The Broken Link - Digital Transactions

Merchants Roll Out Private-Label Gift Cards
(% of category merchants offering gift cards)
21%
19%
6%
4%
0% 0%
Retail MO/TO Hotels Restaurants
merchant category we tracked. The
rate increased from 6% to 55% in restaurants
alone.
Interestingly, the penetration rates
differ materially between the U.S.
and Canada. Restaurant penetration
levels are similar in the two markets,
but the other categories show different
patterns, no doubt driven by
different market developments and
competition.
Pricing for large merchants, as
with many transaction-processing
markets, tends to be highly customized
and negotiated, but pricing to
small merchants tends to be driven
more by policy or list prices. For
general Visa/MasterCard transaction
processing, acquirers gravitated to
similar pricing structures and price
points over the last several years.
In contrast, gift card pricing for
small merchants with these acquirers
has a different character as acquirers
often operate with dissimilar billing
elements and dissimilar price
points. The most common pricing
line items were monthly management
fees, set-up fees, per-card fees,
and per-transaction fees.
The price points for monthly fees
have fallen since 2004, and a greater
proportion of acquirers did not use
monthly fees in 2007. The median
range for monthly fees charged to
merchants was $10 to $15, which was
down from $16 to $20 in 2004. More
than 60% of acquirers charged $15 or
less in 2007, but 32% of acquirers did
• 2003 • 2007
17%
55%
Source: First Annapolis Consulting
not use this billing element at all compared
with 22% in 2004.
The use of set-up fees has declined
since 2004, but the price points for
those acquirers that do charge the
fees have increased. In addition, the
use of set-up fees appears to be correlated
with certain sales and marketing
strategies. The median set-up fee
range was $100 to $200 (up from $50
to $100 in 2004), but 32% of acquirers
do not use this fee type, up significantly
from 11% in 2004.
Challenging Model
One of the factors influencing this
phenomenon is an auto-enrollment
strategy at a small number of acquirers
that have packaged gift cards into
their basic offerings. The acquirer
provides a merchant a certain number
of gift cards as part of a bundled
service at the time the acquirer
signs the merchant. These acquirers
charge merchants primarily for gift
card transactions and as the merchants
reorder cards after the initial batch.
In a sense, the gift card becomes
a loss leader, but acquirers pursuing
this strategy report higher retention
levels for merchants with both
acquiring and gift cards. These
acquirers also report a higher effective
penetration of active gift card
merchants using auto-enrollment. In
other words, auto-enrollment results
in a greater proportion of merchants
using a gift card program than other
sales approaches.
This is essentially the difference
between auto-enrollment—
effectively a negative-response
marketing approach—and opt-in,
positive-response sales approaches
either at the time of the initial sale
or thereafter. Acquirers using autoenrollment
tend not to charge set-up
fees for small merchants.
The use of per-card fees is very
similar to 2004 levels. The median fee
per card is unchanged at 25 cents to
$1. One-third of acquirers do not use
this fee type, which is about the same
as in 2004.
By contrast, transaction fees were
somewhat more prevalent in 2007
than in 2004. The median transaction
fee was 21 to 25 cents, the same as
2004. But 74% of acquirers used this
fee in 2007, compared with 67% in
2004. The transaction fee is the billing
element where acquirers reported the
highest degree of negotiation on pricing;
acquirers indicated that approximately
5% of merchants differ from
the pricing policy.
The picture that emerges from this
research is an industry where merchants
are adopting the single-purpose
gift card at a significant rate and
where, in response, acquirers to varying
degrees have made gift cards a central
aspect of their offerings. There is
not a consensus on the revenue model,
however, since acquirers use divergent
pricing structures. There is some evidence
of price competition, at least at
the billing-element level, as certain
fees have fallen in prevalence or their
median price point has fallen, specifically
set-up fees and monthly fees.
These findings are consistent with
the overall industry trend toward gift
cards becoming a more widespread
offering among merchants. The study
also underscores the challenging economic
model associated with the most
basic forms of the prepaid products
and the need for acquirers and other
providers to investigate value-added
prepaid product offerings and distribution
models. DT
40 • digitaltransactions • February 2008