Nikhil Bhatla
June 13, 2007
Draft v0.1

Gift Cards, Post-Pay Style

aka

The End of Trading Money for Nothing

1. Overview

Today, consumers frequently buy gift cards for family and friends.  The buyer is required to pre-pay, converting cash into a gift card up-front.  Companies make a lot of money from these gift cards, via the float, unspent whole or portion of cards, and overspent cards (i.e. people buying more than they otherwise would have to consume the entire value of the card).  Gift cards are also a popular form of promotion and marketing, giving non-customers a cost-free reason to visit a store and try out their products and services.

2. Proposal

Instead of selling pre-paid gift cards, why not sell post-pay gift cards?  That way, gift-givers don't have to pay for the card up-front.  Instead, they select an amount (say, $20), and then "buy" the gift card by associating it with their credit card (or checking account).  The gift giver is only charged when the recipient actually uses the card, at which point the buyer sees the bill, up to the specified limit, on his credit card statement.  Basically, the buyer is giving a portion of their credit line to a friend or family member, and guaranteeing that they'll foot the bill up to a limit.

The End of Trading Money for Nothing (or something snazzier) would be the name of the organization that holds a patent for this business process.  We would license the patent, as well as provide software/hardware and support services for organizations seeking to deploy post-pay gift cards.

Most buyers, when presented with gift cards they had to pay for up-front and gift cards that they only paid for when they were used, would prefer the post-pay gift card, because it's less money up-front.

3. Brief User Flow

1) Buyer decides they would like a post-pay gift card (at a physical retail location or online)

2) Buyer associates a specific credit card (or checking account) with the gift card, and signs an agreement authorizing up to $X to be charged to his credit account via the gift card

3) Buyer sees a $0 or 1 cent charge on his credit card statement, with the description noting the authorized amount of $X

4) Buyer gives the gift card to family member or friend

5) Gift card recipient goes to a store (retail or online) and uses the gift card

6) The gift card's ID is already associated with the buyer's credit card, so that card is charged

7) Recipient receives receipt indicating remaining balance

8) Buyer sees charge on his next credit card statement, which by default masks any details of the charge other than the price and store (to provide some protection for the recipient's privacy)

4. What The End of Trading Money For Nothing Would Do

- File and license the patent for this business process
- Provide the software management system (and servers?)
- Provide installation services
- Provide customer support
- Provide fraud management
- Provide documentation services (for dispute resolution)
- Provide actual gift card design and manufacture?

5. The Gift Card Market & Business Dynamics

- In 2007, between $70B-$100B will be spent on gift cards(http://www.npnweb.com/uploads/featurearticles/2005/Technology/0504_tu.asp)

- During the 2005 holiday season, $18.5B was spent on gift cards, of the $50B spent during all of 2005 (http://www.aciworldwide.com/pdfs/RetailCommerceServerGiftCard.pdf & npnweb.com)

- Restaurant gift cards are the most popular (27%), while gift cards for department stores (14%), discount department stores (10%), clothing stores (9%) and online retailers (7%) round out the top 5 categories

- In December 2004, 8-11% of all US retail sales was expected to be on gift cards (npnweb.com)

- During the 2004 holiday season, average consumer was expected to spend $80 on gift cards (11% of total budget) (ibid)

- In 2004, 74% of consumers were expected to buy a gift card during the holidays, up from 70% in 2003 (ibid)

- Third-party affiliates receive between 5-15% of a gift card's face-value (e.g. if Target sells a $15 iTunes gift card, they keep between $0.75 and $2.25 as gross profit)

- Basic gift card system costs $150-$200, which includes 100 cards, display rack, and software installation through your credit card terminal (buyerzone.com)

- Small business orders of 500-1000 cards cost 75 cents each

- Gift card software for PCs cost $300-$400 per location

- If using credit-card terminal, expect to pay one-time software installation fee of $50 to $75 per location

- Transaction fees can be from 10 to 75 cents per transaction

- To process transactions, vendors require a 1- to 3-year contract at $25 to $35 per month, which covers reporting, fraud monitoring and customer support

- In 2003, $2 trillion was charged on credit cards

- A credit card terminal, refurbished, can run for as low as $200, or can be rented for $15-$20/month
	- Merchant account providers (those who do your credit card processing) charge 0.5% more if a card number is keyed in rather than swiped (which is why credit card fees are more expensive with Internet shopping than at retail)
	- You can get software that provides a "virtual" terminal for handling credit card transactions
	- Each terminal includes a merchant ID and terminal ID

- A credit card "auth" can be associated with a credit card for 30 days

- 10% of the value of gift cards is never used (Electronic Gift Card Laws - April 2006.pdf)
	- Depending on the state, some or all of this value may escheat to the state treasury after a period of years (usually 3 years)
	- Assuming escheat laws exist in all states under all circumstances (not true), effective free profit is the float, between 5 and 10% of the 10%, resulting in a net profit of 0.5% to 1% of the face value of the gift card, not accounting for continuous compounding and the time period of the float

- Nikhil's opinion: Real value in gift cards is promotional, getting new customers into your store, increasing familiarity and likelihood of a later purchase

6. Today's Pre-pay Gift Card Business Model (TBD)

- Merchants
- Affiliates
- Gift Card Service Providers

- What is the current business model regarding gift cards?  What are the profit margins?  What are the components of the profit margin (affiliate fee, gift card cost, management system cost, etc.)?  

- Cost (including physical card and backend system) - $1/gift card (http://www.buyerzone.com/marketing/gift_cards/buyers_guide1.html)

7. Potential Post-pay Gift Card Business Model (TBD)

- Merchants
	- In post-pay, merchant pays the non-swipe credit card fee on each purchase
- Affiliates
- Credit Card Companies
- Gift Card Service Providers

8. Dispute Resolution

One way for a buyer to legitimately dispute a charge authorized by the post-pay gift card would be to claim that the recipient of the gift card lost it.  This is similar to lost pre-pay gift cards, which the buyer or recipient may seek to recover after someone else has already spent the money.  In both cases the buyer could attempt a charge-back - further investigation is needed of the likelihood of chargeback success.

In general, buyers will likely not be able to successfully dispute purchases made with their gift card, as long as the sum of the purchases is less than the amount authorized for the gift card.  The fact that the buyer has to sign a contract at purchase-time of the gift card makes chargebacks less likely to go through, as compared to them not having to sign a contract.

9. Privacy

The gift card buyer should never be able to see any details about the purchases made with the gift card, asides from the retailer at which the purchase was made (if it's a retailer-specific card), so as to protect the privacy of the recipient.

10. Card Cancellation or Expiration

If the buyer's credit card is cancelled or expires without renewal, the gift card become void.  When the recipient attempts to use the card, it will be rejected due to cancellation or expiration of the underlying credit card.

11. Card Overcharge

If the buyer does not have enough available credit to complete the recipient's purchase, the purchase will be declined due to insufficient credit of the underlying credit card.

12. Additional Features (TBD)

- Pay now or pay later with the same card - it's the buyer's choice

- Provide we-host and retailer-hosts models (of the software/hardware infrastructure required)

- Centralized web-management interface where the buyer can cancel his cards, 

- Inclusion of the sum of all post-pay gift cards on the credit card bill as outstanding liabilities

- Allow buyer to set an optional expiration date?

13. Competition (TBD)

- Protect from competition via a patent

14. Gift Card Technologies

- There are 2 basic models for gift card technologies in use today:
	1) The centralized model, where gift card data is tracked via software installed on to the credit card terminal, POS system, or desktop PC and stored in a database
	2) The distributed model, where the gift card data is stored on the card itself, without any centralized tracking (according to Pops)

- New card is activated by swiping it through a credit card terminal or PC
	- Or via ASP activation, where someone visits a website, enters the gift card ID number and value, and the card is activated

- Gift card vendor receives a small fee each time you activate a new account, and in some cases whenever the customer uses the card

- Reporting systems also often in place for tracking customer purchases and better-targetting marketing

- Who would "issue" the gift card?
	- bank?
	- merchant?
	- us?

15. How It Works: Detailed Technology Overview

4 Scenarios:
	1) Retailer sells their own post-pay gift card in their store
	2) Third-party affiliate sells a retailer's post-pay gift card in their store
	3) Retailer sells their own post-pay gift card online
	4) Third-party affiliate sells a retailer's post-pay gift card online

Offline Scenarios:
	1) Buyer sees gift card and decides to "buy" it
		a) Retailer (first- or third-party) swipes the gift card
			- software on the POS or CC terminal identifies the card as an unactivated gift card
			- unactivated gift card includes merchant ID, card ID, and amount
		b) Clerk enters gift card amount (e.g. $20)
		c) Clerk or customer swipes credit card
			- software conducts an "auth" for the requested amount (e.g. $20)
			- software prints contract obligating buyer to pay the requested amount if billed to their credit card (as evidence against charge-backs)
		d) Clerk or customer enters 3-digit card code (optional)
		e) Customer signs contract authorizing future charges up to $20 on his credit card
		f) Clerk checks signature against signature on the credit card
		g) Clerk tells software that the customer signed the contract (e.g. pushes "Enter")
			- software stores auth code in merchant's database (based on gift card's merchant ID), with date, credit card number, expiration date, 3-digit card code, and name on card, and associates this data with the gift card ID, spent balance, and remaining balance
			- if bought through a third-party affiliate, update affiliate's account, crediting them x% (say, 5%) of the value of the gift card, to be available immediately or paid out in a batch process.  that money comes from the merchant (or maybe us to start).
		h) Clerk gives activated gift card to buyer
		i) Later, the buyer sees a line-item on his credit card statement:
			Best Buy: $20 Post-pay Gift Card               $0.00
			- I don't think you can actually do this, but it would be ideal
	
	2) Buyer gives gift card to the gift recipient
	
	3) Gift recipient is happy :)

	4) Recipient goes to store and spends the card
		a) Clerk rings up purchase
		b) Recipient or clerk swipes the gift card
			- software on POS or credit card terminal reads the card ID, and looks up the associated data in the merchant's database
      			- software checks to ensure that the remaining balance is non-zero
     			- software checks to ensure that purchase amount is less than the remaining balance
        				- if it isn't, store remaining balance as the value that needs to be authorized
        				- if it is, store purchase amount as the value that needs to be authorized
      			- if the stored auth has expired (it's greater than 30 days old), software uses associated credit card to send a new "auth" request to the payment processor
      			- on successful "auth", software sends "deposit" command to the payment processor
        				- payment processor takes the "keyedin" fee, rather than the lower "swiped" fee
      			- money is transferred from the issuing bank, which holds the buyer's account, to the sponsoring bank, which holds the merchant's account
      			- software stores transaction details in a transaction database associated with that card ID
      			- software prints receipt, which includes card ID, amount spent, and remaining balance
   		c) Clerk hands over the receipt and recipient goes on her way
   		d) Later, the buyer sees a line-item on his credit card statement:
           		Best Buy                                      $10.97

Online Scenarios:
	1) Buyer sees gift card and decides to "buy" it
   		a) Buyer adds gift card to shopping cart
   		b) Buyer completes purchase, entering credit card information, including card number, expiration date, 3-digit card code, name, address, and an optional recipient email address and e-card
      			- their web server sends credit info to our web servers via SSL, including e-card and email address if provided
      			- our web server does auth and stores auth code in merchant's database (based on gift card's merchant ID), with date, credit card number, expiration date, 3-digit card code, and name on card, and associates this data with the a new gift card ID, spent balance, and remaining balance
   		c) If email address was provided, recipient received e-card with gift card via email
      			- our web server generates e-card, which includes the gift card ID and available balance, and sends it via email to the recipient
   		d) If email address was not provided, email with gift-giving details is sent to the buyer himself

	2) Buyer gives gift card via email
   		a) Buyer visits merchant's web site (or our web site?) and specified e-card and email address(es) to send to
     			- their web server sends credit info to our web servers via SSL, including e-card and email address if provided
      			- our web server does auth and stores auth code in merchant's database (based on gift card's merchant ID), with date, credit card number, expiration date, 3-digit card code, and name on card, and associates this data with the a new gift card ID, spent balance, and remaining balance
   		b) If email address was provided, recipient received e-card with gift card via email
     			- our web server generates e-card, which includes the gift card ID and available balance, and sends it via email to the recipient

	3) Gift recipient is happy :)

	4) Gift recipient visits merchant's website and spends gift card
   		a) Recipient adds items to shopping cart
   		b) Recipient completes purchase by entering gift card ID during checkout
      			- their web server communicates gift card ID to our web server over SSL
      			- our web server checks to ensure that the remaining balance is non-zero
      			- our web server checks to ensure that purchase amount is less than the remaining balance
        				- if it isn't, store remaining balance as the value that needs to be authorized
        				- if it is, store purchase amount as the value that needs to be authorized
      			- if the stored auth has expired (it's greater than 30 days old), our web server uses associated credit card to send a new "auth" request to the payment processor
      			- on successful "auth", our web server sends "deposit" command to the payment processor
        				- payment processor takes the "keyedin" fee, rather than the lower "swiped" fee
      			- money is transferred from the issuing bank, which holds the buyer's account, to the sponsoring bank, which holds the merchant's account
      			- our web server/database stores transaction details in a transaction database associated with that card ID
      			- our web server communicates remaining balance back to their web server
      			- their web server displays remaining balance and 

	5) Gift recipient visits merchant's website to check balance remaining on gift card

16. Fraud and Exploits

- Buyer can roll-over credit-limit every month (as auths expire), enabling them to buy another round of post-pay gift cards beyond their credit limit
	- But since the gift card is post-pay, that just means that half of the gift cards will be denied if they don't 

17. Laws & Regulations

* Regulation E (Sec 205)
	- Available at http://ecfr.gpoaccess.gov/cgi/t/text/text-idx?c=ecfr&sid=e628436c76122100d4578fb93e9ed203&rgn=div5&view=text&node=12:2.0.1.1.5&idno=12#12:2.0.1.1.5.0.3.5
	- Also known as the Electronic Fund Transfer Act (title IX of the Consumer Credit Protection Act, 15 U.S.C. 1693 et seq.)
  	- Meant to protect consumer information in cases of electronic fund transfers

	- Nikhil's conclusions: 
		- Regulation E does not prevent post-pay gift cards as conceived above (I think)
		- We (or the merchant) are a "financial institution" because we will issue an access device (gift card), so all regulations relating to financial institutions in Regulation E apply to us (or the merchant)
		- The authorization for the post-pay gift card does not seem to be considered a "pre-authorized transfer", because it is not an "electronic fund transfer authorized in advance to recur at substantially regular intervals"  (205.2.k).  It doesn't recur at substantially regular intervals.  So regulations on pre-authorized transfers may not apply.
		- We (or the merchant) is also classified by 205.14 as an "electronic fund transfer service provider not holding consumer's account"
		- What the consumer is doing, in the language of this regulation: "consumer furnishes an access device and grants authority to make transfers to a person (such as a family member or co-worker)" (2.k.2 of the staff commentary on the regulation)
		- Regulation E does not prohibit storage of information required to make EFTs, as Pops thought it might

	- An "accepted access device" can be a card that the consumer has authorized another to use to transfer money between accounts or obtain money, property or services (205.2.a.1)

	- An "electronic terminal" includes POS terminals (205.2.h)
  
	- Could post-pay gift cards fall under "pre-authorized transfers"?  Likely not, because it doesn't recur at substantially regular intervals.  This notion is meant to apply to recurrent billing and things similar to that.
    		- Written authorization for preauthorized transfers from consumer's account. Preauthorized electronic fund transfers from a consumer's account may be authorized only by a writing signed or similarly authenticated by the consumer. The person that obtains the authorization shall provide a copy to the consumer. (201.10.b)
    		- (d) Notice of transfers varying in amount — (1) Notice. When a preauthorized electronic fund transfer from the consumer's account will vary in amount from the previous transfer under the same authorization or from the preauthorized amount, the designated payee or the financial institution shall send the consumer written notice of the amount and date of the transfer at least 10 days before the scheduled date of transfer.
      			- requires email or letter notification?  but we don't have 10 days notice...
    		- (2) Range. The designated payee or the institution shall inform the consumer of the right to receive notice of all varying transfers, but may give the consumer the option of receiving notice only when a transfer falls outside a specified range of amounts or only when a transfer differs from the most recent transfer by more than an agreed-upon amount.

* Regulation Z: Truth in Lending Act (15 U.S.C. 1601 et seq.) (TBD)

* Sections 915 and 916 of the act regarding civil and criminal liability (TBD)

* Patriot Act requirements (TBD)

* Truth in Savings Act (12 U.S.C. 4301 et seq.) (TBD)

* Bank Secrecy Act (BSA) (TBD)

* Anti Money Laundering laws (AML) (TBD)

* Office of Foreign Assets Control (state blacklist) (TBD)

* Federal laws specifically about gift cards
	- None exist (Electronic Gift Card Laws - April 2006.pdf)
 	- One potential piece of legislation, HR 85, introduced on Jan 4, 2005 and intended to eliminate gift card expiration dates, never became law (http://www.govtrack.us/congress/bill.xpd?bill=h109-85)

* State laws regarding abandoned property and the escheatment of unclaimed funds back to the state (giftcards_legal_background.doc)
	- In Illinois, gift cards without expiration dates never escheat back to the state
  	- In Connecticut, gift cards cannot have expiration dates or fees, and they escheat back to the state after 3 years
  	- In Colorado, Maryland, Massachusetts and New Hampshire, gift certificates aren't considered property or low denominations aren't subject to escheat laws
	- In New Hampshire, only gift cards of $101 or greater are subject to escheat laws after 5 years
	- In Massachusetts, gift cards issued in the state must expire in less than 7 years, service charges or dormancy fees are prohibited, but issuers of gift cards no longer have to report unclaimed funds to the state
	- "Open loop" gift cards, which work at several retailers via the Visa or Mastercard networks and are issued by a bank, may be subject to state law in addition to federal law (based on a recent ruling called Simon)

* Paypal is not a bank (http://news.zdnet.com/2100-9595_22-858445.html)
	- The FDIC does not consider the company to be a bank or savings association because it does not accept deposits as defined by federal law, which requires institutions to have a banking charter

18. Other Potential Issues

- Impact on franchisees?
	- Simplest thing would be to work with a regular business, not franchise-style business, at least to start

19. Trade Organizations

- Incentive Gift Card Council (http://usegiftcertificates.org/) (within the Incentive Marketing Association)

20. Marketing, Advertising & Promotion (TBD)

- People should feel good knowing that they can give a gift card without getting charged immediately
- Recipients don't even need to know that the gift card they received was post-pay, not pre-pay
- Need a catchy name
	- "Pay Later Gift Card"
	- "Now or Later Gift Card"
	- "Pay at Purchase Gift Card"
	- "Present-pay Gift Card"
- Market as "consumer protection" - if a gift card is lost, no money is actually lost
	- "gift card insurance" for free!

21. Industry Contacts

- Incentive Gift Card Council directory: http://usegiftcertificates.org/displaycommon.cfm?an=3
- Issuing merchants
	- Blockbuster - Lori Milne: director of account development, partnership marketing
	- iTunes Store
	- Best Buy
	- Hollywood Video
	- Starbucks
	- Home Depot
	- Sharper Image
	- Target
- Partnering retailers
	- 7-Eleven

22. Miscellaneous

- www.buyerzone.com - for purchasing gift card, POS systems, and more

23. Expertise Needed

- Lawyers expert in banking and credit laws, on federal and state levels
- Lawyers expert in gift card laws, on federal and state levels

24. Patent Review

Patents issued for ["gift card"] (172)
- Relevant
	- 6000608: Multifunction card system: a multifunction card capable of serving as a prepaid phone card, a debit card, a loyalty card, and a medical information card
- 6050493: Pre-paid flower or gift card: order by phone one of a set of flowers depicted on the card
	- 6467684: Pre-paid card system for purchasing products or services
	- 6755341: Method for storing data in payment card transaction

- Irrelavant
- 5261174: Combined magnetic picture frame and gift card
- 5219184: Gift card incorporating thank you note and method
- 3370779: Cole Ornamental Stretch Cord Package Tie with Gift Card
- D396055: Gift card with removable personalized angel doll
- 5303489: Combined magnetic picture frame and gift/display card
- D447055: Gift card
- 5143279: Gift card and envelope
- 5232087: Combination product transmittal package and greeting card
- 5592378: Computerized order entry system and method
- 5437478: Gift card with receipt
- 5845425: Photoframe and gift card combination

Patent applications for ["gift card"]
- 

Patents issued for ["gift cards"] (130)
- 

Patent applications for ["gift cards"]
- 

Patents issued for ["gift certificate"] (246)
- 

Patent applications for ["gift certificate"]
- 

Patents issued for ["gift certificates"] (313)
- 

Patent applications of ["gift certificates"]
- 

24. Todos

- Rigourous patent searce: read all issues patents and pending patent applications that mention "gift card" (172), "gift cards" (130), "gift certificate" (246), and "gift certificates" (313)

- Investigate standard credit agreement and figure out what info we need to store to comply with the agreement

- Get credit card processor to support the "permanent auth"?

- Build out business model and merchant ROI models, compared to current gift card models

- Get Arun Uncle's opinion?

- Clean up all TBDs

25. Completed Todos

- Talk to Tunlin about details of Relax The Back's gift card system, if any, as well as standard credit processing agreement
- Talk to Pops about the idea:
	- Is it feasible?
	- What would need to be done to make it work?
	- How would he do it?
	- Can we store the credit card data in a database for charging later?  Is this kosher with the credit processing agreements?

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