Depending on the type of business you run, launching a gift card program can be a great way for you to expand your customer base, grow your revenue, and build strong relationships with your customers.
With the wide variety of gift card programs out there, it may be worth considering offering some form of them to offer your customers. However, keep in mind that not every business will benefit from doing this equally; if you're keeping things small, it might just turn out to be an unnecessary expense.
As an owner of a few small businesses, I have some experience in choosing and running gift card programs, and I can confirm that they can have a positive impact. In this article, I’ll walk you through the various types of gift cards, their pros and cons, and the laws that you’ll need to keep in mind when you get your gift card program off the ground.
Different Types of Gift Cards
A gift card is a prepaid card that consumers can use to make purchases with, either at a physical store or online.
Digital gift cards have no physical card associated with them; they’re formed of a unique string of characters that customers can redeem when checking out on their online purchases. Physical gift cards, on the other hand, have a plastic or paper counterpart, and can typically be used both online and in person.
All of these cards, both digital and physical, fall into one of two types: open loop and closed loop. Typically, both of these can be used in person as well as online.
- Closed-loop gift cards: This type of gift card is generally marketed and managed by retailers, allowing its holders to redeem its value in-store or online. Closed-loop gift cards generally can’t be topped up; once their balance is spent, they no longer have any use.
- Open-loop gift cards: Open-loop gift cards are a type of gift voucher that functions as a prepaid debit card, and are associated with a specific credit card network such as Visa or Mastercard. As such, this type of gift card can be used at any retailer that accepts that card brand.
The Benefits of Offering Gift Cards
Gift cards are a cost-effective way to boost your revenue and grow your business. Let’s take a look at a few of the key benefits that offering gift cards could bring to your business.
- Improve your brand awareness: Branding the gift cards you offer with your business name, logo, and message serves as a great way to advertise your company. By buying your gift card, the customer who purchased it is implicitly positively recommending your business and acting as an ambassador of your brand.
- Boost your revenue: Studies have shown that two out of three consumers spent 38% more than the value of the gift card – so in addition to the sale of the gift card, you’re also drawing in some extra revenue from some of its recipients.
- Improve your cash flow: When a customer buys a gift card from you, you receive the revenue from the sale immediately, and don’t have to wait for the recipient of the card to redeem it before you get paid. Additionally, if the recipient doesn’t redeem the gift card for any reason, you can consider its sale all profit.
- Boost your holiday season sales: Gift cards offer people a convenient alternative to racking their brains over what to buy for their friends and family, and as a result, can be a great way to boost your sales during the holiday season.
The Downsides of Offering Gift Cards
While offering gift cards can bring your business a lot of positives, it does have some drawbacks as well.
Here are a few of the drawbacks of offering gift cards:
- Gift card scams: Gift card programs are increasingly targeted by scammers and fraudsters. Typically, these scams involve scammers obtaining gift card numbers from customers, either by persuading them to input them into a fake checkout form or by compromising the gift card systems. Whether or not you refund these customers, you’ll have to deal with the outcome.
- Integration expense: Launching a gift card program involves an initial investment, both from a financial and time standpoint. You’ll need to train any staff you have to use these new systems, in addition to integrating the software you need. If you run a small business all by yourself, you'll have to invest extra time in getting everything set up and then some more time into advertising the fact that you now offer gift cards.
- Chance of technical issues: Maintaining your gift card program, particularly for digital gift cards, is crucial. You’ll need to make sure the systems you use are stable and tested or you’ll run the risk of errors or delays potentially costing you a customer.
Gift Card Laws
Selling and accepting gift cards are considered financial transactions. As a result, it’s vital that you’re aware of your state and federal gift card laws. The CARD act, introduced in 2009, introduced the following federal guidelines for gift cards in the U.S.:
- No fees for one year: Unless there has been no activity on a gift card for 12 months, it’s prohibited by law to charge inactivity or service fees on them. After 12 months of inactivity, you can only charge one fee per month, with its terms being clearly disclosed before purchase – stating these terms on the back of the card is a safe bet to protect yourself.
- Activation fees: Activation fees are permitted, as long as the fee amount or breakdown is clearly specified before the purchase.
- Gift card expiration: Expiration dates of less than five years are prohibited, and any expiration date needs to be clearly disclosed before the purchase. Displaying the expiration date clearly on the card itself is a good way to go.
- Promotional gift cards are exempt: Promotional gift cards, loyalty cards, and paper gift certificates are exempt from these rules. If you give a gift card to a customer without having them pay for it, you may include an expiry date or fees. However, you’ll still need to clearly disclose the terms for the card.
Remember to check your local state laws as well. Some state laws provide more protection than their federal counterparts, and if your state falls into this category, then your state laws take precedence.
For example, in certain states, including California and Washington, closed-loop gift cards purchased by customers are prohibited from having an expiry date at all.
Gift Cards vs. Prepaid Debit Cards
Gift cards and prepaid debit cards share some similarities: they’re both physical or digital cards that are initially loaded with a set amount of money and can then be used to make purchases. Gift cards are often digital, however, whereas prepaid debit cards typically have a physical counterpart.
However, there are certain characteristics that set them apart from each other:
- Usually, gift cards can only typically be used until their balance is gone, while prepaid cards can be reloaded and used indefinitely.
- Prepaid cards are issued by banks or credit card companies, while gift cards are typically issued by retailers. However, some credit card companies issue open-loop gift cards as well.
- Prepaid cards can be used for transactions anywhere that accept the credit card brand they carry, including ATMs, while closed-loop gift cards can only be used at the retailer that issued them. Open-loop gift cards, however, can be used anywhere that accepts their card brand, similar to prepaid cards.
- Prepaid cards typically include some monthly fees, while gift cards tend not to, unless they’ve been inactive for a period of time.
What's the Best Way to Accept Payments on Your Website?
Whether or not you decide to sell gift cards, you’ll need to set up an account with a payment service provider to start accepting payments on your website. In this section, I’ll provide you with an easy way to do this.
Pay.com is a friction-free way to start accepting a wide range of payment methods, with a simple and straightforward setup process. Even for a first-time business owner, it’s a quick and approachable process. You can be up and running accepting online payments within minutes.
With Pay.com, your business can easily start accepting payments for gift cards. Additionally, you can also accept customer payments with open-loop gift cards and prepaid debit cards from all major card brands.
As an added benefit, the Pay Dashboard gives you access to a clear overview of all your incoming and outgoing payments.