Retailers’ mobile-pay apps are gaining popularity, and many merchants hope their customers will spread their brand affinity by using the apps to send virtual gift cards to a friend or family member’s device.

But the market for virtual gift cards remains small, says Ben Jackson, senior analyst at Mercator Advisory Group. Of the $97.2 billion of gift cards bought in 2011, only 4 % were eGifts, and Jackson expects that figure to remain under 5% throughout this holiday season.

“There are a lot of retailers who are a little behind when it comes to technology, because their job is selling the product in their stores not inventing new payment technology,” Jackson says. This is the main reason for the miniscule market share of virtual gift cards, he says.

The exceptions include Pinkberry, Dunkin Donuts and Starbucks, all of which sell virtual gift cards within their smartphone apps.

While some merchants are unable to process virtual gift cards through their back end systems, others are waiting to see what dominant form factors will emerge. Also many retailers are hesitant to buy the terminals needed to scan a consumer’s mobile app and eGift bar code or quick-response (QR) code.

Many consumers who redeem virtual gift cards today must print out the receipt with 16-digit ID number, which creates long lines when cashiers have to type the number in at the point of sale.

“Many merchants don’t see an upside greater than the downside,” says Jackson.

Pinkberry, the upscale frozen yogurt franchise, recently launched the plastic Pinkcard, which connects with its mobile app to provide added benefit, including sending gift cards from one mobile app account to another. 

“The Pinkcard loyalty program is at the center of the mobile app. We added in several other convenient features – such as eGifting and flavor-finding technology – but the Pinkcard is a main component. It also allows customers to pay directly from their account, with the touch of a button,” says Ron Graves, CEO of Pinkberry.

Merchants such as Pinkberry, which has many repeat customers making small-dollar transactions, are more receptive to mobile payment options such as virtual gift cards.

“These kinds of cards, especially on mobile apps, allow merchants to complete the transaction more quickly and save money on payment processing,” Jackson says. The merchants are saving more with internal systems such as eGifts than they would to process individual debit or credit card transactions.

The Pinkberry eGifting program follows the emergence of several retailer mobile apps that provide similar capabilities.

In June 2011, Starbucks, with an already successful mobile-card app, created an eGifting option on its new Starbucks for iPhone app. This allows users to send electronic gift cards, with values between $5 and $100, via a mobile device to other customers through their contacts list or Facebook contacts.

The eGifts are seen on recipient’s app as new cards. Recipients can register the gifts as new cards or transfer the dollar amount to an already established electronic card.

“It’s a convenient way to give gifts, whether it’s to someone sitting in a cubicle right next to you or many miles away,” says Linda Mills, a Starbucks spokesperson.

Before the Starbucks for iPhone app, the coffee company had Starbucks Card eGift which was only available on Starbucks.com.

Jackson says Starbucks is the obvious leader because of the size, sophistication and widespread adoption of its program. Last year, $110.5 million was loaded through Starbucks mobile app, with 9,000 U.S. stores accepting mobile payments.

In August, Dunkin’ Donuts, a unit of Dunkin’ Brands Inc., launched a mobile-payment app to contend with Starbucks. 

The Dunkin' Donuts app also allows customers to buy virtual gift cards, between $2 and $100, for one another within the app. The virtual gift cards are delivered via text, email or Facebook Connect.

“Dunkin’ Donuts will soon see similar success though,” Jackson says. “In terms of absolute volume, Starbucks will be bigger, but in terms of the value to the company, Dunkin’ Donuts will see comparable success.”

While the market for virtual gift cards continues to grow, Jackson says it still relies heavily on consumers buying electronic gift cards for themselves.

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