Prepaid cards continue to be the preferred gift for both recipients and givers, as retailers develop new ways to make them attractive to customers. This engagement extends revenue opportunities for merchants and can turn anonymous gift cards into distinct customer loyalty vehicles.
Retailers are already gearing up for the holiday shopping rush, making this the right time to look at trends that will affect gift card purchasing towards the end of the year. Nearly two-thirds of consumers who buy a gift card do so during the holiday season. In his report, 2024 Prepaid Holiday Preview, Jordan Hirschfield, Director of Prepaid at Javelin Strategy & Research, looks at the trends likely to impact prepaid card purchases for the remainder of the year, considering factors from buying patterns to macroeconomic influences.
An Adaptable Solution
Retailers have devised creative ways to use their gift cards, spurring loyalty and encouraging consumers to expand their initial purchases. Some organizations now offer bonus gift cards—for example, buying a $50 card from Target might come with an additional card with $10 at no extra cost.
“It’s effectively a coupon except that it’s a coupon promising future benefit back to Target versus just straight money off,” said Hirschfield.
This additional bonus card can provide sizable benefits. Generally, people who use a gift card spend more than the card’s value, often purchasing more profitable, expensive items. By offering an incentive card with the purchase of another gift card or a general purchase, merchants not only improve their revenue but also foster customer loyalty.
Hirschfield contrasts gift cards with coupons, which have many similarities. “Couponing is such a simple transaction,” he said. “Here is a piece of paper or a code and you get X percent off and are encouraged to go back to the store.”
Gift cards enable retailers to be much more creative. For instance, if Target has a department with slow sales, they can try to boost activity by offering a promotion such as an additional $10 card specific to the housewares department with the purchase of a $50 card. Alternatively, they could structure the card to encourage the consumer to bring a friend into the store. These innovative promotions not only drive sales but also engender loyalty.
Starbucks is another example of a merchant adding creativity to its gift card program. If a consumer makes a purchase at Starbucks using their card stored-value account, they receive twice the Star benefits compared to a regular payment. This approach builds customer loyalty while providing Starbucks with more data and analytics on their most dedicated customers.
One category that has seen a slight decline in usage is the general-purpose gift card, such as those from Visa, Mastercard or American Express. These cards remain the top choice for gift-giving, but many people have turned to peer-to-peer apps to give money to friends and family. The number of people listing general-purpose cards as their preferred gift slipped from 26% in 2023 to 23% this year.
Macroeconomic Factors
Heading into the busy season, Hirschfield sees interest rates as a factor that might boost sales. The Federal Reserve has kept interest rates steady for the past year, but many observers expect rates to be cut before the holidays. If that happens, consumers could see their credit card interest rates go down, which would induce them to spend more. Gift cards would be a logical beneficiary of that additional spending.
Hirschfield describes gift cards as the “most resilient” of gifting options. His research shows that 16% of holiday card buyers are likely to spend more this year, while 83% are going to spend a similar amount, and only 2% intend to spend less. These numbers could improve further if the economy strengthens or if interest rates decrease.
“Gift cards still [seem to be] a segment in holiday spending where people will spend more in total than they did last year,” Hirschfield said. “Almost 100% of card buyers are likely to buy gift cards again for the holidays, so it’s incredibly resilient no matter what the economic conditions are. Any easing of spending pressure can only improve that more.”
One downside of gift card sales for retailers is that they don’t receive the revenue immediately. When a card is purchased, it becomes a liability on the store’s balance sheet. Unlike a direct sale, where the store gets that money right away, the funds from a gift card remain unclaimed until the card is redeemed.
However, the situation does have a silver lining. Often, gift cards are redeemed in the first quarter, which is typically a slower period for retailers. As a result, the redemption of these cards can help offset some of the seasonal dips in cash flow.
“The upside of more frequent visits, increased spending, buying more expensive items, and trying new brands and services often offset the downside of the financial liability,” Hirschfield said. “There’s so much opportunity to push more gifts out of that product.”
