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. <strong>The</strong> 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. <strong>The</strong> most common pricing line items were monthly management fees, set-up fees, per-card fees, and per-transaction fees. <strong>The</strong> price points for monthly fees have fallen since 2004, and a greater proportion of acquirers did not use monthly fees in 2007. <strong>The</strong> 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. <strong>The</strong> 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. <strong>The</strong> 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. <strong>The</strong> acquirer provides a merchant a certain number of gift cards as part of a bundled service at the time the acquirer signs the merchant. <strong>The</strong>se 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. <strong>The</strong>se 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. <strong>The</strong> use of per-card fees is very similar to 2004 levels. <strong>The</strong> 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. <strong>The</strong> 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. <strong>The</strong> 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. <strong>The</strong> 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. <strong>The</strong>re is not a consensus on the revenue model, however, since acquirers use divergent pricing structures. <strong>The</strong>re 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. <strong>The</strong>se findings are consistent with the overall industry trend toward gift cards becoming a more widespread offering among merchants. <strong>The</strong> 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
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