Just in Time for the Holidays—Gift Cards That Require Only 10% Down

With the holiday-shopping season set to kick off on Friday, a startup in San Diego has launched a Web site that lets consumers buy gift cards at 10% of face value. The remaining balance, the company says, comes due only when the cards are redeemed.

The site, from Moola Street Inc., went live Nov. 6 and sells what it calls Moola Street Cards. Buyers can e-mail the cards to their recipients, or print them out and mail them, folding them in a way that resembles a Christmas card, for example. Recipients can then use the cards on Moola Street’s site to buy up to three gift cards from the nearly 100 brands the startup represents, including Amazon.com, Macy’s, Target Corp., GameStop, and a number of restaurant chains.

Moola Street sends the cards to the recipient after the order and bills the buyer’s credit card for the remaining 90% of the face value. If the transaction doesn’t authorize—for example, in cases where the credit card has expired—the company notifies the recipient of a problem and sends an e-mail to the buyer asking for another card number.

Del Currie, a long-time Web developer who co-founded the fledgling company and serves as its chief executive, says early activity is positive, though he won’t disclose numbers. “Word is spreading quickly about the site,” he says. “We’ve been getting quite a few orders. I’m very happy indeed.” While the company was initially capitalized only in July, Currie and his colleagues rushed to put together their operation in time to take advantage of the holiday season, he says.

“We’re taking orders, and the system is cranking away,” Currie says. But he hopes to cash in next month on the trend to buy gift cards as last-minute Christmas presents. “After Thanksgiving, we’ll start advertising,” he says. “December is when we’re kicking off. We’ll advertise online with banner ads, promotions, giveaways.”

Currie says the idea for the venture came to him last Christmas, when he contemplated how much of the money he spent on gift cards would go to his intended recipients and how much would stay in merchants’ pockets. “I sat down and ordered $700 worth of gift cards online to send to friends and family, and thought it would be great if I didn’t have to pay for these until they were used,” he says. “So I came up with the concept of being a middleman. We’re classed as a conditional gift because the card hasn’t been paid in full.”

Just how many gift cards go unredeemed—what the industry calls “breakage”—is a hard number to pin down. Currie says it’s about 35% of cards on average, though he adds that percentage can go much higher for restaurant cards. But Ben Jackson, a senior analyst at Maynard, Mass.-based Mercator Advisory Group who follows the prepaid card business, doubts the percentage is that high. Retailers tell him, he says, that about two-thirds of cards sold during the holiday season are redeemed by March, with some merchants reporting percentages as high as 90%. “I don’t think there’s an epidemic of gift cards not being redeemed,” he adds.

At the same time, unredeemed cards are less of a problem now that federal law, embodied in 2009’s CARD Act, requires that gift cards not expire until at least five years after they were issued or last loaded, Jackson adds. “Instant redemption isn’t as critical [for consumers] any more,” he notes.

But Jackson agrees that by allowing recipients to pick as many as three gift cards from major brands, the startup may be adding value and reducing one reason recipients leave gift cards in desk drawers—that the brand was picked out by the giver rather than by the recipient. “The real value is that I can get three gift cards instead of just one,” he says. “The 10% upfront is kind of a secondary piece.”

Currie says Moola Street has been through an angel round of funding to help launch operations, though he won’t say how much the startup has raised. Revenue comes mainly from the 10% investments buyers make for Moola Cards that aren’t redeemed. In those cases, the company pockets the down payments. “Our target is that anything 20% and up [on breakage] is beautiful for us,” Currie says, though he stresses that Moola Street also earns fees from some of the brands whose cards it represents. “We’re quite happy for people to redeem their cards,” he says. “We don’t need that high a percentage on the breakage.”

The next stage could be to market Moola Street Cards to companies as rewards and incentives for employees and customers, Currie says. After all, he adds, “the corporation is only paying 10%” upfront.