The trump card?

Electronic ‘gift’ cards have taken the US by storm, superseding the paper alternative. But will the UK be so keen to embrace this revolution? By Richard West

Experiences and products, ranging from a day of death-defying extreme sports to spa treatments and mini-breaks, can all be acquired with vouchers. Save enough of them and you could probably buy a house (or at least furnish one) while sophisticated online collection schemes allow participants to accumulate minor fortunes. One salesman was reputedly able to pay for his wedding and honeymoon by using vouchers that he’d won on the back of a particularly successful year.

The Voucher Association says that the UK voucher market is worth &£1.5bn and growing fast. By rights, it should be showing signs of wear and tear after government legislation four years ago removed the tax benefits of giving vouchers as incentives. However, because companies can volunteer to pay the recipients’ tax liability, many employers feel that this is a relatively small burden to bear compared with the benefits. As a result, it is estimated that companies spend &£680m on staff rewards, a figure that is growing by 20 per cent a year.

Flash the cash?

But why bother with vouchers? Why not simply reward staff by slipping a few extra quid in their pay packets? According to Lisa Holme, director at marketing agency KLM, the recognition is just as important as the reward.

“The paper voucher has been around for over 20 years because people realised that cash had no tangible ‘trophy’ value. Experience shows that people like to have something in their hands. Besides, money invariably just disappears on day-to-day items, so the motivational factor is lost,” says Holme.

Evidence suggests that people tend to remember how they spend their vouchers and connect the purchases (or the experiences) with the work that they did to get them. Good old-fashioned retail therapy is still among the favourites (most paper vouchers are spent on high street brands), although as a very imprecise rule-of-thumb, the more memorable the reward, the more likely it is to change behaviour.

That is why one of the fastest-growing areas is the so-called “experiences” sector, rewards that money can’t buy, such as luxury trips and special events. Estimates are that this particular segment is growing by 40 per cent a year.

House of Fraser business incentives manager Andrea Born believes that the market’s buoyancy is down to clever marketing and more innovative thinking. She explains: “Years ago, vouchers were probably seen as an uninspired method of motivating people, but this has changed. They have a high perceived value and low actual cost, and the variety available is huge.

“A voucher itself is not particularly interesting; what it can buy is what turns people on, whether a weekend in Paris or a scuba-diving lesson. So it’s the experience that is highlighted when we sell vouchers as a marketing tool.”

Just as the rewards themselves become more sophisticated, vouchers are similarly becoming more hi-tech. In the US, the introduction of electronic vouchers – or gift cards – has revolutionised the market. In 1997, the gift voucher market in the US was worth about $11bn (&£6.5bn) and made up entirely of paper vouchers. By December 2002, it had grown in value to $36bn (&£21.5bn), with gift cards claiming an 80 per cent market share. The acceptance by consumers and retailers has been so widespread that 80 per cent of US retailers now offer electronic vouchers or gift cards, while 45 per cent of US shoppers claim to have used them.

Marked cards

The cards work like electronic keys. The information relating to the gift card (mainly its value) is held on a database, while the magnetic strip on the card simply provides the electronic identification to access the customer’s account. Therefore, the gift card doesn’t have to be plastic – it could be any material providing it features a barcode or a magnetic strip.

The cards can also be made more secure by registering the details online, so that lost or stolen cards can be stopped and the balance transferred to a new card.

In the US, the voucher card’s flexibility has been a winner. Supporters claim that it can help retailers improve their understanding of customers, that it can be easily marketed (it has no value until activated) and that it encourages shoppers to make repeat buys.

Electronic gift card suppliers such as ValueLINK, Cardform and SVS that have moved into the UK are, unsurprisingly, optimistic that the cards will catch on. SVS (UK), the European subsidiary of the American parent, Stored Value Systems, are confident that it is just a matter of time before traditional paper vouchers are superseded by gift cards.

Sounding bullish about opportunities this side of the Atlantic, SVS (UK) business development manager Jon Walkington, says: “In the US, electronic gift cards have long since superseded paper vouchers. In the UK, the gift voucher supplier could soon become stuck between a rock and a hard place. The only solution is for card suppliers to stick to their guns and take on the battle with the paper voucher producers – leaving the winner’s fate in the hands of retailers.”

There is no denying that the statistics are impressive. Starbucks launched its card in the US consumer, corporate and incentive markets in November 2001 and sold 5 million cards worth $70m (&£42m) in the first six months of trading. Sales also rose across its stores.

Atlantic crossing?

However, Voucher Association chairman Yvonne West is not convinced that what has happened in the US will be repeated in Europe.

“Electronic gift cards are probably an inevitable way forward, but I don’t think that people really understand the timescales involved. Apart from the cultural differences in the way Americans and Europeans view ‘plastic’, there are several other commercial and practical issues that need to be taken into account,” she says.

Top of the list of concerns is high street nervousness that consumer spending could be about to take a nosedive. Preoccupied with the possibility of recession, West believes, retailers are scrutinising every penny before they make big investment decisions and, at the moment, most retailers are adopting a “wait and see” approach.

“The truth is it’s a very mixed bag. Some retailers have taken to gift cards very enthusiastically, but others are less convinced. However, nothing is going to happen overnight.

“A few retailers are running trials but only one or two have adopted them. The system requires significant investment in IT and staff training. Large retailers don’t make those decisions lightly, so there is bound to be a time lag,” continues West.

Asda, Borders and, most recently, Debenhams represent the few major players in the business-to-consumer market offering gift cards. However, it is believed that a number of high-profile retail bosses are impressed by the customer relationship management (CRM) potential and marketing opportunities.

The most likely outcome, at least for the foreseeable future, is a mix, with electronic gift cards and paper vouchers sitting alongside one another.

Capital Incentives managing director Graham Povey has spent several years developing technologically based alternatives to paper vouchers and believes that the latter will never become totally obsolete.

He says: “Card-based solutions have many advantages. A client-branded card, for instance, provides a constant visual reminder in the wallet, but they are not always the best solution. They require more administration, but that is not the only thing.

“Recognition is important and this will be lost. The recognition when presented with &£100 of vouchers by a manager in front of your peers is greater than being told that your gift card has been charged up! Vouchers can be more instant, more visible and provide more recognition with less inherent administration.”

In the business-to-business market, the fulfilment houses are already viewing gift cards somewhat warily. They foresee numerous logistical problems and are extremely tentative about entering uncharted waters.

Administrative nightmare?

Randle Stonier, chief executive of marketing and incentive agency, Skybridge, says, “Gift cards could be an administrative headache. Even if it were possible to bulk-load credits onto cards, it would then be necessary to make sure the correct card goes in the correct envelope.

“Furthermore, if the recipient has requested vouchers from more than one retailer, they could receive some paper vouchers and some gift cards, which could also cause confusion.”

No workable solution has yet been proposed for gift cards to be used in the business-to-business market that accounts for 56 per cent of all voucher sales in the UK. Without addressing this area, it is difficult to see paper vouchers being completely replaced in the UK.

There is a long list of ideas that have succeeded on one side of the Atlantic only to disappear without trace on the other. The next 18 months will determine whether Europe is ready to take gift cards on board.

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