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A Virtual Fix for 'Broken' Gift-Card Business


Megan Kendrick, an editor in Phoenix, just discovered 12 plastic gift cards stashed in a drawer, dating as far back as 2003. The unspent balance topped $500. "I didn't realize we had as many as we did," Kendrick, 27, says.

Kendrick is in good company. U.S. households average five cards on hand with a total value of more than $100, according to financial services industry adviser Richard Crone. As many as 20 percent are never or only partially used, he says.

First Data (KKR), Qualcomm (QCOM) and Google (GOOG) are devising a remedy by promoting so-called virtual gift cards. These make it easier for consumers to send and redeem gifts, often in small amounts, by relying on e-mail, mobile phones, or a social-networking site. The cash value on virtual cards will reach $10 billion in the U.S. in 2015, up from less than $500 million last year, says consulting firm Aite Group.

That would benefit users such as Kendrick, as well as merchants, which often can't recognize revenue from gift cards until they are used. Increased gift-card redemptions would also bolster retailers' sales because cardholders typically spend 50 percent more than a card's value, says Crone, whose Crone Consulting is located in San Carlos, Calif.

"The whole gift-cards industry—it's broken right now," says Nicolas Baum, chief executive officer of GiftRocket, a virtual gift-card company that sends money to a mobile phone when the user enters a selected store. "We wanted to take what's bad about gift cards and throw it out the window."

Digital, Liquid, and Timely

Virtual gift cards differ from traditional plastic ones because they're sent digitally and can often be tailored to any value, including small, unrounded amounts. In some cases, they are delivered just as a shopper considers making a purchase.

The new wave in gift cards has drawn notice from venture capital firms, which have invested in startups such as Mountain View (Calif.)-based GiftRocket. The company uses a phone's global positioning system to find a recipient's location and then transmits the funds to their PayPal (EBAY) account. GiftRocket has raised $170,000 from investors Start Fund and Y Combinator, Baum says.

Some services will send a gift card for a particular merchant to recipients who have told social media friends they're headed to that location. Atlanta-based First Data last year began letting consumers send gifts of Cold Stone Creamery ice cream cones via Facebook's social networking site.

"It's going to change the way consumers are giving gifts from an occasion to every day or every week," Sarah Owen, a vice-president at First Data, says. "We'll really see transaction volume pick up over the next five years."

Virtual gift cards will also give retailers new ways to interact with customers, says Tomas Campos, vice-president of online for Pleasanton (Calif.)-based Blackhawk Network, a gift-card subsidiary of grocery chain Safeway (SWY). Merchant cards can be easily recharged or turned into loyalty cards that include animation, games, coupons, and loyalty points to encourage use, he says.

An Exchange for Unwanted Gift Cards

In December, Plastic Jungle, a website on which consumers can buy and sell unwanted gift cards, began letting users sell their cards by entering pertinent information online, getting a near-instant payment in turn. Previously they had to mail the cards in first.

"It's making it a lot more convenient for consumers and driving a new wave of growth," Bruce Bower, chief executive officer of Plastic Jungle, says. "It's a market susceptible to being rewired." The San Jose-based company expects sales to rise fivefold this year, matching growth in 2010, when the face value of gift cards it sold reached about $10 million.

Virtual gift cards' use on mobile phones is expected to take off as well, consultant Crone says. ISIS—a joint effort between AT&T (T), T-Mobile USA (DTE:GR), and Verizon Wireless—will this year offer the feature in digital-wallet applications as part of a test.

"Merchant-branded gift cards are an important feature we plan to include on the ISIS mobile wallet," Jaymee Johnson, a spokesman for the venture, said in a Mar. 21 statement. "We do not have specifics on time lines or product details to share at this time."

Google will test virtual gift cards as part of its mobile wallet service this summer, three people familiar with the plan said earlier this month.

Within a year, the face value of mobile gift cards could reach $1 billion in the U.S., up from a negligible amount today, Brian Riley, research director at financial industry consultant TowerGroup, says. The availability of the cards on mobile devices may double or triple overall gift-card use in brick-and-mortar stores in two to five years, Crone says.

Challenge to Credit Cards and Checks?

Mobile gift cards may also grab some transactions from credit cards and checks, as well as from traditional, plastic gift cards, Crone says.

"Consumers are much more comfortable with having gift and loyalty cards in their phones than credit cards," says Rocco Fabiano, president of Qualcomm subsidiary Swagg, which lets consumers manage gift cards on their phones.

Venture capitalists have their eyes on the market, too. Plastic Jungle, founded in 2006, has received $23.4 million in equity funding from firms that include Shasta Ventures Management, Redpoint Ventures, First Round Capital, Bay Partners, and Harrison Metal, according to the company's website.

Giftango, a Portland (Ore.)-based startup, raised $5 million last year in a round led by Taylor Corp. Giftango helps its 180 customers, including J.C. Penney (JCP), Lowe's (LOW), and Nike (NKE), offer virtual gift cards via e-mail, mobile phones, and social networks.

Giftango's sales have been surging "in the thousands," on a percentage basis, CEO David Nelsen says in an interview. The company, founded in 2005, has received total funding of about $9 million. "Everybody's pouring gas on the flames," he says.

Olga_kharif1
Kharif is a reporter for Bloomberg News and Bloomberg Businessweek in Portland, Ore.

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