PayPal competes for gift cards with new digital store

Just in time for the holidays, PayPal is now selling digital gift cards, offering a virtual version of the most popular gift to give this time of year.

PayPal, the payments arm of e-commerce company eBay, rolled out a digital gifts store this week where online shoppers can select a gift card and amount and pay with their PayPal account.

Right now, your options are limited to iTunes gift cards, in denominations of $15, $20, $50 and $100. So if digital music and movies are on your Christmas list, you’re in luck. But in a blog post PayPal said consumers should “expect us to continue to add more digital gifts digital store,” although it didn’t say whether that would happen in time for Christmas.

PayPal’s new digital store is part of a recently announced partnership with Pleasanton-based gift card producer Blackhawk Network to move  gift cards from a physical space to the digital world, and allow consumers to both purchase gift cards and use them right from within the PayPal app.  As of last week, PayPal began accepting prepaid gift cards that consumers buy from other merchants. And starting in the first half of 2014, consumers will also be able to reload gift cards from the app, check balances and keep all of their gift cards in one place.

Gift cards is a lucrative business for PayPal to enter. Research and marking firm Deloitte predicts 43 percent of U.S. consumers will purchase gift cards over the holiday season, beating out clothing and electronics as the most popular gift of the year. A recent National Retail Federation survey found that three in five Americans expected to receive a gift card over the holidays. Gift card sales for 2012 totaled over $110 billion, according to CEB TowerGroup’s annual gift card report.

But a lot of that money never gets spent in stores, because people forget the gift cards at home when they go to the mall, lose them or simply don’t keep them in their wallets or purses. According to industry estimates, unused gift cards in 2012 were around $1.8 billion, or about $15 for every U.S. household. This is the market PayPal wants to tap.

But PayPal is late to the game, and will have to use its strength as one of world’s leading payments companies to beat out the dozens of startups that have for years been offering a digital solution for gift cards. Among the leaders are San Francisco-based Gyft , where consumers can buy, redeem, store and manage digital gift cards. The startup has backing from Google Ventures.

Gyft Co-founder CJ MacDonald said in a recent interview with the Mercury News that the problem with the traditional gift card is “it’s plastic, which is what we’re trying to get away from.”

Image from paypal-gifts.com

Heather Somerville Heather Somerville (226 Posts)

Heather Somerville is a business reporter covering venture capital and startups for the Bay Area News Group.