How Companies Make Money From Gift Cards

Whether it's for your birthday, completing a survey or a recognition of helping a friend move, getting a gift card is always a pleasant experience. The giver is telling you to treat yourself to something you actually want. The card may be to a specific store where the gift giver knows you like to shop or general, allowing you to spend on whatever you like. Either way, receiving a gift card is always an awfully nice surprise.

But what about the issuers of the gift cards? How do companies use gift cards and most importantly, how can a company like yours be using gift cards to make money? It turns out that while gift cards are great for those that get them, they’re far better for the companies who issue them to their customers. Here, we’ll explore a bit about the types of gift cards, why they’re so good for your bottomline and how you can ensure you’re getting every penny out of them.

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‍What are they anyway?

We’ve all seen gift cards for quite a while but there is a bit more to them than initially meets the eye. It’s important to note that there are really two types of gift cards, closed-loop and open-loop. Don’t let the names deceive you; they’re really quite straightforward.

Closed-loop credit cards are those that can only be used at the store at which they’re issued. So, for example, if you get a gift card to a clothing store, you can only use it at that location, not a nearby electronics store. For small businesses, closed-loop cards make the most sense because they restrict use to the specific store from which they were issued. This means you guarantee that you’re getting that customer back in the door and have the added benefit of the gift buying customer too.

You can get closed loop gift cards by either using your existing merchant account or by going through and independent vendor. Using your existing account is easy because it works with the point-of-sale system you already have. However, it can be a bit inflexible. Independent vendors are a great option because you can design a more robust gift card system, however you’ll pay for the service. 

Open-loop gift cards are those that can be used anywhere because they are tied to specific card payment networks. These operate as more of a convenience for your customers; you’ll never be able to guarantee that you can get folks back in the door. You can apply some restrictions on the cards, but these can get costly.

‍So how can I make money?

Gift cards offer companies some very clear and unique ways to make money. 

‍Low upkeep and start

Companies can produce gift cards yourself but more than likely, they partner with a gift card distributor. These distributors don’t charge all that much for the work. The cards themselves cost a few cents and companies will usually pay a very small percentage of the sale or a fixed price for use of the card. 

Things get much cheaper and easier if you use a closed loop system with your merchant account bank. These programs are sometimes included as a free benefit of your relationship with the bank and you’ll pay a cheaper swipe fee since the dollars aren’t traveling along payment networks.

‍Locking in the customer

This goes without saying but if you’ve got a gift card from a big box store, you’re probably going to do some shopping there. Plus, the store gets two customers, the person who purchased the card and the person who received it. Both of those customers are more likely to spend additional money at the store as well as buying the gift card.

‍Rewards

Most businesses now have some kind of rewards program - gift cards make this much easier to manage and offer a nice incentive for your customers to use the cards as well. Many businesses will offer additional reward points for using gift cards. This makes your customers more likely to frequent your business.

‍Interest-free loan

You can think of a gift card purchase as essentially an interest-free loan. If a customer comes in and buys a $100 gift card at your widget store, they’re not walking out with any product for that value. Yes, someone might come along later  and use the gift card, but you get to count that as income now for redemption on some future date. It’s also possible that…

‍Breakage

Gift card recipients don’t show up at all. We’ve all likely done it; you’ve lost a gift card or spent a large portion of it but wrote the remaining dollar or two off as a loss because you didn’t want to spend cash out of pocket. This can be the most profitable part of gift cards for companies. In fact, this is more common than you might think. By one estimate, up to 47% of the collected value of gift cards in the United States in 2022, nearly $21 billion, went to waste. That’s nearly $175 per person in the United States. You can realize some fairly legitimate profit from gift cards that are never redeemed alone.

‍Let’s get started!

Smart. The first thing you’ll want to do is to contact the payment processor you already work with. If you’re considering new payment processors or are starting a new business and need one, take a look at gift card options as a part of your decision process. Working with your existing payment processor is an extremely low cost and easy to offer gift cards. More than likely, they already have the capability and you already have the POS system, to support a system. If your processor doesn’t offer cards directly they almost certainly have a recommendation.

Like any decision involving your business, getting started with gift cards can be a daunting decision. While they’re easy products to offer and you’ll want to get them on shelves as quickly as you can, you might want a hand looking at all the options and ensuring you’re getting the best deal. Swipesum is there to help; we’ll work with you to determine the best option for your business and work to make sure you’re getting every penny possible.