Gift Cards: 

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A Growing Market

Opportunity

   WHILE THERE ARE NO OFFICIAL NUMBERS YET AVAILABLE on what percentage of ISOs are now selling gift card products and services, it is generally understood in the ISO community that gift cards represent an excellent opportunity to provide merchants with a value-added service that creates a new revenue source. Most ISOs also recognize that providing a gift card solution can open doors that would otherwise stay bolted shut.

What's Driving the Growth?

   The vast majority of the national retailers are now using gift cards. To an ISO who has just entered the gift card market, this might seem like bad news. On the contrary, the rapid adoption of gift cards by large merchants has dramatically increased the size of the overall gift card market by driving gift card sales in the small to medium-sized merchant market. Business owners in this segment of the market are now regularly exposed to gift cards when buying or receiving gifts from family and friends. This has generated a great deal of interest from small to medium-sized business owners who already seem to understand the basics of how gift cards can reduce costs, increase gift sales and enhance corporate identity.
   In the last 12 to 18 months, ISOs and gift card processors that serve this segment of the market have seen a substantial increase in the number of merchants seeking a gift card solution. The dynamics of selling gift card services to small to medium merchants has changed from an "educational sell" to one where the merchant already understands the reasons for using gift cards, but needs to know how to go about creating his or her own private label gift card program.

What Motivates the Merchants?

   Most merchants see the value in automating their gift program: it eliminates paper processes and makes it easier for customers to make gift purchases. However, much of the motivation for converting to gift cards stems from a desire to use gift cards as a marketing tool. This is one of the main reasons selling gift cards can be a very different if not refreshing experience for a salesperson who is accustomed to selling bankcard processing. Even single-location merchants place a high value on being able to have their own gift card programs and see it as way to help enhance their companys' image in customers' minds. The merchant's marketing person or department often becomes the motivating force behind a decision to convert to gift cards.
   The merchant may not always have such clear and strategic reasons for embracing gift card programs, but more often than not, gift cards are perceived as a source of pride and enhanced image for the company. When asked about the main reason for converting to gift cards, one fairly typical merchant response was, "I don't know. We had seen them at Home Depot and some of the other large retailers around town and we wanted to have our own gift cards." There are plenty of tangible benefits that justify the conversion to gift card programs but the buying decision is often based on the image or panache that the cards project for the merchant.

Implementation Issues

   Many new products and services in the bankcard industry have fallen by the wayside because the product was too complicated to sell. The rapid adoption of gift cards by major retailers is also helping clear the way for ISOs because most salespeople can easily articulate how gift cards are used and how they will benefit merchants who make the change.

A Pain in the POS

   Assuming the rates are reasonable, it would seem that converting to gift cards would always be an easy decision for any merchant. Unfortunately, the question of how best to add gift card support to the merchant's point-of-sale system can complicate things. Merchants tend to insist on having a gift card solution that integrates with bankcard processing equipment. Restaurants in particular can be a challenge because a large percentage of restaurants - even small ones - have installed fully integrated touch-screen POS systems that are used for credit card transactions.
   Most of the gift card processors offer a stand-alone POS terminal solution that will do bankcard, check, gift and loyalty all in one terminal. There are too many different types of POS integration issues to go into detail but it is important that your gift card processor be committed to working with integrators as well as providing viable solutions on traditional credit card terminals.

After the Deal is Closed

   There is one important rule to remember after a merchant has signed up for your gift card program: The amount of help the merchant will need to create a gift card design is inversely related to the size of the merchant's company. In other words, the deal isn't really closed until the merchant has submitted card graphics to you or your gift card processor and the little guys face some serious challenges in this area. This may be the 21st century, but some of the smaller merchants don't have their logo in electronic format yet, so the chances of the merchant creating a card design without outside help are, well, slim to none. The best response is to be prepared with a service-oriented solution that provides the merchant with clear guidelines for designing a card and the option of additional design assistance from you or your gift card processor.

Tying Gift and Loyalty Services Together

   Customer loyalty and frequency programs are a natural extension of gift card services and these types of programs can also provide your merchant with a valuable service. In fact, a significant number of merchants choose to implement a loyalty program without gift cards. However, merchants should always be reminded that the customer-tracking technology that you are offering is far less important than the merchant's commitment to ensuring the success of the loyalty program with ongoing promotions and creative incentives that keep customers interested. A failed loyalty program doesn't help the merchant or ISO.
   For those merchants who choose to do a gift and loyalty program, there are a nearly endless number of creative ways a merchant can tie the two programs together. A gift card can become a customer's loyalty card and conversely, a loyalty card can also store a cash value. This gives the merchant more ways to keep its best customers coming back.
   Although the novelty of gift cards may eventually wear off with consumers, this industry will continue to experience rapid growth. There is mounting evidence that consumer demand will remain strong for the foreseeable future. The American Express Retail Index showed that gift cards/certificates are one of the most popular gifts to give, second only to clothing. A study conducted by Berrier Associates reported that 40 percent of consumers listed gift cards/certificates as their preferred gift to receive, more than all other categories.
   Ultimately, gift cards represent a fundamental improvement over paper certificates in nearly every aspect. The small to medium merchant segment of our market remains largely untouched.

Ray Clopton is the President of Smart Transaction Systems, located in Boulder, CO. To contact Ray, call 888.494.9760 or visit the Smart Transaction website at www.smart-transactions.com.