Research, regulation, industry reports

Fed study deflates size of gift card industry

Daniel Ray

The Federal Reserve says the prepaid and gift card industry isn’t as big as it thought it was.

The industry’s own estimates, based on private studies, have varied widely, but many suggested that it is an burgeoning payments behemoth. One study said the just one part of the gift card world, the use-anywhere “open-loop” gift card — alone accounted for $106 billion. (“Open loop” cards are far less popular than the “closed loop” cards, which can be used only in one store or chain, but carry lower fees.)

In its “Electronic Payments Study,” the Fed says hold on there.  That’s a paraphrase. The study actually says, “Separating out the hyperbole from documented results has proven to be a far greater challenge than anticipated. The reluctance by industry participants to share data suggests that there are some concerns about releasing information publicly.”

The estimate it came to on the industry’s size is far more modest. Combined, the use-anywhere and one-store gift cards totaled $46.9 billion worth of transactions in 2006, the Fed says. The transactions numbered 3.3 billion. It estimated the “open loop” segment, instead of being over $100 billion, was worth just $9.3 billion.

Bottom line: The gift card industry is growing aggressively, but it’s still tiny compared to the general purpose credit card industry. The Fed study pegs the total amount charged on general purpose credit cards at $1.9 trillion, spread over 19 billion transactions.

So in terms of dollars, that would make the general cards segment 47 times bigger than the gift-card segment. Think of it this way: General cards are Foghorn Leghorn; gift cards are Henery Hawk.

The Fed study came in the form of a supplemental report, released March 25, that provided additional detail to December’s Federal Reserve Payments Study.

The study was conducted by the Dove Corporation, a private research firm, but had the arm-twisting sponsorship of the Federal Reserve, so it got cooperation from the largest players in the industry, including Visa, MasterCard, American Express and Discover.

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  • Jim

    Thanks for the great post – I’m doing research on the size of the gift card industry for a potential acqusition in the industry. Not sure I believe Dove’s conclusions as they admit throughout their report that their survey method left many key players out and was subject to estimates. So my conclusion is the truth likely lies somewhere in between.
    What do you think?