Everything You Need to Know About Processing Gift Cards

The gift giving season is here. Is your business ready?

Gift cards are a go-to holiday gift for many people. Whether they’re buying for work colleagues or that one family member who seems to have everything, a gift card is always a safe bet. That’s why consumers are expected to spend $29.9 billion on gift cards this year, according to the National Retail Federation.

As a business owner, gift cards are tremendous opportunity to boost your revenue. Every business, no matter the size, can benefit from providing gift cards. Getting started might appear to be a daunting task, but it’s actually much easier than you might think. More on that later. First, let’s dive into why gift cards are important for your business.

Why do I need gift cards?

The simple answer is that gift cards lead to increased revenue. Every time a gift card is sold, you’re effectively winning two customers, both the gift giver and the gift receiver. Both are figurative gold mines for businesses.

Gift card holders are more willing to pay full price for items—or buy more—since they aren’t spending their “own money.” In fact, most of them will probably spend more than the value of the gift card when they use it. That’s a great opportunity for you to capture new revenue.

On the other hand, if the receiver doesn’t end up using the gift card, you’re essentially receiving revenue from the gift giver without actually dispensing any product. Reports suggest that about $1 billion in gift cards went unspent last year. That’s an insane amount of money staying in merchants’ pockets.

Furthermore, gift cards can help you build a stronger relationship with existing customers and increase their likelihood of returning. When a customer has a gift card, they are more likely to call or turn to your website for information about their card or its balance, increasing the opportunity for them to engage with you directly.

If you already have a gift certificate system in place, you may want to consider upgrading to gift cards instead. Gift certificates, while similar in purpose, are less advantageous for your business for several reasons:

• They’re more vulnerable to fraud and theft -- gift cards have to be activated by the store, whereas certificates are easy to copy and difficult to authenticate.
• They’re much less attractive to customers -- carrying around a large piece of paper is much more cumbersome than adding just one more card to your wallet. Not to mention, gift certificates aren’t exactly easy to display in-store.
• They make your job much simpler -- gift cards operate just as any other card would. Just swipe it and go. Certificates often require you to input discounts manually and can greatly reduce the efficiency of your checkout system.

What are my options?

Every business is different, and luckily there are multiple gift card processing options to fit that wide array of needs. Generally, there are two categories of gift card programs: closed-loop and open-loop. Let’s take a look at each.

1.Closed-loop

Closed-loop gift cards are only valid at the store or chain that issued it. If you’re a small business, this is likely the route you’ll want to take. Closed-loop cards ensure that the card receiver will return to your store and (hopefully) bring additional revenue with them. There are a few ways to set up a closed-loop gift card system:

Use your merchant account

The first closed-loop option is working directly with your merchant bank account. It is generally the easiest system to set up, and it often comes at no cost to you. You already know that it will work with you POS-system, so it can be easily integrated into your business, and across all of your locations. Seems like an obvious win right?

However, before jumping into a closed-loop system with your merchant bank you have to consider if it offers all the features you’re looking for. Most of these systems come with few to no features, including no access to electronic or social integrations. Additionally, you will not have a lot of option when it comes to design. In some instances the cards are simply black and white with your logo, so they may not be the attractive gift card you’re looking for.Finally, a closed-loop merchant system locks you in without a lot of flexibility.

Use an independent gift card vendor

The second closed-loop option is with an independent gift card vendor. This system offers more flexibility—because you can choose from a variety of different vendors—and can often be accomplished through vendors with pre-existing partnerships with your processor. With this option you have more say and variety when it comes to the design of the physical cards, and there are options for electronic gift cards and tied-in loyalty programs. Merchants also have the access to more reporting features that can help them better understand customer behavior and measure the impact of gift cards on their business.

That said, there are still a few drawbacks to working with an outside vendor. First, they’re more expensive than what your merchant account will offer. If you sell a lot of gift cards this probably won’t affect your bottom line, but if your program is slow taking off or ineffective can result in a higher loss. There is also a chance that the system will not integrate seamlessly with your existing processing system. Finally, once you start selling these gift cards you have to stay committed to the system until all outstanding cards are used or expired.

2. Open-loop

Open-loop gift cards allow for customers to use their gift card anywhere that accepts credit cards because they are issued by banking institutions and associated with existing card companies (like VISA, MasterCard, Discover, or American Express). While open-loop gift cards don’t guarantee you’ll get a second customer through your door, they are more attractive to consumers because they offer more flexibility in how the receiver spends the card. There are three primary ways to adopt an open-loop program:

Use a restricted card program

The first is an open-loop restricted card program. While open-loop cards are typically not tied to a particular store, restricted card programs allow you to limit where the funds can be used. You won’t have the benefit of branded cards and limiting the use of cards can be pricey, but utilizing these programs enables you to make no changes to your payments setup while still offering an exclusive gift card program. You don’t have to worry about integrating the system with your existing processor or really running the program at all. The third-party vendor takes care of everything related to the gift card, and the cards are printed on-demand so there is no up-front cost for the cards themselves.

This type of program is often used when multiple businesses partner up to offer gift cards. If you run a hardware store and your friend runs a lumber yard with a similar customer base, you could team up to offer gift cards with a restricted card program.

However, there is one major drawback to this system: because the third-party vendor creates the cards order-by-order, it’s not possible to display them in store. If you’re operating on online business, this is no problem, but if you are a brick-and-mortar business, you may want to go closed-loop.

Use an unrestricted card program

The next open-loop option is an unrestricted card program. This system has many of the same benefits of a restricted program, however the card can be used anywhere the associated credit card is accepted. Although the card will have your company’s name on it, the customer doesn’t have to use it at your business. That said, if the card is branded with your business’s logo, many consumers will not realize that it can be spent elsewhere, so you may end up winning a sizeable portion of that business anyway.

Use a branded prepaid card

The final open-loop system is a branded prepaid card. These are similar in most regards to an unrestricted program. The only difference here is that cards are preloaded by your company before they are sold, whereas other systems are loaded when the consumer makes their purchase. This option is really only best for businesses looking to use gift cards as a reward or incentive for employees or customers.

How do I get started?

No matter which system you’re leaning toward, the best option is to contact your current processor right off the bat. Let them know you’re considering selling and accepting gift cards and see what suggestions they might have. Ask if there are any changes that might need to be made to accommodate the gift card system you’re interested in. Even if you think you’re decided on how you want to proceed, this conversation with your processor might make you change your mind.

It’s never a bad idea to ask for recommendations from your processor as well. They may have partners that offer gift card systems or POS solutions that you might not find otherwise. Keep in mind: increased revenue for you leads to increased revenue for your processor, so they’re not going to give you information that will hurt your business.

Once you have decided on a system and a vendor, don’t hesitate to get gift cards on your shelves as soon as possible. The holiday season is obviously the busiest time for gift cards, but no matter when you get started, gift cards can provide a helpful boost to your revenue.