Implementing a successful electronic club gift card program.

In the club industry, paper gift certificates have been a long-standing tradition. But during the past few years, club point-of-sale (POS) systems have become capable of supporting electronic gift cards as an automated alternative to paper certificates. POS-based applications involve plastic media (the size of a credit card) containing a magnetic stripe, bar coding, or embedded silicon chip. The POS system can activate, monitor, and apply credit or debit transactions toward member accounts.

Club gift cards can be used on a regular basis to replace cash, encourage club member frequency, promote new member visits, and direct recipient spending to specific club transactions, events, or activities. Once considered an afterthought or waste-of-time process, club system vendors report that club gift cards (also termed cash cards) are becoming a critical component consideration in both club POS and club management system selection.

Volume Surge

In the past few years, U.S. consumers have shown a voracious appetite for gift cards. Whether as a means to simplify shopping decisions or a way to provide recipient flexibility, gift card sales are now available across nearly all industries (including the hospitality industry). Could this phenomenon also advantage private clubs? From a club management perspective, gift cards have two unrecognized features: breakage and upspending.

Breakage is the term used to describe the value represented by unused gift cards--in other words, many gift cards are never redeemed, either in whole or in part. For example, Consumer Reports estimated that 19% of the gift cards received in 2005 were never even spent. Upspending, on the other hand, refers to the amount of money spent when the consumer purchases goods and services at a higher dollar value than carried on a gift card, and to complete the transaction the consumer must apply additional funds. A firm known as Datamark Technologies notes that when a gift card is used, the average transaction value is 31% higher than the retailer's normal check average.

Technology

Gift cards can be processed using existing club credit card readers, which therefore eliminates the need for separate gift card processing hardware and/or communication software while still maintaining control over the ability to activate new cards, increase the value of existing cards, perform balance inquiries, and redeem purchases. Most club gift card programs are stand-alone, processor-based solutions in which the club accounting system manages member account data, transaction posting, account reconciliation, and system reporting. In order to have an effective linkage, the club system needs to seamlessly interface with the in-house POS system. Depending on the preferred con figuration, the club management system--or POS system--can be used to create, activate, post, and process gift card transactions. The system administrator must program the application to conform to the expiration date, administrative fee, and other requirements of the state in which the club transactions will occur. Due to improved technology, club systems are often able to reissue a lost gift card.

Electronic gift cards fall into two general categories: cards issued by banks (open loop network) and cards sold by private clubs (closed loop network). Open loop cards have a wide degree of negotiability (brands like Visa, MasterCard, and American Express) and are akin to a debit card. On the other hand, in a closed loop system the card is limited in negotiability as it is designated for redemption only at the club, whether it be in a specific club venue, department, function, or activity. Unlike a club credit book posting, or other credit transaction that may be applied to a member's outstanding balance, the gift card requires that the member visit the club in order to apply it to a purchase. It is important to note that closed loop cards are governed by state laws, which vary widely. Some states, for example, do not allow gift cards to expire, while others place limits on non-use and administrative fees are imposed if the card is not used in a specified period of time. Clubs are advised to check local rules and regulations.

Cards Online

Although gift cards for hotels and restaurants are being marketed off-premises in places such as supermarkets and drug stores, the only reasonable off-premise venue for club card sales is online. Clubs with websites can establish a secure section dedicated to gift card sales, thereby enabling members to complete transactions 24/7/365. Gift cards can be purchased in designated dollar increments, event specific privileges, or other controllable units (e.g., greens fees, spa treatments, dinner entree, wine carafe, or Sunday brunch). The club can base its online gift card sales program on an e-commerce provider, installed club management system, or POS interface. In any case, the automated sales from the website will necessitate payment processing, transaction recordation, gift card fulfillment, and account tracking to the host account. The club may also restrict gift cards purchased online to be redeemed online; however, that may defeat one of the objectives of club gift cards, which is to drive traffic to the club. Additionally, clubs might consider the solution some restaurants are pursuing--the placement of unattended gift card dispensing kiosks in a secured area that is accessible even when parts of the club are closed.

Club Appeal

Customized and personalized plastic gift cards, often called signature cards, can be used to boost club gift card sales. Similar to hotel room key cards, changes in the artwork on the card face can be rapidly produced. Embossing, photo-imaging, and digital ink jet applications can be used to affix the recipient's name (as well as the giver's name) or photo to the card. The variety of templates, artwork, fonts, and card formats is also quite extensive.

Additionally, a flexible product gift card enables the purchaser to limit the card's acceptability to select locations and/or restrict validity to specific calendar dates, day parts, meal periods, menu items, concierge services, outings, events, spa treatments, or packages of services. In addition, the price of each or all products on the card can be hidden from the recipient and/or be fluid and tied to the club member's account without recipient knowledge. The technology to accomplish this feature will soon be available through the fulfillment algorithm available in some club gift card software.

Gift Cards & Club Accounting

Despite the following sections on general accounting principles and references to state law, clubs are strongly encouraged to consult a local accountant and lawyer.

In simplest terms, the issuance of a gift card is a currency exchange and not a sale. The sale is deferred and does not occur until the recipient redeems the card as a form of payment. From an accounting perspective, the sale of a gift card represents a current liability to the business, as payment is collected at the point of sale for a promise of future provisions. Standard accounting practices suggest that until redeemed, the amount received in payment for goods or services not be recognized as revenue. As gift cards are used, revenue represented by the rendered goods and services is recognized through gift card bank withdrawal, and the liability is reduced accordingly. In order to account for monies derived from gift card sales, a separate entry and fund deposit is normally created to chart redemption activity and to hold the funds securely for some period of time--may be up to five years--per state governed liability limitations. Historically, a common practice for non-redeemed gift cards was for retailers to charge a holding or dormancy fee ($2-3 per month for non-use) as a cost of deferred redemption.

Lost or unused gift cards, sometimes referred to as 'drift cards,' may not be found until after they expire. Once that happens, redemption may be problematic as the cardholder realizes that the card's value has slowly dwindled as the retailer may apply a service (or dormancy) fee as high as $2.50 per month. As a consumer protection benefit, many states have adopted laws governing gift card issuance, redemption, and non-use. Inconsistent state regulations, designed to clarify consumer's rights relative to inactivity and value preservation, are found in a set of regulations termed escheat laws.

It is interesting to note that there are no specific requirements for disclosing unredeemed gift card amounts under Generally Accepted Accounting Procedures or the Uniform System of Accounts.

Escheat Laws

Gift cards that are not redeemed for the full value on the card result in breakage that becomes subject to state escheat--'unclaimed property'--laws. (Note: There are no national laws regulating gift cards.) Until recently, most states permitted retailers to sell gift cards with expiration dates, inactivity fees (also known as dormancy or administrative fees), and/or other fees designed to reduce unspent balances to protect unclaimed funds from escheatment. This no longer is the case as many states have changed laws to protect consumers. Since 2004, some states have considered or adopted legislation to exempt gift certificates from escheat laws.

1. No Expiration Date Model--a consumer friendly approach in which funds never transfer to the state as a gift card remains valid until used. This model requires the retailer maintain a reserve fund for unanticipated redemptions. Used in several states--including California, Washington, and Massachusetts--money never escheats to the state.

2. Sixty-Forty (60/40) Model--allows gift cards to carry an expiration date, and at expiration (between three and five years) retailers are responsible for 60 percent of the value of the card escheat to the state. Retailers are allowed to keep the other 40 percent to cover reasonable costs (Indiana and Iowa use this model).

3. Imposed Expiration Date Model--under this model, the state eliminates gift card expiration dates but imposes its own end date for redemption (usually three years). Despite the fact consumers will not find expiration dates on gift cards, the cards are expected to be used in a specific time period. Non-use during the prescribed timeframe results in funds escheating to the state. Connecticut uses this model.

Note: Thirteen states have banned expiration dates, and although the laws apply only to local retailers, some national issuers have voluntarily eliminated or loosened card expiration policies. This is consistent with the increased number of retailers that allow online gift card sales and purchases as well as reloadable cards. Hospitality industry-related state escheat law summaries can be found at www.restaurant.org/ governmentlstatelgiftcardslgiftcards_statelaws.doc; and a summary of state gift card consumer protection laws can be found at http://www.consumersunion. or/pub/core_financial_services/003889.html.

Summary

Creation and validation of traditional paper gift certificates is time consuming and requires bookkeeping entries, manual authorization, and comprehensive tracking to ensure validity. Empowering club POS systems to activate, administer, and process transactions against member accounts may represent a significant change in club business practices. Club gift cards can be branded, personalized, and customized and offer the benefits of comprehensive usage tracking and a variety of redemption options. Cards that feature customizable artwork, photographs, and/or personalized embossing can contribute to the success of a gift card program while enhancing the club's image.

Michael L. Kasavana, Ph.D, CHTP is the NAMA-endowed professor in hospitality business at The School of Hospitality Business at Michigan State University.