Gift Cards
As demand for these prepaid cards grows, marketing and pricing strategies emerge.

By Karen Bankston

Editor's note: The following first appeared in the March 2006 issue of Credit Union Management.

Last February, the lobbies of State Employees Credit Union were decked out in red gift bags. In June, members were greeted by employees in wedding veils or mortar caps. Throughout the year, the Lansing, Mich., CU offers visual reminders of a gift idea for whatever occasion members are celebrating. For the 88,000 members of $708 million State ECU, that solution is a gift card. Members can purchase an "instant issue" gift card at any branch or order a personalized card with a customized message on the CU's Web site.

Members can order gift cards with values ranging from $10 to $500 on plastic in bright holiday, birthday or all-occasion gift-giving designs. As appealing as a personalized card might sound, State ECU members seem to prefer the instant gratification of buying at a branch. Over the 2005 holiday season, the CU sold 1,175 cards at its branches and 50 personalized gift cards over the Internet, reports Janet Robert, credit card operations manager.

According to industry statistics compiled by Deluxe Financial Services, prepaid gift card sales were a $72 billion business in 2003, and the share of gift cards issued by financial institutions is expected to rise from 7 percent in 2003 to 35 percent by 2007.

In introducing gift cards as a member service, marketing and pricing strategies are crucial considerations in determining what volume of business a CU can expect. Actively promoting the advantages and variety of uses for gift cards can make them perennial favorites. Depending on how you price them, gift cards may also create a steady revenue stream or serve primarily as a valued member service and source of referrals.

Power of Plastic
State ECU launched its gift card program through PSCU Financial Services, St. Petersburg, Fla., in November 2004 after receiving repeated queries from members. The CU estimated that it would break even on the new service in a year, but it took only six months to sell the 2,800 cards required to recoup its investment.

In addition to lobby displays and promotions, State ECU markets the cards via online banners, in member newsletters, and in statement inserts and brochures.

The cards have proved especially popular with grandparents, Robert says. "We had one couple come in and buy 20 cards for all their grandkids," she notes. "Lots of grandkids just love getting these cards. It's cool to make a purchase with them, and they're savvy enough to know how to go on line and check their balance and see where they've made purchases."

Desert Schools Federal Credit Union reports a similar demand from its members. The $2.5 billion Phoenix CU with 310,000 members markets the cards as part of an overall campaign emphasizing the convenience of CU services and delivery channels, says Chief Information Officer Ron Amstutz, a CUES member.

Desert Schools FCU worked with Visa to put together its program in October 2004. In its first holiday season, the CU sold about 15,000 cards in branches and on line. It fell just short of its goal to sell 20,000 in the 2005 winter gift-giving season, with sales totaling 19,262 in November and December.

In addition to gift giving, the CU has come up with a niche marketing concept for the cards, offering them as an alternative to parents inquiring about opening a checking account with debit card access for their teenagers. Desert Schools FCU plans to launch a checking account for young members ages 13 and up, but in the interim, it has been offering the cards to parents to help their children learn the basics of making debit card transactions and managing their financial resources.

The gift cards are also popular with employees, as Desert Schools FCU found when it gave them to its 1,100 employees as a holiday gift. The CU also issues gift cards to employees as incentives in sales promotions throughout the year, Amstutz says.

Popular With Business Members
Members Credit Union, Cleburne, Texas, had been looking into the possibility of offering payroll cards as a business service when several of its business members began asking if the CU offered gift cards. That's when Ron Fox, president/CEO of the $29 million, 62,000-member CU, decided that gift cards would be a good first step toward offering other stored-value card products.

Members CU signed on for an off-the-shelf gift card solution from Fiserv EFT, Brookfield, Wis., which allowed the CU to get up and running with an in-branch solution by Nov. 1. The gift cards were popular with business members, Fox notes. One member, an insurance broker, purchased 51 cards for employees and clients. And when the only other financial institution in town that sells gift cards ran out, the CU picked up a little business from non-members as well, he notes.

Members CU not only markets the gift cards, but uses them as marketing tools for its other products and services. For example, it offered $100 gift cards to members who refinanced a car loan of at least $10,000 with the CU. With the Members CU logo prominently displayed, the cards make nice promotional gifts for members and tokens of appreciation for volunteers and community members who lend the credit union a hand. For example, Fox gave a gift card to a local minister who said the invocation for a recent grand opening of a new office. 

Fiserv's off-the-shelf product, in which CUs function as gift card retailers, is one of two main options Fiserv offers clients looking to introduce gift cards, explains Vince Forte, SVP/product development. The other is a customizable solution in which CUs become the card issuers and thus have more revenue potential.

The up-front cost differential is that the off-the-shelf product costs in the hundreds of dollars to implement, while the customizable solution would run in the thousands, he says. One option might be to begin with the off-the-shelf product to test demand and decide whether to expand into the customizable system, Forte suggests.

Pricing Strategies
Depending on the prices the CU establishes for its gift cards, they may or may not become significant moneymakers. For example, Fox estimates that Members CU cleared about $650 from selling 220 cards over its first holiday season. "We sell them for $3.95 each, and we got a little push-back on that price," notes Fox, who purchased eight cards himself as Christmas gifts. "Especially when members are interested in buying several at once, it's hard to justify overpricing them."

The value to the credit union is not just in fee income, but in member goodwill as well, Fox adds. "We had one business member who was so impressed by how easy the process was, he told all his friends. I'm sure we got a few referrals based on just that one transaction."

State ECU offers its instant issue cards at $5.95, or $2.95 each when members purchase five or more. Ordering a personalized card on line costs $5.95.

"We did have a few people balk at that price," Robert says. Now that the program has paid for itself, she is working with the credit union's accountants to establish a new, lower price structure.

In addition to fee income from initial sales, credit unions also stand to gain the same level of interchange income they get when debit cards are used. Some financial institutions levy a monthly fee if a balance remains on a gift card six months or a year after purchase (some state have legislation that does not allow this to begin until two years out). And they charge a fee for issuing replacement cards.

Desert Schools FCU offers its gift cards at $2.50 each in its branches and at $3.50 each on line for cards with values of from $20 to $500. Members may also complete a bulk order form on line to purchase from 20 to 500 cards at $1.95 each; the cards are delivered within two weeks, Amstutz says. At those prices, the gift cards are not big moneymakers, he adds, but the fee income does cover the 15 to 20 minutes it takes to process each transaction and the gift cards do bring members into the branch—and not to another financial institution offering the cards.

Disintermediation, or keeping members from going elsewhere for this service, is a key reason for offering gift cards, Forte suggests. "Big financial institutions, community banks, even malls are offering gift cards. It's becoming a more and more commonplace service."

John Barbella, director of business development for Deluxe Financial Services, counts member retention as the primary benefit to CUs of offering gift cards. Deluxe, St. Paul, Minn., offers a turnkey Web-based and, more recently, in-branch solution for issuing gift cards.

Timing is important when introducing gift cards to members, Barbella says. CUs hoping for a big holiday season should introduce the service in September or October to great fanfare, marketing gift cards in branches and on line, and complete staff training early as well, so by the time members are ready to start shopping, the credit union has cornered that gift card market.

Operational Issues
As with any new product or service, it took some merchants a while to get the hang of this new payment method, but those early glitches seem to have been resolved. Over the 2004 holiday season, State ECU discovered the need to educate merchants via the gift recipients about how to process some transactions, Robert says.

After receiving several calls from members, she did some field-testing of her own soon after the CU introduced its gifts cards. She discovered that some vendors were perplexed about whether to run the charge as a debit or credit transaction. In addition, members reported that some restaurants ran into problems when they tried to charge a bill that exceeded the card's value and that it was easier to pay at the register than at the pump when buying gas.

For the most part, those problems were growing pains that have largely been worked out, she notes. After the 2004 holiday season, State ECU employees fielded hundreds of calls reporting problems with the cards. A year later, they received only three calls.

The major debit and credit card processors did have some issues to resolve in processing purchases involving a cash payment in addition to a gift card's value, Barbella says, but those problems have been resolved and gift cards are accepted almost everywhere credit cards are honored.

For Desert Schools FCU, the main operational issue early on was streamlining the information employees record when selling gift cards to reduce the time needed to process each transaction, Amstutz says. With that task accomplished, the credit union is looking to substitute gift cards for other products. For example, the gift cards have such wide appeal that Desert Schools FCU has substituted them for the American Express gift checks it used to sell. In the near future, the credit union hopes to be able to market gift cards as a replacement for traveler's checks as well.   

Down the road¿perhaps even by the next holiday season—Desert Schools FCU hopes to able to offer a reloadable gift card to members. Several parents have requested this as a means of paying their kids an allowance, Amstutz says. Their children would have access to a small amount of cash replenished by parents transferring money onto the same card each allowance day.

In a related service category, Fox anticipates an emerging demand among employers for payroll cards, which could replace the traditional paper check process. When the interest in that service arises among the businesses it serves, Members CU plans to be ready to offer payroll card services.

Karen Bankston is a free-lance writer and editor and the proprietor of Precision Prose in Stoughton, Wis. She writes about credit unions, business and technology.