Virtual Gift Card Player Giftango Looks to Enter Broader Open-Loop Market

Giftango Corp., a major behind-the-scenes player in electronic gift cards, is preparing to move into the fast-growing world of open-loop prepaid cards.

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A first step along that road was reached this week when Portland, Ore.-based Giftango achieved so-called Level 1 certification under the Payment Card Industry data-security standard (PCI). The certification, granted by Anitian Enterprise Security, a qualified security assessor (QSA) that tested Giftango’s computer systems and security procedures, means that the company meets the “highest and strictest” rules for protecting payment data, according to Giftango. PCI certification also permits the company to handle data from Visa, MasterCard, American Express, and Discover-branded cards.

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Now Giftango is moving on to the nitty-gritty of developing an open-loop business, according to chief marketing officer Mike Fletcher. For its virtual gift card business, Giftango buys from about 150 retailers, including Amazon.com, Lowe’s, Sears, and Nike, the information needed to enable its channel partners to offer virtual gift cards from multiple retailers. The electronic cards can be delivered via e-mail, text message, Facebook walls, or application programming interfaces (APIs). Giftango’s channel partners include a subsidiary of Maritz Holdings Inc., ITA Group, and at least seven other firms that provide points redemptions, incentives, or other card-related marketing services. Giftango provides connections to the major gift card processors such as First Data Corp. and other firms.

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But instead of retailers, the open-loop business will call for Giftango to join forces with a prepaid card program manager. Fletcher would not identify any specific companies, but leaders in the space include Green Dot Corp., NetSpend Holdings Inc., and several other companies.

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“That would the type of partner we’d be working with,” Fletcher tells Digital Transactions News. “We are engaged in conversations today. It could happen sooner than later.”

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Full details of the open-loop venture remain to be worked out. For instance, Giftango may offer open-loop gift cards as well as general-purpose prepaid cards or so-called restricted authorization network (RAN) cards that are good at, for example, multiple restaurants but not other merchants. And security is more of a challenge for open-loop than closed-loop cards, he says.

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Fletcher says the existing business with closed-loop virtual gift cards is going very well. Giftango’s channel partners last year bought $2 billion in plastic gift cards from retailers, and it’s that revenue pool that Giftango sees as ripe for conversion from plastic to electronics. The privately held company doesn’t disclose financials, but June’s revenues matched last December’s, with December typically accounting for 50% of the company’s revenues, he says.

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Virtual gift cards have advantages for both sellers and consumers. Retailers and marketers get rid of the expenses of issuing and delivering plastic cards, and consumers like the fast delivery and personalization electronic gift cards provide. “Frankly, the adoption is pretty rapid once that channel is presented to the consumer,” says Fletcher. “Fifty to 75% of their [the channel partners’] users will immediately move over to digital.”

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Still, the virtual open-loop market represents a new revenue opportunity for Giftango, which earns both transaction fees as well as revenue when it resells cards to its partners. “The more products that we can put into the portfolio and make available to our partners, the more revenue we make,” says Fletcher.

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According to preliminary estimates from Maynard, Mass.-based Mercator Advisory Group Inc., users loaded $299 billion on closed-loop prepaid cards in 2011 and $183 billion on open-loop cards. Growth rates for open-loop cards generally have been higher than for the closed-loop variety in recent years.

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As Giftango prepares to move into the open-loop market, the company is in the process of raising $15 million in a Series C round of financing. Giftango hopes to complete the financing in a few months, and if it’s successful, it would more than double the $12 million the company has raised in its seven-year corporate history.

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Giftango is eyeing the possibilities created by the launch of mobile wallets such as Google Inc.’s Google Wallet, the Isis joint venture of three leading mobile carriers, and others. Ben Jackson, a senior analyst who researches the prepaid card industry at Mercator, says Giftango’s open-loop strategy will take time to develop, but could pay off in the long haul.

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Giftango is no stranger to mobile development. Two years ago, it introduced the first software toolkit allowing app developers to offer virtual gift cards within their mobile apps.

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“It’s not in the next six months that that business is going to take off, but as mobile wallets become widespread and the spending becomes virtual, this thing is going to be a lot more valuable,” Jackson says. “Giftango has always been mobile-focused.”