How Companies Make Money From Gift Cards

Whether it’s for your birthday, completing a survey or a recognition of helping a friend move, getting a gift card is always a pleasant experience. The giver is telling you to treat yourself to something you actually want. The card may be to a specific store where the gift giver knows you like to shop or general, allowing you to spend on whatever you like. Either way, receiving a gift card is always an awfully nice surprise.

But what about the issuers of the gift cards? How do companies use gift cards and most importantly, how can a company like yours be using gift cards to make money? It turns out that while gift cards are great for those that get them, they’re far better for the companies who issue them to their customers. Here, we’ll explore a bit about the types of gift cards, why they’re so good for your bottom line, and how you can ensure you’re getting every penny out of them through a few different ways.

Looking to navigate the payments world and get the best deals & rates for your business? The pros at Swipesum can help — and we offer free consultations!

‍What are gift cards anyway?

We’ve all seen gift cards for quite a while but there is a bit more to them than initially meets the eye. It’s important to note that there are really two types of gift cards, closed-loop and open-loop. Don’t let the names deceive you; they’re really quite straightforward.

Closed-loop credit cards are those that can only be used at the store at which they’re issued. So, for example, if you get a gift card to a clothing store, you can only use it at that location, not a nearby electronics store. For small businesses, closed-loop cards make the most sense because they restrict use to the specific store from which they were issued. This means you guarantee that you’re getting that customer back in the door and have the added benefit of the gift buying customer too.

You can get closed loop gift cards by either using your existing merchant account or by going through and independent vendor. Using your existing account is easy because it works with the point-of-sale system you already have. However, it can be a bit inflexible. Independent vendors are a great option because you can design a more robust gift card system, however you’ll pay for the service.

Open-loop gift cards are those that can be used anywhere because they are tied to specific card payment networks. These operate as more of a convenience for your customers; you’ll never be able to guarantee that you can get folks back in the door. You can apply some restrictions on the cards, but these can get costly.

How Do Businesses Make Money On Gift Cards?

Businesses have several methods for making money from gift cards.

Overspent Balances

The studies show that people receiving gifts from the merchants have more chances of trying the business than they did. Customers with gift certificates tend to spend more than what they’re worth because gift cards tend to encourage them to use the entire balance before it expires. They feel they must use their balance before the balance expires.

Unspent Balances & Fees

Open loop cards often have a small initial price that covers costs of producing or processing. Additionally, businesses often charge transaction fees each time the card is used, contributing to their revenue. Because closed loop cards are built into the system of a company, there is no third party fee offset, so card sales are based on value. The costs of the production of the physical card are compensated by the profit margins of the products bought. In addition, when gift cards have been unused for only one year after purchase, businesses will be charged for any remaining amount. It means that if the card balances below its value the customers may get a lower revenue from it.

Types of Gift Cards

A gift card is a fantastic way of showing someone you care and can be used in many ways. A physical gift card can be a tangible way to show someone you care and can be used in many ways. Birthday parties / holidays, weddings, graduation parties & more! Giftcards can give everyone an ideal gift. There are numerous giftcard options that exist and you need to determine what is right for your special day. List some common gift cards.

Gift Card Business Model: Our Takeaway

The use of the gifting card industry model is a great strategy for attracting new customers and increasing revenues. If a business doesn’t currently use Gift cards in their marketing strategies then this could be a viable alternative. These are convenient ways to make your customers buy your product, and you may also build customer loyalty among your audience. Have gift card companies used their promotional products?

Are gift cards profitable for business?

Gift card sales are an excellent way to boost sales within the company. Gift cards are an additional way of generating more customers while promoting your existing customers. How do businesses earn money by selling gift cards?

‍So how can I make money?

Gift cards offer companies some very clear and unique ways to make money.

‍Low upkeep and start

Companies can produce gift cards yourself but more than likely, they partner with a gift card distributor. These distributors don’t charge all that much for the work. The cards themselves cost a few cents and companies will usually pay a very small percentage of the sale or a fixed price for use of the card.

Things get much cheaper and easier if you use a closed loop system with your merchant account. These programs are sometimes included as a free benefit of your relationship with the bank and you’ll pay a cheaper swipe fee since the dollars aren’t traveling along payment networks.

‍Locking in the customer

This goes without saying but if you’ve got a gift card from a big box store, you’re probably going to do some shopping there. Plus, the store gets two customers, the person who purchased the card and the person who received it. Both of those customers are more likely to spend additional money at the store as well as buying the gift card.

‍Rewards

Most businesses now have some kind of rewards program - gift cards make this much easier to manage and offer a nice incentive for your customers to use the cards as well. Many businesses will offer additional reward points for using gift cards. This makes your customers more likely to frequent your business.

‍Interest-free loan

You can think of a gift card purchase as essentially an interest-free loan. If a customer comes in and buys a $100 gift card at your widget store, they’re not walking out with any product for that value. Yes, someone might come along later  and use the gift card, but you get to count that as income now for redemption on some future date. It’s also possible that…

‍Breakage

Gift card recipients don’t show up at all. We’ve all likely done it; you’ve lost a gift card or spent a large portion of it but wrote the remaining dollar or two off as a loss because you didn’t want to spend cash out of pocket. This can be the most profitable part of gift cards for companies. In fact, this is more common than you might think. By one estimate, up to 47% of the collected value of gift cards in the United States in 2022, nearly $21 billion, went to waste. That’s nearly $175 per person in the United States. You can realize some fairly legitimate profit from gift cards that are never redeemed alone.

Gift Card FAQs

How do they make money on gift cards?

Some wonder if retailers can profit from gift cards. Yes. Companies get paid through gifts. Retail stores earn revenue by buying the cards and through gift card transactions. They also make profit from unrestricted or invalid gifts or from people who spend more money on their cards.

How does Visa make money off of gift cards?

Companies supplying Visa Gift Card, on the contrary, make money from the card itself because they don’t mark the price for the physical cards (like a store can do with a blouse or a Crockpot), they charge an activation fee for them.

How much do companies make from unused gift cards?

Generally, a large business calculates the cost of remitting a card from unused cards that will not be refunded despite a high rate of redemption based on historical averages. Some firms are big profit-driven by profits. Starbucks said it would generate revenues of $22 million in 2021. 2022.

Where does the money go when you buy a gift card?

The merchant can immediately take advantage of this amount by using your gift cards to encourage customers to return to the store. The retail company has plans to reclaim their gift cards. 26 December 2021.

Get Started With Gift Cards Through Your Merchant Account

Smart. The first thing you’ll want to do is to contact Swipesum for our experts to send you int he right direction, or the payment processor you already work with. If you’re considering new payment processors or are starting a new business and need one, take a look at gift card options as a part of your decision process. Working with your existing payment processor is an extremely low cost and easy to offer gift cards. More than likely, they already have the capability and you already have the POS system, to support a system. If your processor doesn’t offer cards directly they almost certainly have a recommendation.

Like any decision involving your business, getting started with gift cards can be a daunting decision. While they’re easy products to offer and you’ll want to get them on shelves as quickly as you can, you might want a hand looking at all the options and ensuring you’re getting the best deal. Swipesum is there to help; we’ll work with you to determine the best option for your business and work to make sure you’re getting every penny possible.