The electronic marketplace for gift cards

About a month ago, I did a post on Plastic Jungle’s announcement that they were working with First Data, who runs a number of retailers gift card back end networks, to be able to start processing secondary gift card sales electronically rather than by mail, thus making the process more efficient and easier for customers.  I also theorized that retailers were willing to get involved in this because they realized that the days of free money via gift card breakage (what customers don’t spend) were over because states are now aggressively going after the money via escheat (unclaimed property) laws.  Retailers probably realize they have much more to gain by helping consumers spend the gift cards, because people often spend more than the face value of the gift card when they do visit the store, aka, the bump in sales.

Now, another gift card company, Wolfe, LLC, owners of the GiftCards.com and Swapagift.com sites, is also launching an electronic gift card secondary market they are calling GiftCodes.com.  They are also working with First Data and their FAQ pretty much solidifies my theories around why retailers are willing to let secondary gift card markeplaces handle their cards electronically, as they are pitching both lower escheatment and increased sales as retailer benefits:

Increase Sales / Reduce Escheatment: We enable motivated buyers to purchase your gift card and quickly spend those funds – putting cash in your register and off the balance sheet.

Since Wolfe, LLC’s GiftCards.com business is familiar with  the production of physical gift cards, while the GiftCodes.com site doesn’t say so explicitly, I suspect they might also be interested in issuing physical gift cards as well as electronic ones; not everyone will be comfortable with an electronic only gift card.

However, as we move closer to the reality of electronic processing in the secondary gift card market, I can’t help but wonder if things might take a different turn.

As GiftCodes.com shows, the perception is that retailers get a bump in sales over the gift card face value of 20-30% when the gift card is redeemed.  However, that doesn’t translate directly into profits as this represents sales, not profits.  This helps explain why retailers don’t offer their own gift cards at a discount; the bump in sales, while nice, just isn’t worth offering gift cards at 10% off.  They prefer to do this with discounts on select merchandise at select times … when it makes sense to them.

So why don’t retailers offer to buy back unwanted gift cards themselves?  Obviously the secondary marketplaces are making money, or have the potential to make money, otherwise there wouldn’t be 30 sites that offer some kind of secondary buy/sell/trade services, and venture capitalists would not have put almost $14 million into Plastic Jungle.  If secondary marketplaces are willing to buy your Target gift card for 20% less than its face value, surely Target themselves could offer to buy it for 15% off of face value and make more than the sales bump would get them.  It is hard to imagine major retailers like Target or Home Depot ignoring the fact that secondary gift card marketplaces are making a lot of money off of their gift cards, especially when the retailers themselves could do it easier than anyone else.  Remember, we are talking about almost $100 billion in gift cards that are sold each year.  For some retailers, gift card sales amount to hundreds of millions.  Surely the amount of money on the table is enough to justify a good sized retailer getting into this business for their own cards.

I can certainly thing of some reasons against retailers doing this, the number one reason that customers may see this as an affront to fairness as they might feel they should be getting 100% back from the retailer.  Another is whether there might be some federal laws that prevent retailers from returning anything except 100% of the money to back to customers if they return any at all through a scheme like this.  But I am sure retailers might collectively get around such legal issues by creating an industry sponsored official gift card cash out site, much like airlines banded together to create Orbits when other travel sites were starting to get a little too powerful.

This should be interesting to watch.  If this does happen, it will be a good thing for consumers.  I personally would gladly take 90 cents on the dollar cash for a gift card I would never use.


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