Nearly everyone uses gift cards. Think about it; you probably have at least one gift card in your wallet or purse. Odds are, you've purchased one as a gift for someone else in the past year, too.

Gift cards are usually good for both in-store and online purchases, making them extremely versatile promotional tools. Billions of dollars are spent annually on gift cards—and that amount only seems to grow each year.

So... what are gift cards, exactly?

Simply put, gift cards are plastic cards with a monetary value applied to them. Those funds are applied through a retailer, business, or bank. Some gift cards are designed to work with specific retailers. These are known as closed-loop cards.

Open-loop cards are usually more generic. These are redeemable at any location that accepts major credit cards. These are treated like cash but normally do not provide a cash-back option.

Gift cards like these don't contain any personal information, so transfer of ownership is as easy as handing the card off to a friend. Once the value of the card is depleted the physical card can be disposed of without concern for identity security.

Another term associated with gift cards is gift certificate. Some retailers and service businesses offer paper certificates that serve a similar function to gift cards. Gift cards often provide automated value tracking along with a durable, pristine card solution.

Are gift cards profitable?

Without question; yes! When you purchase a gift card you pay the same amount you wish to add. For example, if you purchase a $25 gift card at a restaurant and gift it to a friend, that friend can now take it to that restaurant and use it to purchase a $25 meal. The restaurant had to pay money to have the gift card available. How do they make money? Why would they want to offer gift cards?

• New customers: People often give gift cards to their favorite businesses as gifts. This introduces new customers to the products and services and encourages them to visit. They'll likely use the gift card balance, but often they’ll return and become a recurring customer.
• Increased spending: When a consumer uses a gift card they often spend over the amount on the card, increasing profit for the business owner.
• Unused cards, balances, and fees: Gift cards can sometimes be lost or forgotten about which means the amount abandoned on the card winds up as profit for the business. There can be fees associated with the activation of an open-loop gift card that can provide profit for the card issuer.

The cost of gift card production is minimal to the profit opportunities. There may be instances where a single gift card use does not provide a profit, but the overall strategy is profitable. They get people to spend more, visit new retailers, try new products and services, and even recommend their favorite businesses to friends and family. To top it off, gift card spending continues to grow each year.

Do gift cards have to be plastic?

There are paper gift card options that exist, though plastic cards maintain several advantages over paper.

• Durability: Plastic cards offer a heavy-duty option that maintain a quality appearance over time. Paper bends, absorbs moisture, tears and shows wear and dirt.
• Magnetic stripes: While there is technology that allows magnetic stripe application on paper, the longevity of the stripe is limited by the substrate.
• Environment: There is a misconception that paper cards are better for the environment than plastic cards. Recycling is possible with plastic cards.
• Personalization: Both card materials allow for personalization.

While paper gift cards do exist, plastic gift cards are much more common, more durable, and last longer—all while maintaining a quality brand identity for your business.

How are gift card transactions tracked?

Every gift card includes a unique number in the form of a barcode, magnetic stripe, encoded chip, or even something as simple as a plain "human-readable" number. It is that number which is activated with the proper dollar amount.

To get started with a gift card program you’ll need to decide how you’ll manage the gift card information. Most businesses use a gift card transaction system database. These databases are usually part of a point of sale (POS) system.

POS systems are available with different features and support levels. POS providers and card manufacturers like CARDSource work together often to ensure smooth gift card transactions. We have relationships with many providers and are happy to provide recommendations if you are searching for the right system for your business.

What kind of equipment do I need to get started?

The equipment you'll need is determined by your unique needs. Normally, minimal physical equipment is needed for processing gift cards.

Beside the POS system equipment, gift cards are the only other item you need to have. Some businesses like to keep gift card holders on hand to offer a gift wrap or packaging option.