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December 27, 2022

How Do Gift Cards Work For Small Businesses?

Merrell Sheehan

Written by:

Merrell Sheehan

How Do Gift Cards Work For Small Businesses?

Each year, gift cards top the charts as the leading holiday purchase, and for a good reason. Many shoppers purchase gift cards for their loved ones’ birthdays, holidays, and corporate events due to their versatility.

But gift cards aren’t just popular among consumers—businesses benefit from them as well.

At Electronic Merchant Systems (EMS), we’ve seen how gift card programs can supercharge small businesses. They can attract more customers, boost revenues, and build brand awareness. You essentially create two customers for every gift card you sell. 

So, how do gift cards work for small businesses? Below, we’ll break down everything you need to know. 

Table of Contents

How do Gift Cards Work?

No matter the size of your business, all gift cards work similarly. Physical gift cards look like debit cards or credit cards. They often feature their business’ custom branding rather than the cardholder’s name and card number.

Purchasing a gift card allows a customer to load a certain balance onto the card, whether that’s $5, $50, or $500. Gift card balances are loaded onto the cards through the store's point of sale (POS) system. Customers can use their gift cards to purchase products or services from companies at a later date or give the card to someone else.

Gift card recipients can use their card’s balance to contribute towards purchases. If one transaction doesn’t use up the entire balance, the same gift card can be used again.

What Happens When a Customer Purchases a Gift Card?

Depending on the gift card program, customers can purchase gift cards in person or online. 

When purchased in person, these are the steps involved in selling a gift card to a customer:

  • Accept their payment – Gift cards are paid for upfront. Customers can purchase gift cards as they would any other product or service. They can use their credit card, debit card, or cash as payment.
  • Load the gift card’s balance – The cashier must load the gift card with the customer’s desired balance. All they have to do is swipe the card through the POS terminal and type in the dollar amount. 
  • Give the gift card to the customer with a receipt – Once the gift card is ready to go, all your cashier needs to do is print out a receipt and show the customer its value. This way, the customer can keep track of it.

When purchased online, customers simply need to:

  • Add the gift card to their online shopping cart
  • Input their desired value
  • Pay for the gift card as they would any other online purchase
  • Wait for the physical gift card to arrive by mail

How Do Customers Redeem Gift Cards?

Roughly 6% of gift cards never get redeemed. If this figure includes any of your gift cards, congratulations!—you just earned some extra profits. 

However, most gift card recipients will eventually redeem their gift cards. Here’s how this process works:

  • The customer selects the items they want to purchase – Gift card recipients often purchase more than they would normally. That’s because they view their gift card balance as free money or a significant discount.
  • Your cashier accepts the gift card as a form of payment – Gift card balances can be applied to purchases just like a credit card or debit card payment. Your employee simply needs to swipe the gift card through your POS terminal or input the gift card’s number into your system.

    It’s important to keep in mind that the majority of customers spend an average of $59 more than their gift card’s value. In turn, many customers may need to provide an additional payment method to cover the rest of their transactions.
  • Your payment processor will automatically adjust the gift card’s balance – If your customer doesn’t spend the entire balance during their purchase, the gift card’s value will be reduced accordingly. Your cashier can print out an updated receipt showcasing the remaining balance.
  • Your cashier may dispose of an empty gift card at the customer’s request – If the gift card’s balance is used up during the purchase, the customer may not want it back. In turn, your cashier can dispose of the gift card or recycle it, depending on your gift card policies. 

If a customer wants to use their gift card to make purchases online, all they need to do is input the gift card’s code in the Gift Card section during checkout.

What Are the Different Types of Gift Cards for Small Businesses?

While all gift cards work similarly, there are two main types of gift card programs you can choose from: closed-loop and open-loop

Both programs have benefits and drawbacks.

What Are Closed-Loop Gift Cards?

Closed-loop gift cards are generally preferred by small business owners.

That’s because these types of gift cards only work at your business. All of their sales result in direct revenue for your business. 

Closed-loop gift cards offer the following perks:

  • They can’t be used anywhere else.
  • They don’t charge any transaction fees.
  • They enhance customer loyalty by encouraging customers to come back to your store.

For consumers, closed-loop gift cards offer less flexibility than their open-looped counterparts. In turn, some customers may not want to purchase a closed-loop gift card for a loved one who lives far away from your store (though having an online store can circumvent this problem).

What Are Open-Loop Credit Cards?

Open-loop gift cards can be used to make purchases at several locations. Visa gift cards are a popular example of this type of gift card. 

Due to their versatility, open-loop gift cards may be a more desirable option for customers who want to give their recipients more shopping options. They essentially work like cash, though with a few limitations. Most notably, open-loop credit cards need to be compatible with a store’s POS system. Depending on the gift card provider, this isn’t always the case. 

As a small business, open-loop credit cards typically only benefit your business if you design them with your company’s branding. If you do, they can double as pocket-sized advertisements for your store, even if gift card recipients use them elsewhere. 

Is Your Business Ready to Use Gift Cards?

Implementing a gift card program is a relatively straightforward process.

More importantly, it can do wonders for your business. If you want your business to enjoy the benefits of a gift card program, the first step is to select your gift card vendor. 

At EMS, our Gift & Loyalty Card Program offers closed-loop gift cards that you can design with your company’s branding. If you enroll in this program, you may also want to implement some of our payment processing and POS services. Thanks to our 30 years of payment processing experience, all of our services are easy to use and offer exceptional functionality. 

When you partner with EMS, we’ll work closely with your business to understand its needs and provide a customized payment solution. After that, we can offer you 24/7/365 customer support. 

By becoming an EMS customer, you can expect to save big on all of your payment processing expenses. The majority of EMS customers report significant savings. 

Are you ready to start offering gift cards at your small business? Learn more about our gift card programs at EMS today.

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