As gift cards catch on in the UK providers need to be aware of the e-money regulations that apply to the cards – however their popularity with retailers and customers is growing. By Caroline Parry
The plastic gift card may still be a relatively new innovation in the UK but its potential for growth is clear. The paper voucher market saw strong sales last year despite tough trading conditions on the high street, and new launches in the card market are expected to help boost sales in 2006.
The first stored-value gift card was launched in the UK by Debenhams in 2002 and a variety of retailers and brands, including Habitat, WH Smith and iTunes, have already followed suit, and many more are due to be launched this year. The cards have also proved popular for employee incentives and business-to-business loyalty schemes.
The UK gift card market is still in its infancy but the US demonstrates the potential of a shift to plastic. The US market is already worth $100bn (&£53bn) and consumers spent $18bn (&£9.54bn) on gift cards during the key holiday seasons in 2005 (ValueLink). According to data from The Vouchers Association, the total UK gift card and vouchers market was worth &£1.47bn last year with paper vouchers still accounting for a majority of sales.
According to Keith Brand, president of stored value and financial services consultant Tefisto Partners, successful gift cards can have a significant impact for issuers as they encourage consumers to spend more than the value of the card, bring in new customers and improve customer loyalty. The cards are also easier to promote in store and they can be displayed on racks on the shop floor – they are worthless until they have been “loaded-up” with credit.
The US model offers seductive statistics for those contemplating a shift to plastic – US gift card company Stored Value Systems says its research shows that 80% of US consumers would rather receive a gift card for their favourite retailer than a gift. But it is essential that UK businesses are aware that unlike paper vouchers, gift cards are subject to stringent European Union legislation under the e-Money Directive.
The directive, which was introduced in 2002, aims to regulate electronic money, which the EU defines as a stored value on an electronic device such as a chip card. In the main this applies to financial institutions through credit cards and, increasingly, pre-pay debit cards, but the laws do acknowledge that e-money is now also issued by other businesses.
The regulations are in place to offer a consistent legal framework across Europe to protect consumers and promote confidence in issuers while also encouraging the development of e-commerce. However, the legislation is also in place to aid anti-money laundering laws as well as data protection.
Ray Brash, chief finance officer and compliance officer at PrePay Technologies, says the biggest issue for companies considering a move to plastic gift cards is that it can lead them into the financial services market “unknowingly and unwittingly”. He explains: “Anyone looking at this market would need to be aware that it is a regulated sector because money is being handled. The cards are not the same as cash or vouchers.”
He adds that the regulations are “ultimately a trust message” so that marketers can demonstrate to consumers that their cash is safe as the market is regulated by the Financial Services Authority (FSA), but he also points out that for some areas of the market, such as pre-pay debit cards, which can have sums of several thousand pounds on them, it is important to have the legislation to protect all involved parties.
Closed and open loops
The grey area in gift cards exists because of the two different types that exist – closed loop and open loop. The former is the most simple and is currently the most popular with high street retailers. Closed loop cards work with the retailer’s internal EPOS or by using a closed code on an existing network, such as Visa, and the money spent is charged on to the card and redeemed at the same point. For this reason, these cards are not subject to the regulations in the e-Money Directive.
On the other hand, open loop cards are more flexible as they can be issued at one retailer but redeemed in a number of different retailers. This is a more convenient product for consumers but, unfortunately, not for retailers as e-Money does apply here. This means there are capital requirements that have to be met and operators of such a card have to be licensed by the FSA.
The directive allows anyone that receives an open-loop card to redeem the value of the card in cash and, for this reason, under the FSA’s anti-money laundering guidelines, known as Know Your Customer (KYC), operators have to limit the amount of cash that can be issued to people without their names and addresses.
It also requires e-money issuers to hold unspent money in investment trusts, although this does not apply to smaller amounts of money at the moment but is currently under review as part of the proposed Payment Services Directive. Gift card operators may find this becomes a bigger issue for them when the directive becomes law in 2010.
These measures are to stop gift cards being used illegally, for example as a way of transferring money across country borders or funding criminal activity, but another result is that it makes operating and buying an open loop card a complicated transaction. As Andrew Johnson, chairman of The Vouchers Association, points out, it is not even clear which address should be taken – that of the person buying the card or the person receiving the gift. Johnson says/ “The legislation that applies to gift cards is totally different to where we have been with paper vouchers.”
These complications mean that the transition from paper to plastic is far from simple. Robert Courtneidge, a partner at law firm OsbourneClarke, who specialises in financial services and technology, says: “How easy will it be to sell a &£10 gift voucher if you have to collect so many details?”
Benefits and disadvantages
Courtneidge, who represents and advises The Voucher Association on the gift card issue, says that there could be positives to low-level KYC such as allowing retailers to take mobile numbers that could be used for an alert system, such as a warning that the stored-value is about to expire. But he admits: “While there are possibilities of using KYC as a consumer benefit by that is really outweighed by the disadvantages.”
As well as facing the same issues as a business to consumer card, companies seeking to use gift cards as incentives in place of vouchers also have to be aware of the way that the schemes are taxed. Brash points out that if a card is redeemed for cash then it will be taxed immediately rather than at the end of the financial year, as vouchers are. He says: “We operate some schemes with corporate incentives
that can be redeemed in different stores and we have had to work hard to get a light touch for this area. The corporate incentives companies can bear a lot of that for businesses.”
Innovative and cutting edge
Caroline Meechan, director of sales and marketing at Marriott Individual Incentives, does not believe that the legislation should dissuade companies from using plastic. She says the hotel chain decided to make the move because vouchers were no longer “sexy” for people working in IT or business. She says: “There are benefits in that it is an innovative, cutting-edge scheme. People in incentives aren’t turned on by paper and plastic is fast and sexy.”
But she adds: “I believe that if you are responsible for selling a gift card then you should do your own research and not just leave it to the companies you are working with. It is not the issuer that would be at fault if it went wrong, it is your brand and that is the responsibility of your marketing team.” But Meechan admits that “overall plastic is not the answer to everything” and she also points out that in terms of incentives the cards are heavy on administration. She explains: “A company does not want to give the names and addresses of its staff out to a card operator. This creates sensitivities about who is the customer. But if you don’t take staff details then how do you keep track of who is doing what with the card?”
There is consultation on the e-Money Directive, which is due to close at the end of October, and Brash says that the European Commission has indicated that it believes the gift card and incentive scheme operators have some valid points and that the commission is keen to avoid legislation that “catches all”.
Operators feel that the future for gift cards is positive although a light touch approach to regulations will be essential for it to develop as the US market has done. For example, the US already has gift card malls – racks where a variety of different cards can be sold and loaded-up in one place and redeemed in another – but the current legislation would make this a complicated move in the UK.
For this reason, Courtneidge sounds a note of caution. He says: “These regulations could be a barrier to the development of the market unless the review allows some changes.” But he points out that there were just ten issuers in the middle of last year and that has already grown to 50, including major retailer such as Tesco.
He warns: “Issuers have to be aware that there is an innate danger in gift card and they have to be careful with what they are doing or they could fall foul of e-Money.”