Retailers are learning that they can use prepaid cards as a personalized product, which opens up many opportunities for the issuers. That’s just one of the many trends Javelin Strategy & Research expects to unfold next year.
Gift cards are generally an anonymous product, but companies have learned that digitizing them can result in much more personalization. If issuers make a prepaid card digital, it can be the trigger point for much fuller engagement. Once you digitize that gift card, issuers can track where the funds are spent and what gets bought.
The Rise of Gift Cards
Retailers already know a lot about their customers through their loyalty accounts. They know if someone normally buys standard-priced items at Target but uses a gift card to buy a luxury item.
“People with gift cards often use them differently from standard payment methods,” said Jordan Hirschfield, Director of Prepaid at Javelin Strategy & Research and the author of the recent 2024 Trends and Predictions: Prepaid Payments report. “There’s a great deal of data that stores can glean from that.”
There’s a similar dynamic at play with prepaid cards that aren’t retail-related, such as health savings account (HSA) or flexible savings account (FSA) cards. Digitizing them allows the issuer to know where and when that money is being spent and get greater interaction with the card’s constituency.
Building on that user engagement is a trend that is likely to take off. Javelin’s research shows that a little less than 30% of prepaid cards are digital right now, but that figure is expected to rise to 50% by the end of the decade.
“Our recommendation is that when you use prepaid to engage your audience, give them the incentive to digitize it to make it a more personal tool,” Hirschfield said. “Let’s say you’re at your local drugstore to buy a greeting card and the gift cards are right there. Right now, it’s so easy to put the gift card into the greeting card, but I think we’ll see new ways to digitize that. You might have a code to scan and then enter a phone number and email address, but it’s not going to be a physical card.”
Digitizing also helps with safety and security issues. When a card is digitized, it becomes much easier to protect from many of the current theft and fraud issues. Digitized cards are susceptible to large-scale IT security issues, but physical cards fall victim to a range of criminal activity, including organized crime and petty theft.
For HSA and FSA and other non-gift prepaid cards, lost card replacement becomes less of an issue when they’re digitized. Issuers can also save on the physical cost of producing and mailing the cards.
California came very close to banning plastic retail gift cards this year, simply to cut down on the environmental impact of all that single-use plastic. The governor vetoed the measure, over concerns about how it would affect small businesses. But that type of legislation is likely to come back at some point. Future prepaid cards could be constructed out of recycled materials or cardboard, but no one wants to start producing different stock of gift cards for different states to comply with local laws. Digital cards make a lot more sense.
Taking Advantage of Shifting Liability
Another trend Javelin anticipates concerns the back-end, technical methods of how gift cards are used. When a gift card is purchased, a liability is created from the retailer’s perspective. Its accounting statements have to reflect that it has a certain number of unused gift cards, totaling a certain dollar amount, on the market.
These cards are a liability until they’re used, at which point the transaction turns them into revenue. Until then, a card is simply a promise to pay. Some upstart groups have been taking on that liability, selling the gift card and holding the liability as a third party. This allows the merchant to enjoy the revenue from the gift cards without carrying the liability, which lets them employ different financial planning strategies for those assets.
Distressed retailers may want to assure their customers that if they buy a gift card, it will still have value even if the stores go under. When Bed Bath & Beyond entered Chapter 11 bankruptcy, its gift cards were unsecured liabilities and one of the first things that got wiped away in the bankruptcy. They were worthless.
It offers a great deal of financial flexibility if a retailer can say another company holds that liability. If the company goes under, you can transfer that credit, in a sense, to another organization.
Multi-Retailer Cards
Multi-retailer cards, which present great marketing opportunities, are another growing trend.
“There could be a dinner-and-a-movie card, combining a movie theater chain with a restaurant chain, and the buyer can use it at both,” Hirschfield said. “These themed cards match the desire of both givers and receivers and gift cards. According to our research, givers of gift cards enjoy retail gift cards because it feels more personal.”
But receivers of gift cards want Visa and Mastercard gift cards because they want to choose what they use the cards for. These multi-brand cards offer a more personal gift for the giver and more choice for the recipient. Hirschfield expects the multi-brand cards to grow at a stronger pace than the regular cards.
Prepaid is a payment sector that is battle-tested through any kind of economy. Some are up and down depending on how the economy goes, but overall, Hirschfield sees a resilient set of products designed to withstand any kind of turmoil.
“People are worried that inflation is going to stop people from shopping, and that will impact gift cards,” Hirschfield said. “But we have found that both gift cards and general shopping habits aren’t affected by inflationary pressures. Most people spend that gift card within 30 days. There’s a fallacy that gift cards sit unused for months, but in general, our research shows that people are going to spend more than that gift card is worth within one month and generally in one visit.
“That stability is going to be a benefit to really across the payments infrastructure because people will be able to plan better. Combined with strategies like digitizing and creating better loyalty platforms, issuers can make sure that people do use their cards in a less anonymous way.”