What Is a Gift Card?

A gift card is a prepaid debit card that contains a specific amount of money available for use for a variety of purchases.

How a Gift Card Works

Gift cards are a form of prepaid debit cards loaded with funds for future use. There are generally two types of gift cards: open loop and closed loop cards. Both types can typically be used online and in person.

Many gift cards will have a minimum and maximum initial loading amount. A common minimum is $10, and a common maximum is $500. In some situations, they can be used to pay for a portion of a purchase with cash, debit or credit used to balance the expense. As a precaution to mitigate the risk of losses, many gift cards can also be registered online—a procedure which allows the remaining balance to be tracked and frozen if a card is lost. In this way, some gift cards are safer than cash.

A gift card is a type of prepaid debit card loaded with funds for future use.

key takeaways

  • Open loop gift cards can be used at many merchants, like regular debit cards; closed loop gift cards are good at just one retailer.
  • Closed loop gift cards are usually not reloadable.
  • Though physical gift cards still dominate the market, digital cards (eGift cards) are growing rapidly.

Closed Loop Gift Cards

Closed loop gift cards are often marketed by stores, allowing a cardholder to purchase anything from that specified retailer. Closed loop cards can generally only be used with a single merchant, either at the store or on its website. However, if one company owns several different retailers, it might issue gift cards that can be used at any of them. Gap Inc. (GPS) is one such corporation: Its cards can usually be used interchangeably at any of its affiliated stores, including Gap, Banana Republic, Old Navy, and Athleta.

Closed loop gift cards will usually not require any activation fees. These gift cards will also not include a processor’s logo (the financial services company that actually handles the transaction mechanics), though they do include the merchant's; in a sense, they act as advertising for the store.

Closed loop gift cards are usually not reloadable, so once the balance is spent, they have no further use. Funds on a closed loop gift card may also have a specified expiration date, which requires the user to use the card within a specific timeframe.

Closed loop cards are popular gifts for wedding and baby registries. Many merchants also offer closed loop gift cards as a bonus for individuals who sign up for their registries.

$506 billion

The projected size of the global gift card market by 2025, according to Persistence Market Research.

Open Loop Gift Cards

Open loop cards offer the equivalent of cash – or more precisely, a credit or debit card that can be used at any merchant where that card is accepted, as well as online. Many of the major charge or credit card issuers/processors, like American Express, Visa, Discover, and MasterCard, offer open loop gift cards. These cards will display the payment processor’s logo and can be used to make all types of electronic payments nearly anywhere.

Open loop gift cards also have the advantage of serving as a standard prepaid card. These cards are usually reloadable allowing the user to add funds on their own as well. Open loop cards will sometimes require an activation fee of approximately $5, which must be paid at the time the card is purchased.

3 Out of 4

Loyalty-program redemptions that are in plastic, vs. digital, gift cards.

Digital Gift Cards

Electronic or digital gift cards debuted in 1994, according to Mageplaza, an extension marketplace of the open-source-commerce platform Magento. And they are growing at an annual rate of 200%, comparing to about 6% for gift cards overall. Increasingly, many merchants are opting to offer eGift cards to customers: Upscale department stores such as Saks Fifth Avenue and Bergdorf Goodman, for example, send bonus gift cards to their loyalty program members (who have spent a certain amount during a promotion or over a certain time period) that are digital, rather than actual pieces of plastic. However, 75% of the volume in gift card program redemptions is still in physical cards versus 25%for digital gift cards, according to a National Gift Card Corp. (NGC) 2018 industry survey.