In a relatively short time gift cards — replacing gift certificates of old — have grown to be an $80 billion business. The vast majority of cards are store-branded. Retailers ranging from Gap to Bed Bath & Beyond sell the store-branded cards that can be redeemed at any of its locations in the country.

In a more curious development, mall companies and managers have gotten in on the action, selling cards that can be redeemed either at any store in a given property or, in some cases, any mall owned by the company.

“Gift cards capture dollars that come into the shopping center, and it provides ease of gift giving that has become incredibly popular,” says Carol O'Grady, vice president and regional marketing manager at Jones Lang LaSalle in Chicago, which unrolled its program at 30 properties two years ago and is ringing up $10 million in sales per year.

This practice has raised a number of sticky questions that are only beginning to get resolved. On a marketing front, are consumers familiar enough with mall companies to know all the properties at which they can redeem the cards? How much money are mall companies ultimately making off these cards? And, most prominently, are the “maintenance” fees associated with the cards that bleed value if they're not redeemed legal?

An expanding niche

Gift card sales have been on the fast track in recent years, growing at a rate of about 20 percent per year, according to the Needham, Mass.-based TowerGroup. The research firm estimates that the entire gift card sales industry generated a whopping $80 billion in 2006, and that volume is expected to exceed $100 billion in 2008. TowerGroup divides the U.S. gift card category into four segments — retail, restaurant, miscellaneous and universally accepted cards. The retail segment represents the largest portion of gift card sales, generating an estimated $29 billion in 2006 with sales expected to reach $36 billion in 2008, according to TowerGroup.

The gift certificate concept has been around for decades. But it wasn't until the late 1990s that the program evolved into the gift card or prepaid bank card format. “One of the reasons for the explosive growth is the change in technology,” says Brian Riley, a senior bank card analyst at TowerGroup. In the past, it was a bit of an inconvenience to buy and redeem gift certificates. Now consumers can readily buy gift cards the mall or online, and they are easy to redeem at any of the mall's retail stores or restaurants, he adds.

Gift card basics

Most mall gift card programs operate in a “closed loop,” which means they are redeemable only within the group of retailers, restaurants and other businesses located within a specific mall or shopping area. Typically, gift cards are sold in denominations ranging from as little as $5 to more than $250. Mall companies see the cards as a service to shoppers and tenants more than a way of making money. They don't ultimately pocket any of the card value. It's a way of generating repeat traffic to the property. Ultimately, the bulk of the value of the cards is passed on to the retailer when they are redeemed, with the balance covering transaction costs.

Mall owners can establish their own terms and conditions related to fees and expiration policies. Most programs charge about $1.50 to $2.00 at the point of purchase. It is also common for a monthly maintenance fee of $2.00 to $2.50 to go into effect if a card is unredeemed after a year.

Most mall owners and managers outsource the card programs to third-party providers such as StoreFinancial or NBO Systems, or partner with credit card companies such as American Express or Visa. Typically, the shopping center doesn't pay or collect any fees for the program. The fees built into the program go toward paying card costs and packaging, as well as ongoing maintenance and operations for those firms in charge of running the programs.

Retail and restaurant tenants redeem gift cards the same as any credit card transaction. Although many mall gift cards are not specifically branded with a major credit card company such as Visa or American Express, the gift cards are paid through one of those credit card processors. Each retailer negotiates its own arrangement with the bank card network, with retailers typically paying about 2 percent when redeeming credit card transactions. The fee applies to gift card purchases.

However, gift card programs do need to comply with state laws and regulations, which can vary widely from state to state. For example, states such as Rhode Island, Connecticut, Massachusetts, Vermont, New Hampshire and Hawaii have barred gift card programs from charging monthly fees.

Gift card fees have caused several lawsuits alleging that “hidden fees” were being imposed upon consumers. Simon Property Group, for example, has faced suits in Georgia and New York related to the fairness and disclosure of maintenance fees and expiration dates that drain card balances.

Most recently, a suit in Georgia against Simon was dismissed that stemmed from a shopper who purchased $400 in gift cards at one of Simon's Atlanta properties in 2001, and tried to use one of the cards in 2002 only to find it was worthless. The court agreed that Simon did disclose its terms, which were printed on the back of the card.

Previously, in 2005, then-New York Attorney General Eliot Spitzer filed a suit in the State Supreme Court over Simon's assessment of the $2.50 monthly fees. (New York bans such fees unless a card has been unused for 12 consecutive months.) Simon agreed to disclose on its card a $5 fee it charges to replace a lost or stolen card, and the $7.50 fee it charges to reissue an expired card. It also agreed to pay the state $100,000 in penalties and $25,000 in costs.

Such cases only serve to reinforce the importance of fully disclosing gift card terms and conditions, says Scott Krigel, chief marketing officer at StoreFinancial in Overland Park, Kansas, which services gift card programs at 300 retail properties in North America. “Disclosure is everything,” he says.

Another challenge for consumers is redeeming the value of cards that are lost or stolen. Most gift cards are unregistered, so there is no consumer protection for lost or stolen cards. American Express has one of the few programs that registers cards at the point of purchase, and allows for the replacement of a lost or stolen gift card. Given the company's history of replacing lost or stolen travelers checks, applying the same principal to the gift card program was a natural fit, notes Stefan Happ, general manager for the U.S. gifting business at American Express.

More growth ahead

One of the latest trends in gift card programs is to make them even more readily available to shoppers. In addition to selling the cards at key locations such as the management office and customer service office, shopping centers also make the cards available through kiosks and automated sale units.

Developers Diversified Realty Corp. first introduced automated units at its properties two-and-a-half years ago. “It allows the customer to purchase a gift card at any hour of the day, and it doesn't require any staffing,” says John S. Kokinchak, a senior vice president of property management at Beachwood, Ohio-based Developers Diversified.

Currently, Developers Diversified offers gift cards programs at its lifestyle centers, mixed-use properties, entertainment centers and regional malls that account for 24 million square feet of its 164-million-square-foot portfolio. However, it is that automation and accessibility — combined with the consumer demand — that is prompting Developers Diversified to consider introducing gift cards at all 800 of its properties. “The technology is advancing to the point where we are considering the likelihood in the near future of rolling this type of card availability to our open-air power centers and community centers,” Kokinchak says.

Developers Diversified has experienced double digit increases in gift card sales in its portfolio, including an 11 percent increase in 2006. Some of its larger lifestyle centers rack up $2 million a year in gift card sales. “It continues to be a popular choice for the consumer because of the convenience and the power to give the recipient a broader choice of what they can purchase,” Kokinchak says.

Powerful marketing tool

Ultimately, gift card programs are emerging as an increasingly valuable marketing tool. Jones Lang LaSalle is using gift cards in a number of its marketing programs, including rewards for shopper loyalty programs and giveaways during the holiday shopping season.

One marketing program at Jones Lang LaSalle's Pembrook Mall in Virginia Beach, Va., uses gift cards as an incentive to attract new shoppers. The mall sends out a direct mailer to new residents, inviting them to redeem the postcard for a $20 gift card at the mall customer service office. “That has proved to be a very successful way for us to initiate relationships with new residents,” O'Grady says. The program rolled out about a year ago, and has generated a response rate of between 17 percent and 21 percent.

In addition, the gift cards create a larger branding opportunity to not only promote a single property, but also to promote a larger portfolio of properties. For example, Developers Diversified has adopted a policy for its Puerto Rico properties where a card purchased at one shopping center can be used at any of the 15 properties the company owns on the island.

The focus on gift cards as a marketing tool only reinforces the need to be very careful in operating a program that doesn't end up alienating customers, Riley emphasizes. “Gift cards can work against retailers in some ways, because if a customer doesn't get the full value of their card, they feel jilted,” he says. “The end play for a forward-thinking retailer would be to make them as consumer-friendly as possible.”