he noted, even in this time when everybody has mobile phones in their pockets and access to the Internet for shopping and banking, brick and mortar sites are still around and thriving.
“When the Internet first started, people were saying there would be no more need for physical banks or stores, yet somehow we still find ourselves driving to the grocery store, shoe stores and other retail locations,” Jackson said.
For gifting, he noted, virtual cards do not provide many givers with the same level of psychological satisfaction as physical plastic cards.
“For many people, there is a gift-giving psychology; they want to give the recipient something physical to open,” Jackson explained. “A virtual gift card does not satisfy that need, while a plastic gift card does.”
In-store shopping also satisfies another need that many people have: to browse.
“People don’t always know what they want before they see it,” Jackson said. “They want to look at the card rack to pick out just the right gift.”
The best of both worlds, Jackson said, is to have racks in the stores that have QR codes that the customers can scan into their mobile devices to purchase the e-gift cards. Then, customers will have the ability to scan numerous options on the rack, but still purchase the cards on their mobile devices. “The customers get the convenience and the stores still get the credit,” Jackson said.
Embracing New Technology
C-stores need to think about the various ways they can integrate digital technology into the in-store experience, he said. For example, if there’s a rack of cards and one variety sells out, there should still be a digital purchase poster or stand-up in the rack that customers can scan. That way, commerce never has to stop, even if there are no physical cards in the spot on the rack. Customers avoid disappointment and the store doesn’t lose any sales.
“The major distribution companies, such as InComm and Blackhawk, should be able to help c-store retailers set up that kind of system,” Jackson said. “Target has already done it in its stores.”
For c-stores that do a booming business selling gift cards, there are opportunities to grow that segment even more. Begin by adding other gift-related items, thus becoming the go-to place for gift shoppers, Jackson suggested.
Greeting cards, balloons and flowers can be bundled, making the concept of giving a physical gift card even more compelling. Because space is at a premium in c-stores, retailers might think about replacing some magazine displays with gift card envelopes or decorative bags.
“C-store retailers have to ask themselves, do I have a compelling value proposition that makes physical gift cards more attractive than virtual ones,” Jackson said. “As the world shifts and things become increasingly digital, that’s a question that retailers are going to have to carefully consider.”
Most e-gift cards are not as easy and convenient to use as they might at first appear, said Richard Crone, CEO of Crone Consulting LLC.
“Ninety-five percent of e-gift cards are printed out by the recipient and redeemed at the point of sale on paper,” he said. “They can easily be lost and the PIN number is displayed right on the paper—that’s not secure and it certainly isn’t convenient.”
Crone explained that stepping up the promotion of private-label closed loop gift cards is the “best first position of defense” against virtual gift cards for c-store retailers. The goal is to get an increasing number of customers to purchase e-gift cards through the c-store’s own branded mobile app.
“Selling and reloading gift ‘cards’ via the convenience store’s own branded mobile app would virtually eliminate the fraud issues now plaguing physical gift cards sold in the store by providing strong authentication and real-time mobile notifications,” he said. “More than 50% of sales of some retailers’ store gift cards are virtual,” Crone said.
At QuikTrip c-stores, prepaid gift cards are important and carefully curated, but they are mainly a convenience for customers, according to Mike Thornbrugh, manager of public and government affairs for the Tulsa-based chain. The real draw, he said, are QuikTrip’s closed loop cards.
Crone also recommended that retailers position gift cards as more than just gifts.
“Most gift card sales are seasonal products, with sales heavily weighted to the end-of-year holiday period and again during graduation and Father’s Day,” Crone said. “Retailers should reposition prepaid accounts as everyday spending accounts.”
Crone pointed to the success Starbucks has experienced by persuading consumers to load money onto prepaid accounts for their own everyday use. Starbucks changed the way many customers view prepaid cards.
“Starbucks paved the way when the company first launched its app through which customers could buy prepaid cards in 2011,” Crone said. “Even prior to offering the mobile payment app, Starbucks had more than 25% of its sales on its own private label prepaid cards.
As of mid-September of last year, Starbucks had 4.5 million transactions per week on its app. As of mid-March 2014, the company had 11.5 million active app users, accounting for more than 14% of total sales. Dunkin’ Donuts has also experienced success by assertively positioning its own private label cards as spending accounts.
“In addition to offering convenience to customers, prepaid private label cards are an effective way to build brand loyalty,” Crone said. “It’s a big opportunity for all of the players.”
But that does not mean the entire “gift card mall” concept should disappear or that convenience store retailers should abandon it. Crone noted that convenience stores can also offer other retailers’ private label cards on their private app so customers can purchase the cards directly from the app. As a result, the app could take the place of the physical endcap to display and sell a variety of e-gift cards.
Whether the customer uses the c-store’s app to purchase its own private label e-gift or another retailer’s, the app opens up a wide realm of communication opportunities between the c-store and its customers, Crone said. One major way it can enhance the store/customer relationship is through presence detection.
“If an app user is at the pump anywhere near one of your stores, you can transmit a special offer targeted directly at the customer,” Crone said.