The First Data-Fleetcor JV may trigger a long-awaited shift to digital gifting
Today, less than 10% of all gift cards sold in the U.S. are digital. That could start to change, as the industry's heavy hitters break down the walls between their plastic and digital gift card operations to spur global growth.
First Data, a major force in U.S. closed-loop gift cards, recently made a decisive move to accelerate digital gift card growth by forming a joint venture with Fleetcor, combining the two companies' respective physical and digital gift card assets into a single unit.
The deal had market advantages for both sides, analysts say. First Data is already a major gift card provider in the U.S., plus it has significant digital gift card assets in Gyft and Transaction Wireless, two companies it purchased within the last few years.
Fleetcor, a major player in fuel cards and payroll cards, two years ago picked up Stored Value Solutions (SVS), a key player in business-to-business digital gift cards and international markets, when it purchased fuel-card giant Comdata for $3.45 billion. While SVS may not mesh perfectly with Fleetcor's other holdings, it dovetails nicely with First Data, which has robust credit and merchant processing operations outside the U.S. but lacks an international gift card footprint.
“This joint venture is a way for First Data to make additional revenue from the acquisitions of Gyft and Transaction Wireless, by using the original model of the two companies as third-party providers,” said Ben Jackson, a director of prepaid cards at Mercator Advisory Group. "And for Fleetcor, the deal gives them a way to make sure their gift card clients stay happy and have all the services they need without making other major investments."
It's still early in the process and the joint venture has no name, but the agenda for the venture is beginning to take shape, said Barry McCarthy, First Data’s executive vice president and head of network and security solutions.
“The rationale for this deal is we think the gift card market is getting ready to move to the next generation, where digital technology will play a bigger role with the growing base of younger consumers who are focusing on mobile e-commerce and corporations integrate gift cards more deeply into marketing and loyalty operations—it’s a natural evolution,” McCarthy said.
"We think the gift card market is getting ready to move to the next generation, where digital technology will play a bigger role."
Bottom-line considerations also drove the deal, as aggregating First Data’s various gift card properties together with those of SVS also could cut operations costs significantly by centralizing processing, distribution and fraud management, McCarthy said.
First Data has invested heavily in machine learning and over time the company plans to leverage those resources into the overall fraud management for all operations within the joint venture.
“Initially it will be business as usual, but as we consolidate more of the elements of the joint venture, we’ll have a larger pool of data to leverage with machine learning to get a better handle on gift card fraud,” McCarthy said.
Funneling digital gift card brands through a single processing hub also will open up new promotion and marketing channels for the joint venture's corporate clients, McCarthy said.
Digital gift cards offer vast distribution efficiencies for brand marketers versus the cost of manufacturing and handling plastic gift cards, McCarthy said.
When a $100 gift card is sold inside a gift card mall like those at supermarkets, the brand on the card’s face ends up paying about $4.50 altogether for distribution costs, according to McCarthy. “That’s a huge expense for a retailer to take on, and one we think is ripe for improvement."
Digital gift cards also provide opportunities for new types of promotions that more companies are embracing.
One example is First Data’s evolution of the popular “Never Ending Pasta Bowl” promotion for Olive Garden, from plastic to digital gift cards. Initially promoted only with plastic gift cards at restaurants, First Data within the last year enabled Olive Garden to launch the promotion via an online “flash sale” using digital cards. Olive Garden’s inventory of 50,000 cards for the unlimited pasta deal sold out within seconds of going live during the latest round, McCarthy said.
First Data isn’t the only gift card company working to aggregate digital gift card brands for better efficiency. Blackhawk Network in December 2016 launched Hawk Commerce, a comprehensive solution enabling marketers to plan, distribute and manage traditional and B-to-B gift cards and electronic gift cards through a single channel.
Blackhawk also sees big opportunities from its partnership with Apple Inc. which supports direct integration of traditional and electronic gift cards, loyalty and rewards programs into Apple Pay, said Teri Llach, chief marketing officer for Blackhawk Network.
“Due to the breadth of our product offerings and distribution channels, we face a number of competitors across different business sectors domestically and internationally,” Llach said.
Plastic gift cards will continue to be a strong piece of the company’s operations, Llach said. Thus, it’s likely to be a long journey to the point where digital platforms dominate the gift card industry.
“Some people will always stick with a physical gift card, while others may adopt digital gift cards where they might not have purchased one before because the new channel makes it easier to use,” said Mercator’s Jackson. “It’s not always a zero-sum game with plastic."