Industry Terms: Gift Cards

June 25, 2012

This is the latest installment in The Official Merchant Services Blog’s Knowledge Base effort. Well we want to make the payment processing industry’s terms and buzzwords clear. We want to remove any and all confusion merchants might have about how the industry works. Host Merchant Services promises: the company delivers personal service and clarity. So we’re going to take some time to explain how everything works. This ongoing series is where we define industry related terms and slowly build up a knowledge base and as we get more and more of these completed, we’ll collect them in our resource archive for quick and easy access. Today’s terms is Gift Cards.

Gift Cards

A Gift Card is a restricted monetary equivalent or scrip that is issued by retailers to be used as an alternative to a non-monetary gift. Highly popular, they ranked as the second-most given gift by consumers in the United States in 2006 — when about $80 billion were spent on them. Gift cards are so popular because relieve the donor of selecting a specific gift and their convenience combined with the proliferation of e-commerce has only made their use skyrocket in the 6 years since those figures were released.

The recipient of the gift card can use it at his or her discretion within the restrictions set by the issuing agency. This makes for a lot of variety in the gift cards themselves, even if their basic function remains exactly the same. Gift cards usually resemble a credit card in appearance, including the presence of a barcode or magnetic strip which is read by an electronic terminal — most often the same terminal merchants use for swiping credit and debit card transactions. The gift card itself is identified by a specific number or code, not usually with an individual name, and thus can be used by anybody. They are backed by an on-line electronic system for authorization. Some gift cards can be reloaded by payment and can be used multiple times.

Some cards have no value initially associated with them. When they are sold the cashier enters the amount which the customer wishes to put on the card. This amount is rarely stored on the card but is instead noted in the store’s database, which is crosslinked to the card ID. Gift cards thus are generally not stored-value cards as used in many public transport systems or library photocopiers, where a simplified system (with no network) stores the value only on the card itself. To thwart counterfeiting, the data is encrypted. The magnetic strip is also often placed differently than on credit cards, so they cannot be read or written with standard equipment. Other gift cards may have a set value and need to be activated by calling a specific number.

Gift cards are divided into “open loop” or “network” cards and “closed loop” cards. The former are issued by banks or credit card companies and can be redeemed by different establishments, the latter by a specific store or restaurant and can be only redeemed by the issuing provider. The latter, however, tend to have fewer problems with card value decay and fees. In either case the giver would buy the gift card (and may have to pay an additional purchase fee), and the recipient of the card would use the value of the card at a later transaction.

Mobile Gift Cards and Virtual Gifting

As we reported last year, Virtual Gifting and Mobile Gift Cards are a recent and hot trend. Mobile gift cards are delivered to mobiles phones via SMS messages and phone applications including iPhone applications allowing users to carry only their cell phones. Benefits include tying them to a particular phone number and ease of distribution through email.

Virtual gift cards are delivered via e-mail to their recipient, the benefits being that they cannot be lost and that the consumer does not have to drive to the bricks and mortar location to purchase a gift card.

In these types of transactions the merchant is not involved in the loop, therefore it’s not a traditional gift card. It’s more of a cash transfer.

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