How Do TCN and Ultimate Gift Card Make Money as a Business?

Lockdude on 23/11/2023 - 13:24
Last edited 23/11/2023 - 13:28

I'm sure there's a simple explanation, but the 15% off TCN cards really has me wondering how money is made here. A couple of things I'm considering.
1. Coles sells them, and presumably want to make some money.
2. TCN/Ultimate Gift Card produce the cards, and presumably want some money.
3. Loooots of businesses sign on to the program - most of whom have their own gift cards available too. So presumably they have to have some strong incentive to sign up (maybe that's not monetary, but increased likelihood of people buying their products?)
4. Then Coles has a 15% off sale on some cards - so whose pocket does that money come out of?
5. Money actually needs to be moved around - how? Does TCN / Ultimate contact the businesses when their cards are used at their POS and ask for a commission or something?

So is it something like individual business negotiate a commission they're willing to join on for. E.g. maybe JB says I'll give you a 5% kick-back if someone purchases from our stores using your card.

So if I buy a $100 TCN card, for $85, JB might give TCN $5. But then what does Coles get? Maybe $5 too? From who? TCN? So I've spent $85, to get $100 worth of goods, and TCN gets $5, Coles get $5 (of TCN's money), so TCN make nothing, and Coles lose $10.

So I've obviously just made those numbers up. But I'm not sure what numbers here would work. Unless JB is giving something big like a 20% kick-back for this stuff. But then there's so many stores on board, surely they couldn't all sustain that!?

So - how do all the businesses in this chain make money. Anyone know what goes on behind the scenes?

Financial Blackhawk Network (Australia) Gift Card The Card Network

Comments

  • Nugs on 23/11/2023 - 13:27
    -1

    Maybe they are laundering?
    .

  • Neoika on 23/11/2023 - 13:30
    +5

    Unused cards and remaining balance. When the product is labelled and sent as gift, it is more likely to be wasted than for own use.

    • Lockdude on 23/11/2023 - 13:31
      +1

      Ah, I hadn't considered this. So they're banking (and might have data to support it) that they'll make money en-masse with these cards from the unused balances that expire after 3 years?

      • Neoika on 23/11/2023 - 13:33
        +2

        You may read many online comments about gift cards unable to be redeemed and probably ended up in the bin.

  • Drakesy on 23/11/2023 - 13:38
    +2

    Gift cards are generally a cheap loan for companies, in this case they're probably using it for capital raising.

  • Neoika on 23/11/2023 - 13:41

    TCN, Ultimates, Prezzee swap eGC are their own assets. They are free money to the business till customers use them (or maybe never), which can create a high cashflow.

  • rambutann on 23/11/2023 - 13:41

    My guess would be that TCN and Coles are trying to penetrate the market by offering these discounts. Make customers return in the future.
    By convincing customers that 'Coles is the place to buy a gift card' people will go there whenever they need one for a birthday - at the same time they will fill their basket with other things because they have already gone to the effort of driving to the supermarket.

    I would guess that the math in the case of a $100 gift card for JB-Hifi purchased from Coles at 15% off would be something like:
    TCN pays $85 to JB
    TCN makes $0
    Coles makes $0

    It would either be this or they pay JB $80 and TCN/Coles make next to nothing.

    Under a normal situation, I think TCN would make around 8-9% and Coles would make around 6-7% before costs.

    I have worked in the FMCG industry before, there are plenty of products in supermarkets that run on sub-10% margins - especially when they are products that drive customers into stores.

    • Lockdude on 23/11/2023 - 16:00

      Hey, this is a really insightful answer. Question though, why would TCN only pay JB $85 instead of the full $100 it cost them? Or do you think JB and all the other retailers on the card would be in on this promotion somehow too?

      Also, funny aside - I accidently types "inciteful" instead of "insightful" - which might have implied a different type of post from you!

      • rambutann on 23/11/2023 - 16:48

        Because its better to take a lower margin (the $80-$85) and get sales because that gift card existed for someone to purchase.

        If that gift card wasn't conveniently waiting to be purchased as a gift in a local Coles, you ask the question - will someone still go out of their way to find a JB Hi Fi store and purchase a JB Hi Fi gift card? Probably not. So by having that gift card available JB HiFi would have captured a sale which they otherwise wouldn't have.

        Theres a 1000000% chance that they also take expiry credit $$'s into account when calculating the economics of all this.

  • CheapandUsed on 23/11/2023 - 13:51

    "Industry analysts have indicated that the average breakage for the industry is between 6 and 7 per cent but that breakage rates can differ significantly depending on the market segment and the average transaction value."

    https://treasury.gov.au/publication/gift-cards-in-the-austra…

    So potentially $6 to $7 for every $100 gift card purchased on average

  • georgez1969 on 23/11/2023 - 13:59

    to take a leaf out of the travel industry, the supermarkets might well be sales agents, earning a commision on gift cards sold. and forward the balance to the card issuer, that manages a cash/trust/holding fund and plays with the money, until one day, one of the participating retailers has a customer redeem one.
    you know how you swipe and put a pin?
    it draws the funds from this cash/trust/holding fund, acting as a clearing house.
    the retailers may well pay a merchant fee, like visa/mastercard, to access this facility.

  • jetblack on 23/11/2023 - 14:37

    I assumed it's similar to how cashback schemes make money - ie. they get a referral percentage for each sale. Difference being shopcack/cashrewards et al share some of that referral money with you, TCN however discount their cards from time to time?

  • Davo1111 on 23/11/2023 - 14:38

    Probably find the retailers know the percentage claimed of giftcards and therefore can offer deals based on that number.

    ie if you know 50% of giftcards are claimed, you can sell giftcards for 20% under face value and everyone makes a profit.

  • webtonmoy on 25/11/2023 - 03:18

    Gift cards have a minimum 3-year validity, and many customers do not use them for a long time. So if I purchase 1000$ gift card at 10% off and use it after 2 years, that is basically a 2-year loan for them for 10%, which almost evens out any discount. Also, it almost guarantees that I would use the card and purchase from that store, and they make a profit on the sale too. Without that card, I may buy from a competitor.

  • chicken-farm on 29/11/2023 - 16:32

    First of all if you think of these gift cards as the same as the Insurance Industry, then everything would starting to make sense!

    15% is honestly not much if you comparing it to the rate of people lost their cards. Nevertheless you don't see 15% off then often and that's to do with the fund management, the massive discount is to attract more people to contribute more funds into the pool, in order to achieve certain KPIs.

    Remember not all the users would be like us (Ozbargin people), who use the card face value instantly, majority of the people is using it as a form of gift, and 1. not gonna spend it asap, and 2. high potential never gonna use it. Just like your card insurance really

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