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December 28, 2009

Online gift cards propel CashStar

Photo/Brandon McKenney David Stone, CEO of CashStar, says his company's novel electronic gift card software has led to phenomenal growth
By Jackie Farwell

It’s the ultimate last-minute present. You go online, buy your second cousin-in-law a gift card to her favorite restaurant, and e-mail the $20 token of thoughtfulness instantly, without having to wait for the mail. She gets her buffalo wings, and you get to cross one more thing off your holiday to-do list.

Making all this e-gifting possible is CashStar, a Portland startup that integrates its online gift card technology onto the websites of 27 retail clients. Business is “booming,” according to CEO David Stone, and the company was gearing up for a wave of business leading up to Christmas. “We’re up thousands of percents,” he says.

CashStar’s clients include The Home Depot, CVS and Uno Chicago Grill, and Stone expects more will sign on to what he sees as the next evolution of the gift card.

CashStar’s platform allows companies to offer interactive gift cards. A shopper goes to a company’s website, buys a gift card for the amount they want, and can add a personalized message or image. The recipient receives the card by e-mail and can redeem it instantly, if the retailer has an online store, print it out and

use it at a brick-and-mortar location, or save it for later. Retailers can also embed incentives, special promotions and rebates into the gift cards.

Online gift cards make up only a small percentage of the $87 billion gift card industry, which is dominated by the plastic throwaway cards sold in many checkout lines. But the segment is expected to grow, and not just because consumers like the convenience, personalized offerings and eco-friendly advantages over plastic. Retailers get more than the dollar value of the cards — they also capture consumer data. E-mail addresses and shopper preferences are a gold mine for retailers, especially for restaurants and other businesses that don’t generate a lot of web traffic, Stone says. Added incentives — buy a $25 card and get a free $10 card for yourself — are also proving popular.

Such benefits have brought the industry to a tipping point, according to Stone, an experienced executive in the payment processing industry who spent 14 years at American Express. “The next 24 months it’s going to move fairly fast, and we’d like to capture the lion’s share of that market,” he says.

CashStar has more than tripled its staff this year, from eight in March to 27 full-time and about 15 seasonal employees. It also moved from South Portland into a 6,000-square-foot office on Middle Street in Portland. Stone declined to share revenue figures, but says projected revenues for 2010 are “in the millions.”

Since its founding 18 months ago, the startup has brought in nearly $9 million in capital, from San Francisco-based Passport Capital and from Steven Boal, CEO of Coupons Inc., CashStar’s sister company. The Maine Technology Institute this summer awarded the company $472,000.

So far, CashStar appears to be the only firm of its kind, though many retailers operate their own e-card functions on their websites. CashStar, however, is keeping an eye on a couple of mobile companies, including San Diego-based Transaction Wireless, getting into the business, Stone says.

Other challenges remain. Popularity of private-label gift cards is plummeting, and store gift card spending is expected to fall 7% in 2009, according to Massachusetts market research firm TowerGroup. The reduced spending is attributed to the weakened economy, lower holiday sales and less consumer confidence in retailer’s inventories and overall stability. After all, a virtual gift card is virtually useless if the company goes under.

TowerGroup analyst Brian Riley cites other challenges for CashStar as it introduces a new payment option into the market. He thinks consumers may miss the tangibility of plastic. “People are so used to the dimensions of a card,” he says.

And mobile payment processing on iPhones and BlackBerrys, the industry’s hottest new development, will prove formidable competition, he says. But, the e-gift cards are easy to purchase and use online, and CashStar is in the right segment of the market. “The e-commerce niche probably has a lot more promise in it than the retail point of sale,” Riley says.

According to CashStar’s market research, 68% of online shoppers say buying an online gift card is more convenient than plastic, and 80% said they’d be more likely to buy an online gift card from retailers that offer personalized cards. One of CashStar’s clients, restaurant chain O’Charley’s, which owns the Ninety Nine franchise, saw a nearly 200% increase in online cards ordered off its website between Mother’s Day and Father’s Day this year, according to Stone. Discussions with several Maine companies are under way, he says.

The startup is also selling directly to consumers much earlier than it originally planned, offering its clients’ cards on the CashStar website. The startup plans to offer its own CashStar-branded card in 2011, after signing on additional clients this year, Stone says. “We’re toying with the idea of a dining card.”

CashStar has to get through 2009 first, though. Stone was readying for a blockbuster pre-Christmas boom, preparing to staff customer service lines as late as 2 a.m. “Very important to us will be the two or three days before Christmas,” he says. “We’re optimistic we’re going to see a ton of last-minute purchases.”

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