Changing Times, Changing Product Mix

O ne of the hallmarks of the payments services business, I've come to understand, is its resilience. Just when you thought there was nothing new service providers could come up with to enhance the point-of-sale experience - let's face it, smart cards haven't taken the check-out by storm, nor have electronic checks - loyalty and gift card applications hit their stride.

I've been waiting, personally, for this since Christmas 2000, when my brother and his wife gave me a gift card from Home Depot. I had recently moved and was in the midst of many home projects. For obvious reasons, I found myself shopping at Home Depot, and for much more than the value of the card.

I'm sure an outcome of this sort was on the minds of Home Depot executives when they implemented the gift card program. But it struck me as a fairly expensive undertaking that could be justified by only a few dozen of the nation's largest retailers.

Today, I'm told, 85 of the top 100 retailers in the U.S. have a proprietary gift and/or loyalty card program that uses mag stripe card technologies. Nearly half of all American consumers have used prepaid gift cards, up from 11% just one year ago, according to one survey. Some of the most optimistic proponents say there could be upward of 1 billion gift cards in circulation by this time next year, if there aren't already now.

So it should come as little surprise that trickle-down market forces are beginning to pressure middle-market retailers to follow with their own branded prepaid gift and loyalty card programs.

Jack Lance, President of Valutec Card Solutions, sees a huge opportunity for his Nashville, Tenn.-based company. Valutec offers all of the tools an acquirer/reseller needs to implement and maintain an electronic gift card program for its merchant customers. He expects a 20-fold increase in Valutec's merchant gift/loyalty card portfolio between now and the end of 2004.

"Of all the options ISOs have available to them, a closed-loop gift/loyalty card program creates the most stickiness," says Lance.

Valutec offers off-the-shelf gift and loyalty card programs that run on Verix, the multi-application terminal operating system from VeriFone.

VeriFone announced Verix a couple of years ago, with a great deal of fanfare but little in the way of real-world application. Gift and loyalty card program support is the first big score for Verix. Verix runs on several models of VeriFone POS terminals, including the Omni 3300 family of countertop terminals and the Omni 3700 family of "hand-over" devices.

Patty Colby, Manager of Value-added Applications at VeriFone, says gift and loyalty card applications are a natural for Verix. "This is the first of several new applications VeriFone will bring to the table in 2002," she says. "Verix allows you to do more with a POS terminal than anyone is doing today."

Colby says VeriFone's Omni terminals, loaded with Valutec gift/loyalty card functionality, are an affordable option for retailers with as few as 1,000 potential cardholders.

"Verix is to the 21st century what Tranz was in the 1980s," Colby added, referencing the earliest line of VeriFone terminals. Tranz terminals were considered workhorses; they helped drive the trend toward electronic authorization, and many are still running today, especially at small mom-and-pop stores.

Transcom Processing Services, a services reseller based in Hopkins, Minn., uses the Verix-Valutec combination to support prepaid gift card services for its merchants.

"Our offering of single source 'plastic gift certificate' transaction processing services is a very real differentiator in a commodity merchant bankcard business," says Transcom President Mark Lewis. "Merchants want a single integrated terminal/printer that can accommodate all their payment services without impacting their terminal applications and support from various processors."

The payoff for Transcom: more credit and debit card business and a new stream of transaction revenue from gift cards, Lewis adds.

Bill Blakely, President and CEO of Electronic Data Resources, based in Palm Beach, Fla., says the biggest advantage to selling Verix-based terminals is that a merchant needs only one at each check-out counter to handle everything - credit, debit, gift card, checks, etc. "We're not dealing with multiple terminals anymore," he says. What's more, Blakely adds, it's "significantly easier to get new products to the merchant point-of-sale."

Such as prepaid gift and loyalty card programs. Risks are Easier to Track Despite the obvious benefits of selling prepaid card programs to merchants, the business has had some image problems. For example, there's been a lot of talk in the industry lately about the risks associated with gift card programs, with some experts warning that gift card sales can create a large pool of unfunded liabilities for card acquirers.

Perhaps this is true. But it seems to me that an electronic (mag stripe-based) gift card program offers substantially more opportunities to control risks than the paper-based gift card programs of the past offered.

It's not unusual for paper-based programs to be compromised by employee pilfering, photocopying and counterfeiting or by unscrupulous merchants who inflate the value of purchases and pocket the difference. Many of these risks don't transfer over to electronic card programs. Indeed, the underlying technologies that support electronic card programs should make it easier to spot patterns of fraud.

Card issuers and acquirers employ sophisticated risk models today to help evaluate cardholders, check writers and even merchant account applications. Processors use similar models to help identify anomalies in transaction patterns. What's to keep these companies from using similar modeling techniques to identify potentially fraudulent transactions involving prepaid cards?

There are other options, too. Acquirers have never been afraid to price services to reflect increased risk; witness the mark-ups on card-not-present transactions.

If the risks of supporting prepaid card programs become significant, acquirers and processors can change pricing to reflect those risks. Acquirers might even consider holding some customer funds in abeyance as a cushion against liabilities that result from a high-risk merchant going out of business and leaving consumers cards that can't be used yet have value.

As I noted earlier, payments is a resilient business. Electronic prepaid card programs have great potential for helping acquirers and ISOs generate new revenues from the point-of-sale. No one wants to kill the goose that laid this golden egg.