The Gift Card Sector Comes of Age. Part 5 of 5: Disruption – The Slow Rise of Pre-paid Cards as a Financial Force

In this five part series, we have referred to gift cards and pre-paid cards interchangeably when traditionally there have been key differences – most notably that gift cards are generally one-time use, have no/few fees, and are not re-chargeable. But this reference was deliberate as emerging gift card solutions are empowering retailers to compete at the pre-paid card level. Which in turn enables retailers (many of whom already offer financial services) to become even more bank-like, but at lower cost and a more holistic view of the lifetime customer.
In this last post, we will look at two of the companies contributing to this shake-up – an emerging start-up featured as one of the 2015 Money20/20 Launchpad companies – Slide – and an established and rapidly growing alt fin services provider Cards.com.
Gift/Pre-paid Cards Will Permanently Replace Some Bank Accounts.
As previously discussed in this series, for Millennials and those entering the U.S. financial system for the first time, there is no really compelling reason to have a bank account. Even with rising interest rates, the return on holding your money in a bank is magnitudes lower than any number of alternative investment vehicles. Particularly for younger consumers who have low/no savings and high debt, using financial services that are low cost in absolute terms – not relatively speaking –are a priority. Dwolla and other low cost non-bank alternatives will likely see a spike in users in the coming years, particularly in the advent of a recession.
Slide: Gift Card Management for Consumers, A Platform for Retailers
Into this environment where many can “take or leave” the bank, there are increasingly viable, highly usable and even fun alternatives. Seed-funded Slide made its fintech industry debut at last year’s Money 20/20 conference, debuting at the show a suite of mobile gift card management features that presents the consumer user with the ability to manage their gift cards all in a single wallet app. As compelling from the retailer’s perspective, the company enables the consumer to buy – and reload – their gift cards in a theoretically infinite number of designs, adding a level of engagement with the brand not available on typical gift card sites, which tend to present brands in a mass market, commoditizing the value of the gift card itself and burying the brand in a sea of logos. The company’s plans include adding the ability to instantly trade and transfer gift cards, placing the start-up in the realm of P2P payments.
What’s interesting about Slide are its initial users, who are not so much the typical tech early adopter, but who are more representative of the general population, such as mothers. According to Slide co-founder and CEO Mike Morris (formerly with American Express), “Slide users come from pretty much every corner/pocket across the country who share such common pain as managing their gift cards.”
Retailers, some of whom have previously declined to have their gift cards sold online, are signing up with Slide. Morris observes that “The e-gift card industry is growing by 44% year-over-year, and merchants seem to be waking up to the fact that their gift card programs are generally underutilized and can be leveraged to engage and delight customers in new ways through digital experiences.”
Card.com: Branchless Bank with $450 Million in Deposits – and Counting
Last fall, CARD.COM announced $9 million in growth funding to expand its mobile tech offering and to move from word of mouth to marketing-driven customer acquisition. With over $450 million in deposits to date, CARD.com has clearly made in-roads into its goal of becoming a leading non-bank financial institution.
While CARD.com has no branches, 85% of their customers use their mobile app monthly, compared to the banking industry average of 30%. The remaining percentage use the service via the company’s website. Significantly, as a SaaS (software-as-a-service), the company can scale up quickly to meet demand. Where it has run into some issues, and where it plans to invest significantly, is in the area of real-time customer service. New service introductions can also be introduced relatively quickly as compared to the banks, with CARD.com set to launch sub accounts (for spouses, teens, domestic helpers, etc.). Much like Slide, CARD.com is seeing significantly traction amongst moms. And compared to non-card focused branchless banks GreenDot and NetSpend, CARD.com reports that over 85% of their deposits are direct deposits of paychecks (as compared to a 30-40% range) – and their number of deposits is significantly larger, despite having only launched three years ago. As a point of comparison — the mobile banking sector today represents only 2 million accounts out of a total 14 million (inclusive of those doing mobile banking via branched banks) according to the Digital Bank Report. CARD.com in comparison has more than 600,000 accounts.
The main driver behind this success? Customized cards and attention to serving the customer, even if that customer is unbanked. The service offers “Fair, Fashionable and Fun online prepaid card solutions” and treats its customer “as an individual who is cool like James Dean, sultry like Bettie Page or a cat-lover with a heart of gold. CARD.com lets you represent the things you care about, with awesome perks along the way.” Clearly not your average bank.
Going into 2016, the remaining stigmas against gift cards will be further chipped away as the sector matures beyond paycheck deposits and retail goods. In October 2015, Stockpile.com raised $15 million in a Series A round from superstar VC Sequoia Capital and rockstar actor Ashton Kutcher, amongst others. The service will enables consumers to buy company stock via gift cards at retail locations, helping to democratize and demystify investments (not good news for the few remaining retail Wall Street brokers).
Suffice it to say, gift cards are at the least hot. And on a relatively slow but steady trek towards true consumer financial revolution.
 

The Gift Card Sector Comes of Age. Part 4 of 5: Sector Outlook – Gift Cards as Alternative Banking

In part 3 of this gift card series, we looked at the business drivers behind increased consumer adoption. In this post we will further examine one of these drivers – the bundling of bank-like services into the pre-paid card relationship as an emerging consumer financial paradigm. This courting of the un-banked and under-banked by retailers and other non-bank entities represents an arguably permanent shift away from the traditional retail bank as consumers’ primary financial resource.
In the past, the “un-banked” and “underbanked” have referred to new country arrivals and those otherwise disadvantaged in the U.S. financial system – minors too young to have a checking account, young adults with no credit history, people unable to maintain the minimum balance requirements for a checking account, and so on. People alternatively have treated this issue as a problem for charity, or as a way to take further advantage of a group with few financial choices (i.e. predatory financial services — payday lenders and other consumer “subprime” credit providers with double-digit interest rates, low limits and high fees). But as bank fees rise (without the needed longer bank branch hours and other services/features needed by many people – underbanked or no), alternative banking is becoming a smart choice for the informed consumer across demographic and economic segments.
In this environment of disillusionment with the banking system (alt financial services users say that there are issues with the lack of “service,” “trust,” and “respect” from traditional institutions), more people are turning to alternative financial service products – and the market for these services is growing. A 2011 Federal Deposit Insurance Corporation (FDIC) survey revealed that 25% of all U.S. households used an alternative financial product between June 2010 and June 2011. The study also found that non-bank transaction services (i.e. non-bank money orders, check cashing and remittances), were used by 39% of U.S. households.
Fast forward to 2015, and the percentage of alternative financial service users amongst the low and middle classes has grown to 39%. While new payment models have been introduced to serve the involuntarily underbanked, companies like PayNearMe, which enables users to pay for goods and services online and in-store with a card backed by cash paid to a physical outlet – have experienced issues with a fractured market for its services as well as logistical, even store security issues when dealing with larger cash transactions. As such, those solutions that court consumers who are voluntarily opting out of the bank and credit card system – such as bitcoin and other cryptocurrency exchange services and emerging high-service, high usability gift and other pre-paid card products are gaining ground as they begin to capture multiple segments of the diverse un—and under-banked market.
Interestingly as banks move towards pushing the consumer into a self-serve model via ATM’s, email inquiries and fees for in-bank visits, pre-paid card issuers are increasing the levels of service that have traditionally been out of reach to the under-banked and other users of pre-paid value vehicles. As such, being a pre-paid cardholder – particularly at the platinum levels – is an attractive alt fin consumer choice. At the least, pre-paid cards can be seen as a way to augment a bank account.
Millennials: The First Wave for Alt Finance
More importantly, choosing to be un-banked is now a viable financial lifestyle choice. Whether as a result of people’s disillusionment with traditional banks, a desire to share less personal information with institutions, or because XXX, people who are able to participate in the larger banked population are choosing to instead to become at least partially unbanked, with their financial assets divided across multiple financial accounts. As significant, some users are skipping the banks altogether for more lucrative products like loans and going directly to alt finance specialty services such as SoFi, a lender focused on the millennial market.
Increasingly post-Millennials are choosing to eschew traditional banks altogether with the rise of alternatives such as Robinhood. And while the Millennials do have bank accounts with the majors, their money and perhaps more importantly, their transactions, are split amongst several institutions — as a hedge against another financial crisis, if unconsciously. While Millennials need – and value – financial advisement as much as other segments, they are getting their information from like-minded peer sources versus a bank expert – and they are likely to get their advice from multiple sources as well.
But several trends indicate that the ranks of the underbanked are growing as the un-banked and underbanked are presented with ever more “banking-like” options and with the emergence of innovative new offerings that provide consumers with options that the banks have been slow to offer, or which have previously only been available to those with stellar credit and/or large deposit accounts. In comparison with fee-laden bank accounts, pre-paid cards are highly attractive. American Express offers:

  • No credit check
  • No minimum balance
  • No hidden fees
  • Value-add services such as online bill pay, tools to manage your money
  • Cash-back on premier tier (with minimum loads)
  • Free direct deposit
  • Large scale cash re-load networks (45,000+) and ATM access
  • Subaccounts
  • Mobile capabilities
  • Connected to your checking/savings account

In addition, the American Express-Walmart Bluebird offers:

  • Dedicated customer service
  • Check-writing
  • Transfer funds between Bluebird and checking/savings accounts

While the pre-paid business currently represents a relatively small 2% of the business, it may figure importantly as American Express struggles to keep its high net worth customers, and in the wake of such losses at the Costco co-brand account. The pre-paid business is experiencing triple year-over-year growth as a result of these attractive features, though in the scope of AmEx’s overall business, pre-paid is not contributing significantly to the company’s profitablity.
But that’s not the point. AmEx is developing consumer relationships — building brand, goodwill and a customer pipeline for higher margin products. In this manner, American Express is able to tap into consumer segments that had previously been unable to them, and to potentially retain the customer relationship if and when a pre-paid card user is able to, or decides to become banked.
In the final part of this five-part series on gift cards, we will look at two companies in particular – one a recently launched start-up and the other an established and fast-growing force in the pre-paid cards business – that are focusing on usability and merchant/brand relationships to capitalize on the rising use of stored value cards as non-bank financial account vehicles.

The Gift Card Sector Comes of Age. Part 2 of 5: The Business, Social and Technology Trends Driving E-Gift Card Adoption, Innovation and Investment

In Part One of our look at the gift card sector, we provided an overview of the accelerated activity characterizing the sector over the past 4 years. Now in Part Two, we will examine some of the drivers behind the segment’s growth.
The Investment Perspective
FinTech in general is hot. And Square’s meteoric rise, led by Twitter CEO Jack Dorsey, made retail POS – and payments in general — sexy in that “ripe for innovation” kind of way. As a segment within the FinTech category that correlates closely with the growth of mobile payment technologies, e-gift cards are understandably an area of interest. And an area that is not yet saturated or highly visible (relative to say, the post-Square POS me-too frenzy), enabling even smaller funds to get in on a good deal.
Mobile Device and App Proliferation
The ubiquity of smart phones and the emerging use of mobile wallets makes e-gift card transactions a logical next step in ecommerce adoption for early adopter/tech savvy consumers. And for the underbanked, who are increasingly mobilized, e-gift apps can be the first and/or are the only step available to them for participating in the electronic purchase of goods and services.
Consumer Migration To All Things Digital
U.S. consumers are clearly weary of the physical store. This season’s unprecedented boycott of in-store Black Friday by some major retailers like REI and consumers’ growing weariness with, and wariness of the physical retail store experience this year reached an inflection point, morphing from mere disenchantment to angry action, with growing support for the consumer boycotting of Black Friday.
Rather than abandoning the retailers, consumers continued to engage with their favored brands online, with REI experiencing a 10-26% rise in online sales during the Thanksgiving holiday, according to digital analytics company SimilarWeb. Other retailers saw even more dramatic increases in online sales, with GameStop and Staples experiencing a one-day rise of 120%+, PetSmart a rise of 69% and Nordstrom and Pier1 both reporting a 54% one-day rise in web traffic. Overall, Black Friday in-store sales dropped by more than $1 billion – or 10% from previous year holiday sales while online sales increased. In fact, a National Retail Federation (NRF) survey found that indeed more people shopped online (103 million) than at the store (102 million) during the Thanksgiving/Black Friday period.
Gift cards are playing a part in this migration online, with consumer attitudes about gift cards changing as the sector provides more value-added features that increase the level of both physical and e-gift card personalization available to consumers, and that provide the convenience of allowing users to add value, store and transact with the cards anytime, anywhere. Moreover, marketplaces like Raise, Cardpool and Giftcards.com are enabling people to buy gift cards online for a discount, making gift cards even more appealing in some cases than the purchase of a discounted physical good as you could theoretically double dip – use the full value of a discounted card to buy a wanted item when it goes on sale.
At the same time, in both the U.S. and Canada, e-gift cards are not only viewed as acceptable, but increasingly as the preferred way to show gift appreciation.
In the next Part Three of this series about the gift card sector, we’ll look at how the growth of gift card business model and technology innovation is not just about the convenience of the pre-paid card, but about a larger trend towards the de-centralization of consumer finances, driven by such factors as millennial distrust of the bank as the sole institution for housing one’s money, and the broadening ranks of the under-banked.

The Gift Card Sector Comes of Age (Series). Part 1 of 5: Gift Cards are Cool Again (and Everyone Wants In)

The gift card sector is sizzling these days – more so than they’ve ever been. In the past four years, there has been a significant uptick in new technology and new business models in the sector. The new entrants have reached critical mass such that this year’s Money2020 conference organizers selected an e-gift card start-up — Slide – to be amongst its featured Launchpad 360 companies, and chose to include in this year’s agenda several sessions on the topic of gift and pre-paid cards, with one session proclaiming that The Gift Card Is Cool Again.
But the real indicator that there is real opportunity in the sector is that there is diverse and large-scale investment being put into the e-gift card sector. While obvious that MasterCard would include companies like Slide in its incubator program, celebrities such as Mary Hart (a Yiftee investor), national retailers, small fintech funds as well as top tier VC’s like Bessemer Venture Partners are identifying both market need and product fit within the sector.
Companies such as Loop Commerce (not to be confused with mobile wallet/POS company LoopPay) garnered a $16 million series B round in April 2015 to build out its e-gift card business, and more recently, Cards.com scored a $9 million growth capital facility this past November to expand services surrounding its custom e-gift card business. And gift card marketplace Raise is using the $56 million Series B round the company secured in January of this year to expand aggressively — growing from four employees working out of a small apartment in 2013 to a 200+ workforce housed in a 50,000 square foot space in Chicago’s Loop business district. On a smaller scale, hyper-local e-gift provider Yiftee has carved out its own market niche, raising over $3 million since its founding in 2011.
Gift card companies are also being acquired by some of the fintech industry’s most formidable players, with First Data Corporation buying bitcoin-based Gyft in July of 2014, less than a year after the start-up’s $5 million series A round. One year later, First Data continued its mission of building the “industry’s most integrated, complete and comprehensive prepaid gift card solution at scale” via its acquisition of Transaction Wireless, a digital gift card distribution and marketing platform.
In the meantime, established gift card infrastructure companies are growing and consolidating. Similar in rationale to eBay’s separation from PayPal, Safeway (yes the grocery chain) spun off its fast-growing gift card division Blackhawk Networks in April 2014. A year earlier in April 2013, the wholly-owned subsidiary had raised $230 million, for a market value of $1.2 billion. Significantly, the sale was led by Tier One banks Goldman Sachs, Bank of America, Citigroup and Deutsche Bank. Eight months post-IPO, Blackhawk purchased European gift card startup Retailo, deepening its international reach (20 countries) and continuing to diversify outside the U.S.
So why is the gift card sector taking off now? There is a confluence of factors that are contributing to the rise of the e-gift card. The most important is the advent of mobile. While no single mobile wallet has taken off across all consumer demographics, the plethora of offerings and accompanying marketing drives have contributed to a consumer belief that transacting via one’s mobile device is reasonably safe and a viable way to pay (as opposed to using cash or a card). Add to that the willingness of consumers to trade electronic security and their personal information (PII) for the convenience of mobile and you have a situation where the loading of gift card value onto one’s phone is a better way to manage these pre-paid assets. We’ll take a look at mobility and the other social, business and technology trends that are making pre-paid value cards relevant and valuable to both consumers and businesses in part two of this five part series.

Swyp’s universal credit card launches just in time to become obsolete

Sunnyvale startup Qvivr is is building a universal credit card named Swyp , competing with the likes of LoopPay, Coin and Plastc, but it’s adding its own unique twist. Swyp is a “learning” credit card that tracks your habits in order to surface the right card at the right moment, without you have to flip through your digital wallet.

Like its competitors, [company]Swyp[/company] lets you load your plastic cards into a special digital card-sized device that can emulate the magnetic stripe on any credit, debit card or gift card. A retailer simply swipes the Swyp at a point-of-sale terminal just like a regular credit card. As with most of those universal cards, only one set of credentials is active at any given time, requiring you to select the appropriate card on your smartphone or on the device’s interface before any transaction.

But Qvivr claims it has developed background smarts that can make that selection for you. Its algorithms analyze your purchase behavior, so for instance it knows to use your gas card at the filling station or your debit card at the grocery store. Qvivr said Swyp can also work on schedules, prioritizing your business card during work hours and your personal card during evenings and weekends.

Swyp app

Qvivr said it will sell the device, along with its accompanying card reader and Android or iOS app, for $100, though its taking a limited number of pre-orders on its website for $49. In all, it’s a smart looking device with a few unique twists that would have been an ideal purchase for a gadget lover – if Swyp had launched a year ago.

Unfortunately, the timing for the Swyp card’s commercial release is this fall, which just happens to be when the U.S. retail industry is making a major shift toward smart cards using EMV technology. As Swyp relies solely on today’s magnetic stripe technology, it’s effectively beginning its journey to obsolescence before it’s even on the market.

I asked Qvivr about this, and the response I received was that Swyp will eventually tackle the EMV transition and that it has the technology to do so, but it’s not focusing on EMV in its initial card because “merchants won’t upgrade for a few more years.”

While it’s true the complete transition away from mag-stripe transactions will take a while, Qvivr is far downplaying the significance of EMV (which is named after its backers Europay, [company]MasterCard[/company] and [company]Visa[/company]). In Europe and other regions of world EMV transactions using chip-and-PIN and chip-and-signature methods are already standard. In the U.S., banks are issuing new chipped cards this year and many merchants – from big box retailers to Square sellers — are upgrading their point-of-sale gear to support the more secure payments they promise.

Square’s new EMV-equipped Reader

Square’s new EMV-equipped Reader

Yes, come the October deadline, every retailer in the U.S. will still be able to take a mag stripe card payment, and every credit card will still have a magnetic stripe. But if a retailer accepts a mag stripe payment on a card that has EMV capability, that merchant will be on the hook for any fraudulent purchases.

MasterCard estimates that by the end of 2015 half of U.S. credit and debit cards will have smart chips in them. Not only should stores want to take them for liability reasons, but also consumers should want to use them because the data on those chips in encrypted.

While Qvivr is right that its card will still be usable long after the shift to EMV commences, by using outdated technology it’s essentially holding its customers back while the payments industry moves forward.

This post was updated at 9:20 AM to reflect that Qvivr is the name of the company that manufacturers Swyp.

Amazon closes out its mobile wallet trial after 6 months

It looks like Amazon’s diapers weren’t the only product the e-commerce giant retired Wednesday. The company has shut down its mobile wallet beta, which allowed Android and Fire phone users to store loyalty and gift cards in a digital billfold.

In a statement given to CNET, [company]Amazon[/company] spokesman Tom Cook said the e-commerce giant learned plenty from the six-month trial, and that it would apply those lessons to future Amazon products. But he didn’t say if Amazon had plans to bring its wallet back as a commercial product or if it would revisit the concept of smartphone payments in the future.

[company]Apple[/company] Pay has simultaneously reinvigorated the market for contactless and mobile payments while putting a lot of pressure on competing technologies. [company]Google[/company] Wallet has seen a big uptick in near-field communications (NFC) transactions, but it’s also been scaling back Google Wallet’s other features such as Digital Goods, which let you use its app to buy stuff outside of the Google Play store.

[company]Softcard[/company] — the carrier NFC payments system formerly know as Isis — just laid off 60 employees, and the latest rumors have it that Google and Softcard want to merge their wallet efforts. Meanwhile MCX, a smartphone billfold effort backed by the country’s biggest retailers, is fighting (and losing) a public relations war with Apple over its merchants’ resistance on accepting Apple Pay.

It might be tempting to view the closure of Amazon Wallet as the company conceding victory to competing smartphone payment technologies, but I think we would be reading too much into its actions. Amazon Wallet was never really an aggressive move into retail commerce like Apple Pay or Google Wallet. It never let you store credit cards or make a secure payment at the register. Instead, it was basically a way to store a bunch of loyalty and gift cards in a digital format, so merchants can scan in a bar code from your phone rather than a piece of plastic.

If Amazon is really going to go after the smartphone payments space, I imagine it would launch a much more fully featured wallet in the future. And if it doesn’t, Amazon got a lot of good data from beta that it could apply to its other mobile payments efforts, particularly the mobile point-of-sale credit card reader it just launched to compete with Square.

Boomerang shifts focus from social gifting to viral marketing

Chicago-based Boomerang is kicking to the curb its initial local-merchant approach to social gifting. Instead it’s focusing on what it believes is a much bigger opportunity: tapping into the viral marketing potential of online gift cards.