An interesting pattern has emerged in thethird party gift card distribution market. Issuers are seeinggreater sales in stores where gift card purchases are eligible forearning points in rewards programs. Those stores that offerdiscounts on gas as part of their loyalty programs are particularlyactive.
At first glance, this seems like it would be a good thing. Increasesales of gift cards mean more sales at the issuers’ stores becausethe 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 storesthrough closed-loop cards, the issuers do not want to lose moneyfor that commitment. In some cases, this may be what is happening.Retailers suspect that their customers are heading to the grocerystore to buy up gift cards and earn rewards points before coming into shop. The problem is that the retailers share the money on thosecards with the distributor and the card mall host.
What this means is that even though the customer pays $100 for agift card, the gift card’s value to the issuer is less – anywherefrom $5 to $30 dollars less depending on the deal the retailer hasstruck. What retailers are saying is that the customers buyingcards to earn points are customers they would have had anyway, sothere is no incremental spend. These customers are also planningtheir trips, so there is little over-spending and the savings thatcome from processing a gift card over another type of payment carddo not make up for the discount.
Issuers need to do something to avoid losing their shirts in thesearrangements. This problem also would extend to scrip companiesthat encourage schools and other non-profits to sell gift cards asfund raisers. In some cases, retailers may want to ask about havingtheir gift cards, or all gift cards, excluded from rewardsprograms. In some programs open-loop gift cards are alreadyexcluded. Distribution companies may also want to negotiate ontheir clients’ behalf. In addition, retailers should examine theredemption information on their cards and see whether this behaviorhas any particular pattern.
While pulling gift cards from card malls in some locations is anoption, issuers should not make this decision too rashly. Thesegift card buyers represent loyal and enthusiastic customers whoshould not be turned off. Issuers may want to find other ways toincent more desirable behavior.