Though no independent industry data exist to support the notion that “virtual” gift cards are on the rise, internal research from prepaid companies suggests consumers more often are opting for the product’s convenience instead of plastic.

Virtual cards tend to be usable mostly online because issuers provide just card numbers to recipients but no plastic card to swipe at the point of sale. As such, companies are investing more funds and resources to partner with an array of merchants to extend prepaid’s functionality beyond simple in-store redemption.

Giftango Corp., the first company to introduce virtual gift cards in 2005, on July 28 announced partnerships with 35 nationally recognized merchants, including Inc., J.C. Penney Co. Inc. and Nike Inc., to provide electronic cards for its customers.

In addition, CashStar Inc. over the past year has expanded its virtual card client base to include Home Depot Inc. and CVS Pharmacy. And First Data Corp. is behind Cold Stone Creamery’s new Facebook application, which enables consumers to provide recipients a code to use to redeem funds provided as a gift at the ice cream parlor chain’s 1,400 U.S. locations.

Indeed, merchants quickly are embracing virtual prepaid cards, says Adil Moussa, an analyst with the Aite Group. Merchants initially showed interest in the product “once a catchy name [virtual] was used and research was to show the costs and benefits,” he adds.

However, despite the emergence of multiple players in the virtual gift card market, the product is “still evolving,” says David Nelsen, Giftango CEO. He views the space as something of a battle royal as companies vie to become a leader in the space.

“It’s kind of like the Wild West right now,” Nelsen says.

Mobile functionality and social networking websites such as Facebook are playing a role in the direction virtual gift cards turn next.

In May, InComm Inc. acquired GroupCard, which has developed a Facebook application that enables multiple consumers to contribute to the purchase of a gift card from a retailer’s Facebook fan page or website.

InComm’s acquisition is part of a plan to help the Atlanta-based prepaid card marketer “evolve the payments space” through technology, Brian Parlotto, InComm senior vice president of consumer products and international, told PaymentsSource at the time of the deal (see story).

Social networking is “is one of the biggest buzz spaces right now across the entire [payments] industry,” Parlotto said.

David Stone, CashStar CEO, is a bit apprehensive about the effect social networking will have on the virtual gift card market.

CashStar is developing social networking-based products, but Stone believes the merits of “social e-commerce” are debatable because of privacy concerns associated with the popular websites. The company, however, will seek to adapt to consumers’ and merchants’ needs and wants, Stone adds.

Mobile is another form factor companies are exploring.

CashStar is developing a mobile application that would enable consumers to convert rewards to digital gift cards that could be displayed on smart phones, Stone says. The Portland, Maine-based company is developing the application for an unnamed bank.

Mobile also presents a challenge as virtual gift card companies seek a way to develop bar codes easily be scanned at the point of sale.

Giftango may be on the verge of finding an answer to that problem. The Portland-Ore.-based provider is focused on what “the next step will be, and that’s transitioning from e-mail to mobile,” Nelsen says. “We have a lot products ready to go in the mobile segment, but right now we’re staying focused on what’s out there today.”

The current email-based form factor is doing well, Nelsen and Stone agree.

Based on Giftango’s internal research, more than 70% of consumers choose to purchase a virtual gift card from merchants offering that option.

CashStar is experiencing similar results. The company saw increased sales in virtual cards in the week leading up to Mother’s Day and Father’s Day.

Convenience and personalization are helping to drive sales, Nelsen says.

Consumers may buy the card at a merchant’s online checkout page and send the card via an e-mail. Senders may upload their own images and add personal messages, while recipients may redeem cards online or print them out to redeem at the retailer.

“There is a ‘cool factor’ there, and people are getting more familiar with” virtual cards, Nelsen says.

Stone believes the space is about to quickly accelerate. “The age of the digital consumer is here,” he says.

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