Gift card rewards programs can create unexpected challenges for retailers when consumers earn loyalty points or other incentives for purchasing closed-loop gift cards through third-party distribution channels. While increased gift card sales might initially appear beneficial, retailers may actually sacrifice revenue when existing customers purchase discounted gift cards simply to maximize rewards before making purchases they would have made anyway.
The economics become particularly important when retailers must share gift card revenue with distributors and card mall operators. If rewards-driven gift card purchases generate little incremental spending, the cost of distribution could outweigh the benefits. Retailers therefore need to understand how loyalty incentives influence gift card purchasing and redemption behavior.
An interesting pattern has emerged in the third party gift card distribution market. Issuers are seeing greater sales in stores where gift card purchases are eligible for earning points in rewards programs. Those stores that offer discounts on gas as part of their loyalty programs are particularly active.
At first glance, this seems like it would be a good thing. Increase sales of gift cards mean more sales at the issuers’ stores because the buyers are committing money to a particular retailer. However, this may be a case of too much of a good thing.
While retailers want customers to commit money to their stores through closed-loop cards, the issuers do not want to lose money for that commitment. In some cases, this may be what is happening. Retailers suspect that their customers are heading to the grocery store to buy up gift cards and earn rewards points before coming in to shop. The problem is that the retailers share the money on those cards with the distributor and the card mall host.
What this means is that even though the customer pays $100 for a gift card, the gift card’s value to the issuer is less – anywhere from $5 to $30 dollars less depending on the deal the retailer has struck. What retailers are saying is that the customers buying cards to earn points are customers they would have had anyway, so there is no incremental spend. These customers are also planning their trips, so there is little over-spending and the savings that come from processing a gift card over another type of payment card do not make up for the discount.
Issuers need to do something to avoid losing their shirts in these arrangements. This problem also would extend to scrip companies that encourage schools and other non-profits to sell gift cards as fund raisers. In some cases, retailers may want to ask about having their gift cards, or all gift cards, excluded from rewards programs. In some programs open-loop gift cards are already excluded. Distribution companies may also want to negotiate on their clients’ behalf. In addition, retailers should examine the redemption information on their cards and see whether this behavior has any particular pattern.
While pulling gift cards from card malls in some locations is an option, issuers should not make this decision too rashly. These gift card buyers represent loyal and enthusiastic customers who should not be turned off. Issuers may want to find other ways to incent more desirable behavior.
Third-party gift card distribution can expand a retailer’s reach and attract new spending, but rewards programs can alter the economics when loyal customers use them primarily to earn additional benefits. Retailers should examine redemption data to determine whether these purchases are producing incremental sales or simply shifting existing customers to a less profitable payment method.
Rather than immediately withdrawing gift cards from certain distribution channels, issuers can explore alternatives such as excluding gift cards from rewards programs, renegotiating distribution arrangements, or developing incentives that encourage more profitable customer behavior. Understanding the relationship between gift card distribution and loyalty rewards can help retailers preserve the benefits of these programs without unnecessarily sacrificing margins.
