Who’s on the grill today? Doug Blasiman, Chief Financial Officer of GiftCards.com.
Although we love the convenience and flexibility of gift cards, the issue of gift card fees remains a constant criticism. Stores and restaurants offer free gift cards with no fees and expiration, in part, because closed-loop gift card programs are profitable. Customers come in to the store to buy the gift cards, recipients come in to shop, and statistics show that the latter group will almost always overspend the value of the card. A closed loop gift card is as much a marketing tool as it is a convenience for consumers. But the goodwill changes when the subject of open loop gift cards comes up.
Gift cards that can be used anywhere typically cost money to purchase/activate, can lose value through non-use fees, and can expire. What’s the difference? Gift Card Girlfriend talks with Doug Blasiman to get the answers.
GCG: I’ve been looking forward to grilling you on the subject of gift card fees from the moment I joined the company. Paying more than face value for a gift card is a sensitive subject for consumers. Take me through the gift card lifecycle so we can understand what goes on under the covers.
DB: First I need to explain our relationship with Visa and MasterCard. In order to issue gift cards and prepaid debit cards to the public under these brand names, we have to partner with a sponsoring bank as an Independent Sales Organizations (ISO) for both Visa and MasterCard. The sponsoring bank charges our company a fee every time we activate a gift card through their network. In addition to the bank, we need to partner with a debit card processor to provide card processing services for the cards. The debit card processor also charges fees for the card and services they provide.
GCG: So those are the first two fees we’ve encountered in the process. The sponsoring bank and processor charge GiftCards.com (or rather the holding company) a fee to activate a gift card on behalf of Visa or MasterCard. What’s next?
DB: When a customer buys a gift card from our site, they pay for the gift card using a credit card. GiftCards.com is charged a merchant fee for accepting credit card transactions. The fee we are charged is a percentage of the dollar value of the gift card purchased. This is the same as any store or restaurant that accepts credit cards. For example, if you buy a $40 sweater at the store and pay for it using a credit card, the merchant will have to pay about $1 in payment processing fees.
However, the retail store will have marked the sweater up in order to pass this fee on to the consumer without you knowing it. We can’t do that with a gift card. A $40 gift card costs us $40 plus the fee paid to the issuing bank and processor plus the payment processing fee just described.
GCG: That makes sense. Plus, I presume there are some costs associated with printing the actual cards. We print those in-house, correct?
DB: Correct. We do all of our printing in-house. We print the physical plastic, print a standard “free” gift card carrier, and package it all for delivery. Add those costs to the processing cost for issuing the card and the merchant fee for accepting the card, and you can see that a $40 gift card certainly costs us more than $40.
GCG: Actually, our fees are quite low. Prior to joining GiftCards.com, I looked at other providers of personalized gift cards and found that our fee structure is lower than the competitors—especially when you can upload any photo you want to design a fully custom gift card. (See, I’m a fan!) According to our current payment structure, a $40 personalized gift card would cost the consumer $3.95 to print plus $1.99 for shipping and handling at the lowest UPS rate. So basically, the consumer spends $46 for a $40 gift card that is both personal and convenient to use.
That’s not a bad deal when you figure it would cost only a few dollars less to buy a generic Visa or MasterCard gift card at the grocery store and it might even cost you more to order a generic (non-personalized) gift card from one of our online gift card competitors.
So here comes the zinger–breakage. What happens to one of our gift cards when the recipient doesn’t activate it or activates it but doesn’t redeem it?
DB: The minimum expiration period for a bank issued Visa or MasterCard gift card is 5 years. After the gift card has been inactive for 12 months, a monthly fee of $4.95 per month is charged against the balance until the card reaches a $0 balance or the card becomes active again. Any balance left on the card will escheat to the state. Fees are clearly described in the cardholder’s terms and conditions so there should be no surprises for the customer.
GCG: People complain about inactivity fees. But if you think about the practical use of a gift card, it makes sense. If a gift card has been inactive for over a year, chances are the customer has misplaced it or has lost it entirely. Keeping the gift card active ties funds up indefinitely and prevents the consumer, business, or the state from closing out the books on the transaction.
Let’s compare our open loop (can be used anywhere) Create-a-Card or Predesigned gift cards to closed loop gift cards that can only be used at the issuing store. I’ve always told people that those gift cards are free because they make money for the merchant. For example, if a customer receives a gift card to Target, he is likely to go to Target and overspend the dollar amount of the gift card. This gives Target a chance to “woo” the customer and turn her into a loyal, returning customer. The other alternative is that the customer never redeems the Target gift card. In which case, that money goes to the merchant. Is that right?
DB: That is correct that the Target gift card can only be used in a Target retail or online store. Closed loop gift cards are subject to the same rules and regulations as open loop cards, but some states have enacted more restrictive rules on expiration. For example some states prohibit any expiration date. The Visa gift card can be used at any merchant worldwide that accepts Visa. The customer can’t “shop Visa” or “shop GiftCards.com” like they can shop Target. So those of us who are involved in providing these open loop gift cards make money on the front-end or back-end. We can’t profit from selling merchandise like a store or restaurant would. In essence, providing the Visa gift card is our business. It costs us to provide that service and therefore is not free.
GCG: Lastly, when I pay for merchandise or services with a Visa gift card, I understand the merchant also pays a transaction fee. Is that right?
DB: Yes, but they are paying the payment processing fee, just as we do when a customer pays for merchandise with a credit or debit card on our website. This is the interchange fee that the merchant is charged by their payment processing service whether the customer pays with a credit, debit, or open loop gift card. The fee varies by card and by the item purchased, but is essentially one of the costs of business the merchant signed up for when deciding to accept credit and debit card payments. This is the back-end side of making an open loop gift card program profitable. The credit card company, the sponsoring bank, and GiftCards.com all get a percentage of that interchange fee charged on the sale.
GCG: This is a great help. Thank you for breaking it down for us. The fees thing has always been a mystery to me—not that I don’t understand it, but that I don’t understand why people have a problem with it. I guess it goes back to my banking days when customers complained that big banks wouldn’t let customers from smaller banks use their ATM’s without paying a fee. The company who built the infrastructure, deployed the technology, and maintains the system has to get paid for doing that. The rest of us have to pay rent (in some way) to use it. I think open-loop gift cards work the same way. If you want a gift card that is convenient and can be used anywhere, then you have to pay a little extra to take part in the process. An extra few dollars to have a personalized photo added, custom messages embossed, and delivery to your doorstep is a deal to me.
Now the most important question of them all: What’s the best gift you’ve ever received?
DB: A GiftCards.com Visa gift card personalized by my sons with a picture of our 1st place winning barefoot ski boat. That card brings many memories with it and I still have it today.