Coinstar’s Alula Kiosks Add Physical Touch to Gift Card Exchange Market (January 2013)

By Kate Fitzgerald, Emerging Payments Editor

Coinstar Inc. is grabbing attention in the secondary gift card market with Alula, a kiosk service it’s piloting that enables consumers to immediately convert unused gift cards into cash at supermarkets. The service adds a fresh twist to the process of selling unused gift cards to third parties, which typically resell them online for slightly less than the card’s face value. The majority of such online gift card exchanges require at least a few steps, while Alula speeds up the process with in-store card exchange that also could help increase visibility for the emerging secondary gift card market, observers say.

Alula is a pilot venture from Coinstar, whose core automated retail businesses include Redbox self-service DVD and video game rental and Coinstar self-service coin-counting brands. Last year the company began testing 50 bright-yellow Alula kiosks in supermarkets in Ohio, Illinois and Arizona to gauge consumer response. (“Alula” is named for a bird’s wing.) Consumers may insert any of about 170 different retailer gift cards into an Alula kiosk and see the amount of payment offered. The company is testing offers typically ranging from 60 percent to 85 percent of the face value of the gift card. Consumers who accept the offer receive a voucher they may exchange immediately for cash at the supermarket checkout lane. Alula then resells the cards it receives to a secondary market and profits from the spread. To help prevent fraud, Alula requires customers exchanging gift cards to provide a Visa or MasterCard credit card as an identification token. “A consumer’s credit card will not be charged,” an Alula spokesperson tells Paybefore.

Possible Challenges

The concept raises a few questions for industry observers. First, requiring a credit card could present obstacles for some cash-strapped consumers, Madeline Aufseeser, a senior analyst with Aite Group, tells Paybefore. “Creating awareness for gift card redemption programs is great, however, in the universe of people with unused gift cards, not everyone has a Visa or MasterCard,” she says, noting that some consumers also might find it confusing to insert a credit card when redeeming a gift card. And, persuading supermarkets to give up limited floor space also could be a challenge. Adoption “will depend on how profitable it is for supermarkets,” Aufseeser says.

Coinstar’s strategy in placing separate new kiosks in stores, apart from its broadly distributed machines that sort and redeem coins, is clearly aimed at creating visibility and simplicity for consumers new to the gift card exchange process, Ben Jackson, a senior analyst with Mercator Advisory Service, tells Paybefore.

So far, Alula has not disclosed which third-party companies are absorbing the consumer cards it accumulates, but major players in the online gift card exchange market are aware of the newcomer. Plastic Jungle “has worked closely” with Alula, Margaret Mackenzie, CEO of the San Jose, Calif.-based online gift card exchange company, tells Paybefore. And Plastic Jungle, along with certain other gift card exchange companies, welcomes Alula’s arrival. “Any reputable company, like Alula, that broadens safe choices for people who are selling their gift cards, is good for our market and therefore good for us,” Mackenzie says, adding that Plastic Jungle is “confident” Alula understands the potential fraud risk of buying unused gift cards and is taking steps to manage that risk.

Various players in the secondary gift card market are taking different routes to blocking fraud. Omni Prepaid LLC’s Giftcards.com buys unused gift cards and gives customers the choice of receiving the value in the form of a check, a PayPal deposit or cash delivered via MoneyGram locations. The Pittsburgh-based company has patented a proprietary technology to block fraud on resold gift cards that Blackhawk Network has licensed.

GiftCardRescue.com, an Ellicott City, Md.-based company that purchases unused gift cards in bulk from merchants, including check-cashing operators, also is watching Alula, although it has not worked with the Coinstar division, says Kwame Kuadey, the company’s founder and CEO. He sees Alula as a positive for the secondary gift card market, which has relatively low consumer awareness. “We’ve only begun to scratch the surface of the secondary gift [card] market’s potential growth,” Kuadey says. Last year gift card distributor Blackhawk Network purchased third-party gift card exchange Cardpool, and more players have since entered the market.

Merchants also are likely to see Alula as a positive by helping drive overall usage of gift cards and traffic to stores, Jackson notes. And the possibility exists for Alula to launch its own online market to resell unused gift cards below their face value, he suggests.

Coinstar emphasizes that so far Alula is in the experimentation phase. “The pilot process enables us to learn a lot about what solutions make the most sense for our retailer partners and their customers. … We have not finalized the product offering or approach,” the spokesperson says.