Giving is big business. Birthdays, holidays, and other occasions to say “thank you” drive a global gift card industry worth over $350b and projected to grow to $500b+ by 2025. The share of the industry captured by digital (or “eGift cards”) is also growing, by some accounts at a rate of up to 200% per year. As the industry pivots to digital, certain links in the value chain are stubbornly staying put, while others leapfrog ahead, creating opportunities for customer experience optimization and inspiring new product design. Innovations within this family of products has parallels to innovations in payments, and the market is embracing change. But does innovation in gifting have implications for digital finance at large, or is it an isolated ecosystem?

The digitization of the gift card industry may be considered a microcosm of the digitization of financial services as a whole, and common dynamics are at play in both, but certain idiosyncrasies set the gift card space apart. Gifting transforms the value of a payment by lending it purpose-built features and opening the door for new psychological forces to influence buyer behavior -- all of which redounds to businesses’ bottom lines. For instance: It’s been noted that consumers often spend more than the original value of their gift card in a phenomenon called “spending lift”, which is on the rise. Furthermore, when they use a gift card, shoppers are 2.5x more likely to pay full price for an item, and in the U.S. alone, over $1b of gift card value goes unspent altogether each year.

From Me To You - Digitally

Banking, payments, lending, insurance -- name an area of financial services, and chances are good that it’s undergone a fundamental transformation over the last ten years. Some services are by now well-digitized (mobile banking, for instance), but others have proven harder to change. Gift cards belong to the latter category. The gift card as it’s commonly understood dates back to 1994 and reloadable cards have been around since at least 2001, but it wasn’t until 2016 that tech-forward firms like Uber, Lyft, and Postmates began to offer egift cards - giftable value stores not tethered to a piece of plastic. Today, egift cards still make up an arguably undersized fraction of total gift card spend -- about 25% in the U.S. In other words, three-quarters of gift cards are still physical.

Emergent digital gift card products digitize the events in the traditional gift card purchase process. The two most important events in question are purchase and redemption. Though there is no apparent consensus with respect to the terms “digital gift card”, “virtual gift card”, or “egift card”, the value proposition of these products is that they can digitize purchase, redemption, or both. A digital purchase with retail redemption, for example, might be a virtual gift card redeemable at a local business. A retail purchase with digital redemption, on the other hand, could be a physical gift card for a digital service like Uber or Netflix, or an in-game currency gift card. Or the process may be digital from end-to-end.

An important distinction exists, however, between the two main “types” of gift cards: closed-loop and open-loop. A closed-loop gift card is affiliated with a particular retailer or brand, and can only be redeemed with that brand (examples include Amazon gift cards, most gift cards for local retailers, and any in-game currency). An open-loop gift card, on the other hand, is often provided in partnership with a payment network (like Visa) and can be redeemed anywhere that accepts payments from that network. In practice, open-loop gift cards are similar to prepaid debit cards, though they may not be reloadable and they often expire sooner than prepaid cards. While open-loop cards are fungible and offer greater flexibility for users, they create less opportunity for innovation, precisely because they are flexible. So the digitization, product diversification, and value creation in the gift card space are primarily in the area of closed-loop cards, with limited options for open-loop digital gift cards.

Staggered Markets

The U.S. is the biggest market for gift cards (comprising ~$160b out of the global ~$350b market). American gift card providers are expanding to the rest of the region - allowing some closed-loop cards to be used in Canada - but for the most part, open- and closed-loop cards alike cannot be used internationally. Where cross-border use is allowed, prohibitive fees often apply, rendering gift cards an imperfect solution to cross-border remittance needs. Regulations, furthermore, limit the potential of gift card products to be used cross-border.

Globally, gift cards have seen uneven adoption from region to region, and even within regions the divergence from country to country is in many cases substantial. Larger and more developed countries naturally feature larger markets for gift cards, but growth is difficult to predict; market growth projections range from a CAGR (Compound Annual Growth Rate) of 4% in low-growth established markets to over 15% in active emerging markets during a forecast period from 2019-2023.

According to researchers,the U.S. is the big fish in the Americas, at close to $160b in 2018 and a 2018-2025 CAGR of 6%. The market in its neighbor to the north (Canada), at $5.7b, is more than twice the size of its neighbor to the south (Mexico) at $2.6b; Mexico, however, is growing at more than twice the rate of the Canadian market. Likewise, other Latin American markets are approximating double-digit CAGR over the forecast period. Brazil is expected to grow at 10.6% per year to reach a market size of $6.7b by 2023, while Argentina and Chile are also projected to exhibit double-digit growth, both potentially crossing the $1b threshold (with Colombia not far behind).

While Latin American markets sprint ahead, Europe trots along. Most major markets are forecast to exhibit growth of 4-6%, with France rounding out the low end at 3.9% and the United Kingdom overperforming at 8.6% (though this figure corresponds to the period 2015-2020). The U.K. is also Europe's largest market at $13b, followed by Germany, France, Italy, and Spain.

Gift cards are still finding their footing in Africa, where Nigeria, the largest market, is just under $1.3b in size. Nigeria, along with South Africa and Egypt, are the only markets forecast to cross the half-billion-dollar mark -- though they’re expected to post double-digit growth through 2023, reaching $2b, $1.2b, and $646m, respectively.

Finally, Asia’s gift card scene is not unlike that of the Americas in that one market - China - dwarfs all others with an expected CAGR of 6.8% and forecast size (by 2023) of over $150b. The next-largest market, Japan, is predicted to cross the $20b mark by that time (growing at a similar rate). Contrast these figures with India’s projected 2019-2023 CAGR of 17.5% and Vietnam’s projected 16.2%, and it becomes easy to argue that, as in so many areas, developed and emerging Asian markets are worlds apart.

Some Strings Attached

Like any ecosystem does over time, gift cards have grown into a diverse product class all their own. Where gift cards were once static value stores, gift card products (both digital and physical) are now more specialized and flexible, factoring different consumer motivations into product design. Many cards today offer variable value, and can be loaded with as little as $15 or as much as $500 in the U.S. market. Additionally, the value held in today’s gift cards is increasingly branded; there’s no better example than Epic Games’s V-Bucks, a proprietary currency spendable only within the Fortnite platform. An investment of $25 buys 2800 V-Bucks, which is a further level of abstraction than the “$25 worth of merchandise at retailer X” proposition offered by traditional gift cards.

Abstraction, in fact, is the reason why consumers purchase gift cards in the first place. When a customer purchases a closed-loop gift card with cash or a credit card, they lose fungibility; in other words,while cash is accepted everywhere, a gift card is only accepted at a narrow selection of vendors. So why would anyone buy these things? Why limit the fungibility of a value store? The answer is abstraction. A gift card feels more personal -- and more like a gift -- than cash precisely because it can only be spent on select merchandise. Value in the form of a gift card becomes abstracted from the payment itself, such that giver and recipient are both absolved of feeling as though the gift is an ordinary financial transaction. But as Mondato Insight explored last year, abstracting payments can lead consumers to overspend, which could explain a phenomenon like gift card “spending lift”. So the same feature which makes gift cards an attractive option for gift-givers makes them an attractive product for any commercial enterprise looking to get their customers to increase spending.

From many perspectives, gift cards are a win-win. They create the option to share value with a loved one without bluntly giving them cash or incurring the inherent risk of picking out a specific piece of merchandise. For businesses, gift cards bring in additional spend and help goods move off the shelf at full-price -- that’s if they are even redeemed at all. Digital gift cards make this process all the more frictionless by allowing giver and recipient alike to communicate value (and occasionally thanks) digitally -- the rough equivalent of what email did for correspondence in the 90s. However, gift cards are not (nor have they ever been) on a linear trajectory toward success as a product class. Even in 2020, notoriety persists around gift cards' fraud potential -- an unfortunate side-effect of abstraction and anonymity. Additionally, cultural factors play a role when it comes to the perceived value of gift cards, as many cultures don’t share Westerners’ reluctance to give cash as a gift. In any case, gift cards have proven to be a resilient and adaptive form of payments, with new use cases, broadening global adoption, and digital-driven product innovation perhaps on the horizon for the coming decade.

Image courtesy of Khanh Dang
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