Part II - The Australian gift card market



The popularity of gift card products appears to provide some measure of the benefits of their use for both consumers and gift card issuers. Gift cards are a market response to the consumer's need to fulfil their gift giving obligations and the issuer's desire to capture consumer spending. In this regard, many gift card transactions are mutually beneficial to both the purchaser and the issuer. Although there appears to be some risk that the receiver of a gift card may be unable to redeem its full value, overall, gift cards appear to provide significant benefits to consumers.

This section will outline features of the Australian gift card market and provide an explanation as to why gift cards have become popular for Australian consumers who purchase or receive them.

Features of the Australian gift card market

As gift card use has increased, the Australian gift card market has become more sophisticated. As the market has expanded, new commercial opportunities have become available and new market participants have emerged. While gift cards are predominantly marketed for the purposes of gift exchange, they are being increasingly used for store promotions and to satisfy other marketing objectives.¹³ This section will examine the key definitions used to describe features of the Australian gift card market, its main participants as well as the trends and dimensions that characterise it.

Key definitions

For the purposes of this review, a gift card is a form of credit that is designed to be purchased by one consumer (the purchaser) and given to another (the receiver). When provided in the form of a plastic card, the receiver of a gift card is able to access and spend the value associated with the device by swiping the card at a point of sale similar to the use of a debit card.

Gift cards make use of a range of forms and technologies. CCAAC does not seek to define gift cards by these attributes. While physical gift cards appear to be the most commonly used gift card form, developments in technology have allowed gift cards to be electronically delivered to the recipient via SMS messages, email or by smart phone applications. Some businesses may also provide gift cards in more traditional forms, including hand written certificates.

For the purpose of the review, gift cards do not include other forms of prepayment that are not intended or designed to be purchased, most commonly, by one person to be given to another person as a gift. For example, the review has not examined prepayment arrangements for mobile phones, internet access and other utility services, or group buying websites.¹⁴

There are, however, a range of products that may be purchased for personal consumption or as a gift. For example, credit for music download services or cinema vouchers may not be specifically marketed as gifts, but are often used for this purpose. These products are not excluded from consideration to the extent that the principles behind CCAAC's findings are capable of applying to these products.

The term 'breakage' is often used to refer to gift card balances that go unredeemed. This can be calculated for a specific gift card or for the market more broadly. Breakage represents a transfer of welfare from the consumer to the gift card issuer. When expressed as a percentage of total gift card sales, it can provide some measure of the level of consumer losses in the market.

CCAAC is aware of reports of industry wide breakage ranging from 3 to 30 per cent with some individual gift card issuers reporting breakage of less than 3 per cent. Upon investigating the level of breakage in the market, it would appear as though figures placed at 30 per cent are speculative and are not based on data relating to the Australian market. Industry analysts have indicated that the average breakage for the industry is between 6 and 7 per cent but that breakage rates can differ significantly depending on the market segment and the average transaction value.

Gift card types

Gift cards are generally available in two forms including:

1. closed loop gift cards that are accepted or honoured at a single retailer or group of affiliated merchants (such as a chain of book stores or clothing retailers) as payment for goods or services; and
2. open loop gift cards that typically rely on a payment system (such as Visa or MasterCard) that can be widely used at a wide variety of retailers that accept or honour cards displaying that network.

Closed loop gift cards are more popular within the Australian market, with some estimating that open loop cards make up less than 10 per cent of gift card sales.¹⁵ By contrast, in the United States open loop sales are estimated to account for between 20 and 25 per cent of total gift card sales.¹⁶

Open loop gift cards have unique characteristics and are usually issued by financial institutions. As such, these cards may be subject to rules that do not apply to closed loop gift cards. Gift cards issued by shopping centres may to some extent, share some characteristics that are common to open loop gift cards. Shopping centre gift cards are redeemable at participating retailers within a shopping complex but unlike open loop cards, cannot be used more broadly. The review has examined issues that may be common to both closed and open loop gift cards.

Participants in the gift card market

There are a number of participants in the gift card market in addition to consumers who give and receive gift cards as illustrated in Figure 2. These include:

• Gift card issuers issue store credits and are ultimately responsible for honouring the redemption of issued gift cards. This is most commonly a retailer, a shopping centre or a bank. They may use the services of a gift card program operator to facilitate their gift card program.
• Gift card program operators maintain networks and information systems required for the use of gift cards. Some gift card issuers have commercial arrangements with gift card program operators.
• Secondary market participants are involved in the trading or distribution of gift card products. Research identified a small but growing 'second hand' market for gift cards in Australia. For example, some websites allow gift card holders to sell their gift cards for typically between 60 and 90 per cent of the original purchase price.¹⁷

Figure 2: Gift card market participants

Trends and dimensions

While gift cards are a relatively new product, their popularity has grown rapidly. Paper gift vouchers and certificates have a longer history in the Australian retail market; however, plastic gift cards have become more common in the last decade¹⁸. Gift cards generally contain information on a magnetic strip which is readable by a retailer's point of sale processing systems. Gift card issuers are attracted to electronic gift cards as they are easy to use and difficult to forge. It would appear as though those with the technical sophistication to counterfeit gift cards are drawn to more lucrative targets such as credit cards.¹⁹ Gift cards do not typically hold any value until they are activated upon purchase.

Research and data on the Australian market is limited, however, submissions to the Issues Paper estimated the size of the Australian gift card market at between $1.5 billion²⁰ and $2.5 billion²¹ annually. Also, in a joint submission to CCAAC the Australian Merchants Payment Forum (AMPF) and the Australian Retailers Association (ARA) submit that the total value of gift cards offered by six of its major members was approximately $1.25 billion in 2011.

According to an online survey of 1295 adults conducted by Retail Decisions Australia, 62 per cent of respondents had received and 69 per cent had purchased a gift card in the last 12 months.²² This same research indicated that the average value loaded on a gift card was $57 and that categories such as clothing, household goods, and entertainment were popular purchases for gift card holders. According to a submission provided by the Australian National Retailers Association (ANRA), out of a survey of 1000 consumers, 20 per cent of respondents indicated that the bulk of their Christmas spending would be on gift cards. This is an increase from previous years and suggests that gift cards are becoming a more popular gift choice at Christmas.

Gift cards also appear to be a popular choice when selecting gifts for young people. In survey results provided by a submission made by the Australian Youth Forum, 87 per cent of respondents²³ had received a gift card in the last 12 months. The survey also revealed that some young people use gift cards in lieu of a credit card, and that in some circumstances, a gift card is preferable to cash as it provides greater control over what it is used for.

The gift card market has expanded substantially since the introduction of electronic gift cards. According to a submission made by the Blackhawk Network, a global third party gift card distributor, industry growth in Australia has averaged approximately 25 per cent over the last 5 years.

Findings

Evidence of a vibrant Australian gift card market demonstrates that gift cards are a popular choice for consumers and that many Australian retailers benefit from offering gift card products. Estimates provided in submissions to the Issues Paper suggest that the gift card market can be valued at between $1.5 to 2.5 billion per year. However, CCAAC acknowledges the difficulty in estimating the size of the gift card market accurately. In addition, it is evident that the market is growing and that new gift card forms and functions are emerging.

Gift cards and consumer welfare

A number of submissions, including those from both consumers and gift card issuers, identified a number of ways in which gift card use can impact on consumer welfare. Here, welfare is considered to be a measure of the degree of benefit that consumers gain through engaging in some type of activity, for example, giving or receiving gifts.²⁴ Some submissions commented on the positive benefits associated with the receiver's freedom to select a gift of their choice while others commented on the negative consequences of where a consumer has been unable to redeem a gift card. According to survey research by Retail Decisions Australia, 40.5 per cent of respondents had received gifts that were not wanted or needed.²⁵ From this, it would appear as though gift cards have the potential to be welfare enhancing when compared with alternative non-cash gifts. However, gift cards do not offer the same flexibility as cash and the receiver must exercise a higher degree of care to ensure that they are able to redeem its full value.²⁶

More generally there is a significant body of economic literature that deals with the issue of consumer welfare when gifts are exchanged. Notably, this work includes an assessment of the welfare losses associated with receiving non-cash gifts.²⁷ Welfare losses are described as being equivalent to the additional benefit that would have accrued to the receiver had they been able to choose a gift of the same value.²⁸ Through this lens, unless the gift giver selects the very item that the receiver would have otherwise purchased with an equivalent amount of cash, the non-cash gift is revealed to be an inferior choice.

In some circumstances, the giver may be able to choose a gift that would be preferred by the receiver as they may be unaware of the product or the benefits which they provide. However, most gift givers choose gift card products because they are uncertain of the receiver's preferences.

Giver and receiver benefits

Although useful, analysing consumer welfare through the receiver's benefit alone does not capture the full story. Gift exchanges exist as part of a social obligation as well as a desire to maintain good relationships with friends and family. While gift giving may be a benevolent act, there may also be a private benefit that accrues to the gift giver.

Gift giving can occur because the giver values how the receiver values the gift. For example, a grandparent may be glad to know that their grandchild enjoys a gift that they have been given. Altruism can be formally presented through models where the welfare of the gift giver increases with the welfare of the receiver.²⁹ Through these models, gift giving is seen as an outcome of welfare maximisation where the marginal benefit gained through another person's use of the gift is higher than the marginal benefit gained through the givers own use of the money required to purchase the gift. Here, the motivation behind giving is driven by the welfare of the receiver. Where this is the case, a non-cash gift may continue to be an inferior choice of gift where the giver is unaware of the preferences of the receiver.

Constrained choice

There are circumstances where non-cash gifts may be valued by the giver despite constraining the choices available to the receiver. The gift giver may be motivated to select a gift based on other attributes that are contingent on the nature of the gift. For example, where a parent purchases an educational book for their child, they may not only benefit from the child's own enjoyment of the book, but they may also benefit because they value the book's educational properties.

Similarly, when purchasing a gift for a partner, or potential partner, there may be a signalling benefit to the giver.³⁰ The act of choosing an appropriate gift may signal to the receiver both the willingness of the giver to invest effort on behalf of the receiver while also indicating what the giver knows about the preferences of the receiver.³¹

While cash may offer greater flexibility in terms of the choices available to the recipient, it may be seen as impersonal and may fail to satisfy some of the other objectives of gift giving. Gift cards assist the giver in satisfying the dual objectives of providing choice to the receiver, while satisfying other objectives that may be unrelated to the receivers benefit. For example, a parent may wish to provide their child with a gift card from a store where they know their child can choose a gift that they enjoy while sufficiently constraining their choice to ensure that an appropriate gift is chosen.

Gift cards as a market response

At face value it is difficult to assess why some consumers prefer gift cards to cash. While gift cards offer the receiver some choice, they offer less choice than if cash were given. Survey research by Retail Decisions Australia found that up to 70 per cent of consumer respondents, as both
givers and receivers, believed that gift cards were better than cash while 83 per cent indicated that the best feature of gift cards was the choice that it offered.³² This seemingly contradictory result is perhaps best explained as a consequence of the complex incentives that drive gift exchange. This research also found that 73 per cent of respondents agreed that gift cards were the best option when they did not know someone well and that 76 per cent of respondents gave gift cards because they were a convenient choice.

Findings

CCAAC finds that gift card products, when used as intended, have the potential to provide significant benefits to Australian consumers. CCAAC encourages policy makers to ensure that any new policies relating to gift cards do not restrict consumers from benefiting through their engagement with the Australian gift card market.

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¹³ For example, complimentary gift cards are used by some retailers to reward customer loyalty.

¹⁴ The gift card review may concern these products to the extent that they share some of the core features that characterise gift card products.

¹⁵ Australian Retailers Association and Australian Merchant Payments Forum

¹⁶ Australian Retailers Association and Australian Merchant Payments Forum

¹⁷ For example, see the Card Limbo website

¹⁸ Blackhawk Network, pp 3-4.

¹⁹ JC Williams Group 2004, Gift Cards Are Here to Stay, Available on the

J.C.Williams Group website (accessed 22 May 2012).

²⁰ Mihm, U 2010 (Updated 20 April 2012), Gift Card Traps, CHOICE. Available on the

CHOICE website (accessed 22 May 2012).

²¹ Blackhawk Network, p 4.

²² Horne, D 2010, 'Retail Decisions Prepaid Market — the Australian Gift Card Market', Retail Decisions and Global Prepaid Exchange

²³ Of the respondents to this survey, 73 per cent were aged 24 years old or younger.

²⁴ As examined in Blackordy, C and Donaldson, D 1988, 'Cash Verses Kind, Self-Selection, and Efficient Transfers', The American Economic Review, Vol 78 No 4, pp 691-700.

²⁵ Horne, D 2010, 'Retail Decisions Prepaid Market — the Australian Gift Card Market', Retail Decisions and Global Prepaid Exchange.

²⁶ A comparison of gift choices can be found at Appendix 4.

²⁷ Waldfogel, J 1993, 'The Deadweight Loss of Christmas', The American Economic Review, Vol 83 No 5, pp 1328-1336.

²⁸ See Appendix 5 for a more detailed explanation.

²⁹ Becker, G 1981, 'Altruism in the Family and Selfishness in the Market Place', Economica, Vol 48 No 189, pp 1-15.

³⁰ Mankiw, G 2006, 'The Economics of Gifts', Greg Mankiw's Blog. Available on the

Greg Mankiw's Blog (accessed 22 May 2012)

³¹ Spence, M 1974, Market Signaling. Cambridge, MA; Harvard University Press.

³² Horne, D 2010, 'Retail Decisions Prepaid Market — the Australian Gift Card Market', Retail Decisions and Global Prepaid Exchange