The race to kill the plastic gift card

December 12, 2012: 3:03 PM ET

Startup Gyft, backed by Google Ventures, thinks it has found the right formula for digital gift cards.

By Kurt Wagner, reporter

Screen shot 2012-12-12 at 2.57.04 PMFORTUNE -- Gyft CEO and Co-Founder Vinny Lingham has one goal: eliminate the plastic gift card.

That idea animates San Francisco-based startup Gyft, an app that offers users the ability to buy and then give gift cards directly on their smartphones. Users can purchase gift cards from close to 150 vendors -- including Amazon (AMZN), Nike (NKE) and Old Navy (GPS) -- and send them to any other user of the app. Having the card balance available on your phone, so goes the theory, is more convenient than physical cards.

Backed by Google Ventures (GOOG), Gyft offers a few additional features to those who have already purchased plastic gift cards. Users can upload the balance of an existing gift card directly to their account, or even re-gift a card to one of their contacts. "We want Gyft to be the digital wallet that everyone has on their phone for receiving gift cards," says Lingham. In the company's first month, users uploaded more than $1 million in existing gift cards to the app.

Gyft hit the scene just in time for the holiday season, amassing more than 50,000 downloads in the company's first 90 days, an important footnote considering the money at stake. A recent study by the National Retail Federation found that 81% of holiday shoppers plan to purchase gift cards this year. Total spending is predicted to reach more than $28.5 billion, and depending on the vendor, Gyft receives between 10% and 15% of the value of each gift card sold through its app.

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But spending isn't the gift card industry's problem -- unused gift cards leave billions of dollars on the table every year. Research from Visa found that 40% of gift card owners fail to redeem the card's full value, leaving more than $2 billion in gift cards unused in 2011. "It is clear that there is a tremendous amount of value trapped in stored value cards or gift cards," says Joe Kraus, a general partner at Google Ventures. "[Gift cards are] so much more convenient by mirroring them into the device we carry with ourselves all the time." Retailers aren't the beneficiaries of this wasted cash, however. Federal regulations prohibit companies from listing gift card sales as revenue until the cards are redeemed, meaning both retailers and gift card owners want to eliminate the waste.

Gyft hopes to help by taking a narrow approach to solving a major problem. Gyft, unlike other gift-giving companies such as Giftly or Facebook's (FB) Karma, deals exclusively with gift cards, minimizing its reach in the overall online shopping arena. But Lingham, alongside co-founders CJ MacDonald and Mark Levitt, wanted to avoid expanding too quickly. Gyft is Lingham's third startup: in 2003, he co-founded Clicks2Customers, a search marketing company, and in 2007, Yola.com, a website builder. This time around, he decided to keep things simple. "One of the pitfalls of very creative people, particularly entrepreneurs, is you tend to see too far into the future," says Lingham, 33, who grew up in South Africa. "The inherent nature that makes you what you are is also your biggest enemy."

Lingham credits Apple (AAPL) for unintentionally helping ease Gyft's product into the market. When Apple previewed its new iOS6 operating system in June, Passbook was highlighted as the iPhone's new digital wallet feature. If retailers wanted to keep up with an influx of iPhone users trying to use coupons, loyalty cards or tickets straight from their phone, retail technology would need to be ready. Gyft, launched three months later, no longer needed to convince retailers to accept payments via smartphone. "Apple saved us in a big way," says Lingham. "They saved us from having to educate the public on why this was a good solution." With Gyft, gift cards can be integrated with Passbook if users wish to see all of their digital wallet items in one place.

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Gyft's digital gift card platform could fit nicely into other digital wallets already claiming a broader hold on the market -- Google Wallet and Visa's V.me for example. Given Gyft's connection to Google Ventures, Google Wallet would be a logical suitor, although Kraus would not comment. Square Wallet, another mobile wallet offering, announced earlier this week that gift cards will now be part of its package. The announcement validates Lingham's business idea but demonstrates how crowded the space is.

While the app was previously exclusive to iPhone, Gyft launched its Android application this week and hopes to provide users with a desktop platform beginning early next year. (Non-iPhone users can still use Gyft through a mobile browser.) In the future, Lingham envisions the app will provide retailers with the opportunity to reward customers by giving them gifts or unique coupons through push notifications. As companies continue to fight for customer attention when it comes to digital payments, Gyft hopes to carve out a place among the giants -- one plastic gift card at a time.

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