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.