Merchants Get More Aggressive About Gift Card Reloads

A provision in the new Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 that exempts some reloadable prepaid cards from interchange regulation could make such cards an attractive option for retailers. But merchants were heavily promoting reloadable gift cards long before the legislation appeared for another reason: to get consumers more engaged with their brands, says Michael Hursta, vice president of gift cards at processor First Data Corp.

“It’s not new that gift cards are reloadable,” Hursta tells Digital Transactions News. “What’s new is that merchants are becoming more aggressive in trying to attract consumers to their brand and so they’re providing more incentives for consumers to load their card.”

The dollar value for gift card reloads grew rapidly during the first half of the year, increasing 25% from 2009’s first half across all merchant types, according to First Data’s First Half Gift Card Performance Report. The dollar value for gift card reloads increased 47% for quick-service restaurants.

Overall, the dollar value of gift cards sold increased 4.6% in the first half, while the number of gift cards sold increased 2.7% from 2009’s first half, First Data said without disclosing actual figures. The average gift card amount rose 1.9% to $33.73 from $33.11 in 2009. First Data based its report on aggregate transaction data generated by its gift card processing business.

Most retailers have cards that consumers can reload, Hursta says. “But we’re seeing more retailers who are establishing Web sites for people to register their gift cards and tie them to a credit card in order to do automatic reloads,” he says. “That’s been a huge driving force.”

Merchants also are creating more programs where consumers get benefits—such as financial incentives or free products—either for reloading a gift card or spending on a closed-loop card, Hursta says. “Of course, in order to gain those benefits, you generally need to reload the card in order to spend on the card.”

Retailers also are shying away from using the term “gift card,” Hursta says, adding, “It’s rare to see the term ‘gift card’ on a merchant brand anymore.”

Quick-service restaurants have been most active in promoting reload programs for gift cards, because their customers tend to make frequent purchases, often several times a month. “Generally speaking, reload programs have been most successful with merchants that have more frequent visitation,” Hursta says.

Consumers who patronize merchants several times a month also are more likely to go through the reload process to take advantage of the benefits. “They are pulling out that card often enough that it makes sense for them to engage with registering the cards and all the rest of it that usually comes with it,” Hursta says.

More retailers are likely to follow the lead of QSRs and institute aggressive promotion of reload programs for gift cards to form ties with their customers. “Merchants are looking for ways to get consumers engaged with what they’re doing,” Hursta says. “What we’re seeing is more merchants wanting to be able to communicate with consumers that own their cards, and so it makes sense to invite them to register the card so they have a means to communicate with them, usually over e-mail.”

While retailers’ desire to cement relations with customers is driving the push for reloadable gift cards, just how regulations are implemented under the Dodd-Frank law could create problems for the industry, says Ben Jackson, senior analyst for Mercator Advisory Group Inc.’s Prepaid Advisory Service.

Although prepaid reloadable cards appear to have been carved out of the law’s debit card interchange restrictions, gift cards clearly were not. That implies that merchants will have to be careful how they market these cards. Also, the current language of the law is still subject to interpretation by the Federal Reserve, which under Dodd-Frank must implement the law's provisions. “It’s not entirely clear that will be the final word,” Jackson said during a Webinar this week. That’s because Congress exempted reloadable cards running on the bank card networks so as not to harm prepaid cards issued for distribution of government benefits for the unbanked. Private-label, or closed-loop, cards appear not to be affected by Dodd-Frank, since interchange pricing does not apply to them.

“While reloadable prepaid cards looked to have dodged a bullet, as the Fed is writing regulations, they may say the spirit of the law says only those cards that help the poor or provide government benefits are carved out,” Jackson said.