We see gift cards everywhere, from Amazon and Mastercard to retailers like Abercrombie & Fitch and Best Buy. They’re one of the most requested gifts for people of all ages, and it’s not really surprising when you think about it. Would you rather pick out whatever you want from a store you love or get something chosen for you by someone who might miss the mark? Because of their popularity, almost every big business offers gift cards, but did you know that gift cards for small businesses could also be a valuable resource?
Gift cards for small businesses can actually help retailers make more money through repeat business, but there are certain rules and regulations that companies must follow when diving into this $160 billion industry. Beyond that, not all gift card programs are the same. Some err on the side of customer loyalty programs, while others are credit cards that translate to pure, sweet cash. Either way, a well-executed gift card program is a slam dunk.
TL;DR (Too Long; Didn't Read)
Gift cards are an inexpensive way that small businesses can bring in new customers and increase customer loyalty. Plus, they're excellent marketing tools.
Open-Loop vs. Closed-Loop Gift Cards
At the heart of it, all gift cards function like preloaded debit cards. The majority of them have a minimum and maximum initial loading amount, usually ranging from $10 to $500. In today’s age of tech, the majority of gift cards can also be registered online or put into an app so consumers don’t have to worry about losing the balance if they lose the physical card, and they can view the balance in real time. Brands like Uber, Amazon and Starbucks are known for this practice.
Though most of us are used to seeing physical gift cards with barcodes or magnetic stripes, they’re not all the same. Physical gift cards are either:
- Closed loop, which can be used to purchase anything from a single retailer. Sometimes, this also extends to corporations. For example, any gift card from Gap Inc. can be used at an affiliated store, like Banana Republic or Old Navy. These cards are generally not reloadable, though sometimes they are. They also do not usually require activation fees and may have an expiration date.
- Open loop, which is the equivalent of cash. Open-loop gift card providers are generally major credit card companies like American Express, Mastercard, Visa and Discover, and these types of cards can be reloaded and used anywhere those credit cards are accepted. There’s generally a $5 activation fee.
Beyond physical, plastic gift cards, some small-business owners opt to print paper gift certificates (which are much less common in the digital age) or use digital gift cards, which are simply redeemed online through use of a barcode number. Some physical cards may also double as digital gift certificates for online stores.
Gift Cards for Small Businesses Help Boost Sales
During the holiday season, gift cards can really boost sales. Why? They’re the perfect option for a wealth of gift givers. Sure, some of us want to be the thoughtful person who spends months picking out the best gift, but most people are just:
- Busy people who want to get in and out of the store
- Gift givers who struggle to pick out presents
- Gift receivers who prefer to pick out their own gifts
- People who don’t know the person to whom they’re giving a gift very well
What do you get the person who has everything? A gift card — but these don’t just boost sales during typical gift-giving seasons. They actually help grow your sales overall because of one main caveat: Whoever gets a gift card or gift certificate from your business can only spend it at your business.
A lot of times, customers make repeat visits until they’ve used the entire value of the card. You can use this opportunity to upsell additional products and services. Think about it: How many people end up going to a store and spending more than their gift card’s value simply because they like something more expensive? This is revenue you would have never gotten without gift card sales.
Gift Cards Increase Customer Loyalty
Gift cards are a great way to turn new customers into loyal customers, and research has shown that 11% of gift card receivers had never or rarely visited the merchant before receiving a gift card. Basically, you’ll have the exact number of visits it takes a customer to spend the value of the gift card to win him over.
Because brands know that gift cards build customer loyalty — whether they’re purchased for your most loyal customers or by your most loyal customers for their friends and family — they’re often built into existing customer loyalty programs. For example, Sephora allows gift card transactions to rack up points that can be redeemed for free gifts. Similarly, Starbucks allows gift cards to be loaded onto its app and accumulate stars just like any other app-made purchase.
Gift cards can also be used to foster customer loyalty because they work as:
- A bandage in the event of a poor customer experience: For example, Delta often gives out flight vouchers (i.e., gift certificates) to consumers who complain about delays on social media.
- An incentive to fill out surveys: You can better serve your customers and increase consumer loyalty if you know what your consumers want. Surveys help nail this down.
- A reward for loyalty: Some companies give gift cards to their most loyal customers. Sometimes, this may be the result of racking up a certain number of loyalty points. For example, a cafe’s cardboard loyalty punch card may turn into a gift card worth one free coffee once 10 purchases have been punched.
- A reward for joining a mailing list: A gift card is a low-cost prize to include in a raffle for mailing list signups.
- A donation/promotional reward: This brings in new customers who may not have visited your business beforehand if they didn’t get something for free. For example, you can have a weekend promotion that offers 15% off a total purchase if made with a gift card. You can also promote yourself through a Groupon deal that offers $50 worth of gift cards for $25 or whatever sum you like.
Gift Cards Increase Brand Awareness
Branding is a big deal when it comes to growing a business, and gift cards are a powerful marketing tool. They actually help market the overall image of your company. For example, Apple built an entire marketing campaign around iTunes gift cards. Similarly, Sephora’s gift card design (they come in black-and-white striped compacts) is synonymous with the brand.
This type of brand awareness can increase your overall reach. All in all, it’s a way to let your customers do your marketing for you (and they’re paying you to do it).
Gift Cards Are a Secure Way to Pay
Security breaches can absolutely destroy consumer trust and ruin a company’s revenue stream. You’d be shocked at how much sensitive data is hiding inside point-of-sales systems. No one is immune, whether it’s massive companies like Lord & Taylor and Saks, which had huge credit card breaches back in 2018 or indie e-commerce makeup brands like Lime Crime, which had a security breach in 2014.
Gift cards eliminate this risk because they aren’t tied to sensitive financial information like credit cards or debit cards. Users don’t need to input a billing address, and many times, consumers using e-gift cards don’t even have to register and can check out as a guest. This is one of the reasons so many people use Visa and Mastercard gift cards when making online purchases.
Gift Card Laws
Gift cards are regulated by the law, and it varies state to state. Generally, gift cards cannot expire in less than five years from the date of activation, but you may charge a fee for nonuse after a year. This must be clearly disclosed prior to purchase, and most companies just print the expiration window on the physical gift card like a credit card expiration date. Still, in the United States, the majority of closed-loop business gift cards do not have expiration dates.
Expiration is tricky because some stricter states (like California) have banned expiration dates entirely. Other states may not allow the gift card’s value to decrease because of nonuse. Considering that most retailers have online stores that service the entire U.S., complying with expiration laws would be a nightmare. Generally, you’ll only see expiration dates on open-loop gift cards like Visa or Mastercard gift cards.
Choosing the Right Gift Card for Your Business
How do you set up a gift card program for your small business? You’ll need to choose a gift card provider and the type of card (i.e., closed or open loop). Generally, you’ll choose from the follow card platforms:
- Closed-loop programs from merchant banks
- Closed-loop programs from gift card vendors
- Open-loop restricted card programs
- Open-loop unrestricted card programs
- Open-loop branded prepaid cards
Each has its pros and cons. Some may be less of a hassle, while others may be more rewarding for customers.
Closed-Loop Programs From Merchant Banks
Merchant banks are typically the first place small businesses go for a gift card program because they’re already working with a credit card provider. Most do offer closed-loop cards that are easily integrated, are free or inexpensive and work across all retail locations.
Unfortunately, they’re not really customizable, so they don’t help much with brand awareness. They’re also very bare bones and lacking in features (i.e., customers can load a card with cash, use it and check the balance, but that’s it). Merchant banks are also generally lacking in e-gift card and social options, which make them a poor choice for e-commerce businesses.
Closed-Loop Programs From Gift Card Vendors
If you’re not using a major merchant bank, you can get a closed-loop card from a third-party gift card vendor. Sometimes, credit card processors have existing partnerships, which makes this easier to implement. Overall, third-party vendors offer custom gift cards (a powerful marketing tool) that operate online via social apps, smartphone readers and QR codes. These generally come with lots of reporting tools and reward opportunities for consumers.
Though third-party vendors offer flexibility in case you ever want to switch credit card processors, they’re often more expensive, harder to implement and require some sort of commitment.
Open-Loop Restricted Card Programs
These types of cards aren’t tied to a store, and though you generally see larger retailers utilizing things like Visa and Discover gift cards, small businesses can level the playing field by offering the same. These are the easiest to implement because there’s no integration, and it’s extremely cheap and very flexible.
It also requires the least amount of effort on the part of the business owner since it’s handled by a third party. However, this option is only available online, and older credit card machines may not process it correctly.
Open-Loop Unrestricted Card Program
This is basically just an open-loop card with your company name on it. It has many of the same benefits as the open-loop restricted card, but it’s only available online and customers can use it virtually anywhere. While you’re gaining brand recognition, you’re not really gaining the additional business.
Open-Loop Branded Prepaid Cards
This is an option for brands that don’t want to deal with the hassle of selling gift cards but want to give away branded gift cards in promotions. You can order these in bulk preloaded, and customers can use them just about anywhere. This is more of a marketing tool than a standard gift card program.
- Investopedia: Gift Card
- GiftCards.com: Do Gift Cards Expire?
- GiftCards.com: Gift Card Girlfriend’s Complete Guide to Gift Cards for Small Businesses
- Square: Hyper-Effective Gift Card Marketing Strategies
- Gift Card Granny: Gift Card Statistics
- Govinfo. "Federal Register: Part II Federal Reserve System 12 CFR Part 205 Electronic Fund Transfers; Final Rule," Pages 16581-16583. Accessed Sept. 29, 2020.
Mariel Loveland is a small business owner, content strategist and writer from New Jersey. Throughout her career, she's worked with numerous startups creating content to help small business owners bridge the gap between technology and sales. Her work has been featured in publications like Business Insider and Vice.