Should Your Business Offer Gift Cards?

Merchant Warehouse |

December 1, 2011

It has oft been said that it is better to give than to receive. In the case of giving gift cards this is certainly the case, because there are many compelling benefits to selecting, purchasing and giving these gift cards to friends and loved ones in place of traditional gifts. A gift card is considered a restricted monetary equivalent, or “scrip,” meaning it is a substitute for currency, is not legal tender and is really a form of credit issued by many retail stores and financial institutions.

Gift cards are being used more and more to give card recipients the flexibility of choosing the gifts they want. For instance, if you know someone that loves electronics but don’t know what he or he needs, you can give a gift card from an electronics store for a certain dollar amount, effectively giving the recipient a credit at that store that they can apply to any purchase they wish to make.

As of 2006, gift cards rank as the second most-given gift by consumers in America, the gift most desired by women and the third-most wanted by men. Gift cards have become increasingly popular with givers, too, since they do not require the gift-giver to choose a specific present. All that is required is either a retail store that issues gift cards that can be used at their store, or a branded card that can be used anywhere (such as an American Express gift card).

In just the last two years nearly two billion dollars were spent on gift cards in Canada while almost eighty billion dollars were spent on gift cards in the United States. Gift card recipients can use their cards at their discretion within the restrictions set by the card-issuing agency or company.

Many Benefits

Gift cards are of great benefit to merchants for many reasons. First of all, the sale of a gift card itself immediately generates revenue for the merchant, for that sale. The card itself also acts as a continuous advertisement in a purse or wallet, where it may be seen on a regular basis by the recipient.

Of course, customers don’t always use the entire balance on the card, which encourages repeat visits. Cards reduce cash refunds because the card user is choosing the gift they desire instead of receiving a gift they might return.

Gift cards are often rechargeable after initial value is depleted, which again brings in customers to the store and cuts back on gift certificate or new card manufacturing. Many times, gift cards can be used to gather customer demographic data, which helps retailers determine who is spending their money on what.

A major benefit is what is known as the increase of “float and slippage.” This refers to the fact that an average 10-15% of all gift cards are never redeemed although the money has already been spent on the card and paid to the issuing merchant.

Yet another benefit is the potential increase in incremental sales above the gift card amount. When visiting the store to redeem the gift card customers may buy items which cost more than the available balance, thus increasing spending overall.

In addition to providing significant operational savings to merchants, there is also a great reduction on administrative and reconciliation costs. These cards also limit theft and fraud since they have already been paid for. Also, in the process of a typical gift card transaction, no change is given, which cuts both time and risk (of error or theft) at checkout.

How They Work

Gift cards very often resemble a credit card or display a specific theme on a plastic card the size of a “regular” credit card. Gift cards are identified by a unique number or code similar to a credit card, though they are not usually identified with an individual’s name because, of course, they are fully transferable andcan be used by anybody. They are backed by an online electronic system for authorization. Many gift cards can be reloaded with additional dollar credit and can be used many times over.

Many gift cards have a barcode or magnetic stripe on their reverse side – once again, like standard credit cards – that is read by an electronic credit card point of sale (POS) machine. Some gift cards initially have no value until they are sold, at which time a cashier enters the amount that the customer wishes to put on the card for its eventual recipient. This amount is rarely stored on the gift card itself but is instead entered into the store’s database, which is linked back to the card identification.

To thwart counterfeiting, the data is encrypted as it is on most electronic payment cards. In some cases, the magnetic stripe is placed differently than on traditional credit cards, so they cannot be read or written on standard terminals. Other gift cards may have a set value and need to be activated by calling a specific phone number, often toll-free.

Gift cards are divided into “open loop” and “closed loop” cards. The first of these two are issued directly by banks or credit card companies and can be redeemed by different establishments, while the second kinds are issued by a specific store or other retailer and can be only redeemed by the issuer. The latter type tend to have fewer problems with card value decay and additional fees. In either case, the giver buys the gift card and the recipient of the card uses the value of the card in a later transaction. Finally, there is a third type of gift card called the “hybrid closed loop” card, where the gift card issuer has bundled a number of closed loop cards such as those in a specific shopping center or casino.