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How Do Gift Cards Work?

We often get inquiries from many small businesses who are considering the use of gift cards to help increase business sales. We often get asked if it is worth the hassle and the cost for a small business to offer gift cards options to their customers.

How does a gift card program for your small business actually work? We describe the process below and we also answer some of the most common questions we receive about a small business gift card programs.

How Does the Gift Card System Actually Work?

There are various options when it comes to setting up gift cards. However, if you choose to use plastic cards with a magnetic strip on back, there are generally two different categories these gift cards fall under. They are commonly referred to as open loop and closed loop cards.

Open loop cards typically have a logo of one of the major credit card companies such as Visa or Mastercard somewhere on the gift card. Open loop cards are also defined by their ability to be used at a variety of different stores that accept Visa or Mastercard. Most open loop cards can occasionally also require a small fee up front for processing.  

A closed loop card is the general format used for small businesses. It is unique to your specific store and usually has your branding, artwork and logo on the gift card. This card cannot be used at any other location to make purchases. Most closed loop cards are processed just like your regular bankcards and debit cards and are often processed through the same point of sale device, terminal or card reader.

Both cards have a magnetic strip on the back that is used to transmit gift card data from the card to the store.

About Open Loop and Closed Loop

When you use an open loop card, then you will typically need to involve a bank to honor the funds that have been purchased on the gift card. To use the card, you will need to indicate the amount that you would like to be placed on the gift card and send the money to the bank. The bank will hold onto the funds.

Before the owner of the card can use the gift card, they will need to activate the card using a special code or answers specific questions about that card to verify the authenticity of the gift card. This is usually done via phone or through an online website.  

When the owner of the gift card would like to use the card at a store, they will simply swipe the card through the credit/debit card machine. The credit card machine will send the card information to the bank where the funds are being held. The bank will then release the funds to the small business owner and the transaction is complete.

With a closed loop card, the small business owner holds the funds in reserve. The customer will simply use the card to purchase products or services from the small business owner. The small business owner has a customized system that will recognize the card and let the business owner know that the funds for the card have been verified.

So How Can Your Small Business Make Money On Gift Cards

When a customer comes in to purchase a gift card from your business, they are essentially prepaying for someone else to make a purchase through your small business. There are a couple of different ways that your small business can make money on gift cards.

Why Gift Cards are Great for Your Small Business

New Customers

Gift cards are great because they help customers who love your store encourage other new customers to make purchases with your small business.

Balances Not Spent On the Gift Card

If the owner of a gift card chooses not to purchase any product from your store, then the money still belongs to your store. You still receive the money on the gift card.

Customers Generally Spend More Than the Balance

It is hard for many consumers to find products that match the exact amount of funds placed on the gift card. Typically, most customers want to use the gift card to the fullest, so they will spend just a little more than what is on the gift card and pay for the extra out of pocket.

Question and Answers for your Gift Card Program

Q: What Does My Customer Need to do with their Gift Card at My Store?

All a customer needs to do to use a gift card is simply swipe it through your credit card machine. All the information that you will need to validate the gift card is stored on the magnetic strip on the back of the card. The merchant account processor will take care of all the approvals.

Your customer will simply need to verify that your small business will accept the gift card available to them. This will be simple if the card is closed looped and branded.

If it is an open loop card, your merchant account processing system should read it as if it were a credit card. Your merchant account system will talk to the bank and move the funds to your small business.

Q: Are There any Fees to Set Up a Gift Card Program Through SecureGlobalPay?

Gift cards do not usually have a percentage rate or discount rate associated with the processing of the transaction. However, in most cases they have a small transaction fee or small fixed monthly fee, depending on the program you choose to process those transactions. The only up front investment cost would be the purchase of the actual gift cards. The more detailed and custom the card, the more a merchant will tend to pay for these cards. In many cases, a merchant processor will offer some basic cards to a merchant solution at no cost, to be used as an incentive to try out the gift card program.

Q: Do I Need to Purchase any Specialized Equipment to Accept Gift Cards?

A: You will not need to purchase any specialized equipment to accept gift cards. Most gift cards will have a magnetic strip on the back that can be scanned with your current credit card processing hardware. The strip on the back includes all information need to validate the gift card being used in your store.

Q: Can My Customers Combine Balances of Multiple Gift Cards into One?

A: It is possible for you to combine multiple gift card balances onto one card. This is typically done in your POS system, or through your merchant account provider.

Q: Is Customized Reporting Available for my Gift Card Program?

A: Yes. Tracking your Gift Card sales is as easy as checking your email. SecureGlobalPay offers a daily batch report of all transactions, monthly corporate summary statements, and a report of all transactions monitored by location. It will also include all fees. We can send the reports electronically, by fax or in print.

Q: What If I am Running Low on Gift Cards

A: If you are running low on in-store gift cards, we recommend that you give us at least 15 business days to order and print more customized gift cards for your small business.  Should your order be during the Holiday Season, this could take much longer. Please make make sure and order/re-order your cards well before the Holiday Season starts.

Sign Up Today with SecureGlobalPay’s Gift Card Program

You can save up to $50 on your program as well as:

Free Setup and Consultation

Free Starter Packet with 50 gift cards

Free 30-day trial period