Gift Cards for Small Business: Open Loop vs. Closed Loop

For small business owners, gift cards are a useful tool that can translate to big sales.  2018 saw around $335 billion loaded onto gift cards, and close to three-quarters of consumers spent over the gift card value when redeeming it. In addition to spending more, about 51% of gift card recipients become repeat customers.

Gift certificates and gift cards are not the same things. A gift certificate is a paper voucher that millennials may recall receiving-- and possibly losing before they could redeem it-- for their birthday. They are still in use, but their presence is rapidly declining in favor of the advantages of gift cards. Among their advantages, gift cards allow merchants to refund the purchase price for returned items back to the card rather than issuing cash refunds as they would have to do with gift certificates. Customers can also reload gift cards, which has become popular as consumers have become more budget conscious.

By offering gift cards, you’re boosting sales and revenue while also enticing customers to purchase more.

Gift cards for small business: The benefits

Neiman Marcus, Blockbuster, and Starbucks were the first retailers to sell gift cards — and now gift cards are offered in retail and restaurants far and wide.

Gift cards aren’t just for major companies either. Gift cards are an easy way for small businesses to build customer loyalty, attract new business, and boost their bottom line. Customers may pick up gift cards for a variety of gift-giving occasions like birthdays and like graduation, or just to say thank you.

The benefits of gift cards for small business include:

• An opportunity to boost sales and revenue
• Help drive foot traffic to your business
• Acquire new customers
• Generate repeat business
• Increase average ticket spend

How to choose the gift card program that’s right for you

Starting your gift card program may seem overwhelming, but there are ways to implement a program quickly. First, it’s essential to understand the difference between a closed loop and open loop, as well as the different types of small business gift card programs available.

Closed-loop gift cards can be used only in your store and are ideal for small businesses who want to attract new business and build loyalty and return business. While this is great from a retailer's perspective, it may feel constricting to the gift card giver who might want something more open-ended for the recipient.

Open-loop gift cards can be used in a number of different businesses, though restrictions may apply. In open loop gift cards, you will see the store or brand name alongside that of a credit card network like Visa. This means they can be accepted anywhere that accepts that form of credit card.  While open-loop gift cards offer additional flexibility, in regards to where they can be used, it doesn’t guarantee the cards are used at your business.

Closed-loop vs. open-loop gift card programs

Closed-loop merchant bank program: These are closed-loop gift card programs offered by certain merchant banks to be used at your store only. Set up for this program is straightforward and integrates quickly with your existing credit card processing platform. 

Closed-loop from vendor program: These closed-loop gift cards are created by a vendor who specializes in merchant gift card programs. When you are determining a vendor to use, make sure to ask for clarification on what systems are required to process gift cards under their program to ensure you have the proper capabilities.

Open-loop restricted program: These programs leverage a credit card network like Visa or MasterCard, but are restricted for use at specific businesses or locations. A good working illustration of this is a gift card you would purchase for a mall. That card can be used at any store at the mall, and can limit the types of purchases made using it.

Open-loop unrestricted program: An open-loop unrestricted card is like the restricted card, without the ability to add limitations like open-loop restricted programs. Basically, it is a gift card with your business’s name on it that can be processed anywhere that the associated credit card is accepted.

Open-loop branded prepaid program: A branded prepaid card is a gift card that has your business name on it but can be used anywhere. You prepay for the card, and the customer can use them like a pre-paid credit card. This type of gift card offers the user a lot of flexibility while reminding them of your brand while using it. It is an ideal option for generating positive brand associations (and the word-of-mouth recommendations that result), but not for driving business directly to your business.

Consumer Protections and Gift cards

In 2009, Congress passed the Credit Card Accountability Responsibility and Disclosure (CARD) Act. This act established consumer protections pertaining to gift cards based on many state laws. According to the National Conference of State Legislatures, this act states that gift cards cannot expire within five years from the date they were activated and generally limits inactivity fees on gift cards except in certain circumstances, such as if there has been no transaction for at least 12 months."

Some states have prohibited gift card expiration dates altogether for consumer-purchased cards. Check your state's laws to find out if this is the case in your operating area.

Gift cards for small business: How to start your program in 4 easy steps

1. Order stock of the physical gift cards

You can order gift cards from a provider. They can be purchased directly from a vendor or a third party depending on your needs. Ordering in bulk is always preferable since bulk orders reduce costs. Ensure that you brand your gift cards with your logo, business name and contact details like you would a business card.

2. Barcodes or Magnetic Stripe? Inputting cards into your POS system

How you input cards into your system will depend on your POS provider. The two options for storing information on gift cards include either barcodes or magnetic stripes.

If you choose barcodes, that means you will assign a unique account number to each card’s barcode. A barcode allows you to capture the gift card purchaser's details and gift card amount which you can then connect to an account number. This makes it easy for customers to reload the card once it is empty or pay any remaining balance with another payment method.

Cards with magnetic stripes each come with a unique identifier. You swipe the card and input the amount purchased into your system. The POS system will then deduct the balance of the gift card each time it’s swiped until the total amount of the card is spent.

3. Promote your new gift card

Get creative when you're promoting this new service! Offer different sales and incentives on the cards that are designed to get customers to return to your store and buy more by offering a free, lesser-value gift card when your customer buys gift cards over a certain value. For example, offer a $10.00 gift card when your customer purchases gift cards over $75.00. Alternatively, you could offer a gift card when they purchase certain promotion items in-store to be used at a later date. The customer may choose to use this gift card themselves or pass it along to a friend. Since customers spend on average 20% more than the value of the gift card, this lets you welcome new customers and increase your revenues at the same time.

4. Watch your sales grow

Gift cards can help attract new customers, boost customer loyalty, and increase your bottom line. 

Your business can reap the rewards of establishing a gift card program. Contact Sekure Payment Experts to learn more about gift cards for small business and we’ll help you take the next step.