The Broken Link - Digital Transactions

ENDPOINT
Behind the
Experimentation in
Gift Card Pricing
The presence of
several specialized
gift card processors
plus the acquirers
with in-house
programs indicate
there is overcapacity
specifically in
single-purpose gift
card processing.
Single-purpose gift cards are now central to merchant acquirers’ offerings to small
merchants, but acquirers vary widely in their gift card pricing strategies, say Marc
Abbey and Paul Grill.
The proprietary gift card has been a stunning
success in recent years, and has
increasingly become a ubiquitous product
in the offerings of payment card acquirers
for their merchants. Gift cards were a highlight
in an otherwise mediocre 2006 Christmas shopping
season, with the National Retail Federation
estimating that over $26 billion in closed-loop
gift cards were purchased in that season.
In recent research, First Annapolis examined
gift card pricing policies of acquirers with
respect to small merchants—Visa/MasterCard
sales of $10 million or less—and found that
pricing structures in 2007 had some important
differences from the structures we found
through similar research in 2004.
In the single-purpose gift card market,
Comdata Corp.’s Stored Value Systems and
First Data Corp.’s ValueLink dominate the
national merchant market, which is nearly
fully penetrated in the sense that almost all
major merchants have a program by now. The
regional merchant market is much more fragmented
and much less penetrated.
In 2004 and again in 2007, First Annapolis
studied the overall pricing strategies of acquirers
representing 54% and 62% of industry
volume, respectively. These acquirers
ranged from small non-banks to the largest of
acquirer/processors.
In 2004, only 25% of acquirers reported
offering single-purpose gift cards to small
merchants. By 2007, more than 80% of acquirers
indicated they offered gift cards. Of the acquirers
that offered gift cards in 2007, approximately
two-thirds did so through a reseller arrangement
with some other prepaid card issuer or processor.
A surprising one-third of acquirers provided
gift cards through an in-house capability.
Dissimilar Pricing
Though the broader prepaid market is becoming
more complex with the proliferation of product
types, functionality, and target markets, the
single-purpose gift card requires a fairly simple
form of processing capability at the moment.
One school of thought is that gift card processing
will consolidate aggressively due to the
effects of scale economies over time.
The presence of several specialized gift
card processors plus the acquirers with in-house
programs tend to underscore the argument that
there is overcapacity specifically in singlepurpose
gift card processing.
Earlier in 2007, First Annapolis completed
research measuring the penetration rates of single-purpose
gift cards in the U.S. and Canada
in four merchant categories: retail, mail order/
telephone order, hotels, and restaurants. This
research updated similar research from 2003, and
we found a significant increase in penetration of
gift card programs in these small-merchant categories:
from 2% in 2003 to 28% in 2007. This
penetration rate was up significantly in every
Marc Abbey (top)
is the partner
responsible for the
acquiring practice
and Paul Grill is the
partner responsible
for the emerging
payments practice
at First Annapolis
Consulting Inc.,
Linthicum, Md.
Reach them at
marc.abbey@
firstannapolis.com
and paul.grill@
firstannapolis.com.
February 2008 • digitaltransactions • 39