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. Store gift cards are designed to be used at specific merchants or retailers, while general-use prepaid gift cards are not affiliated with any specific merchant and can also be used to withdraw cash at ATMs.
Key Takeaways
- A gift card is a prepaid debit card that is loaded with a specific amount, which can then be used to make purchases and other financial transactions.
- Store gift cards (closed loop) are designed to be used for purchases at specific retailers, while general-use prepaid gift cards (open loop) may be used at a wider variety of locations.
- Some gift cards may allow for cash withdrawals at an automated teller machine (ATM).
- Closed-loop gift cards are usually not reloadable.
How a Gift Card Works
Gift cards are a form of prepaid debit card that’s loaded with funds for future use. There are generally two types of gift cards: open-loop and closed-loop. Both types typically can be used online and in person.
Many gift cards, also known as stored value cards, will have a minimum and maximum initial loading amount. For example, there may be a minimum of $10 and a maximum of $500. In some situations, gift cards 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 that allows the remaining balance to be tracked and frozen if a card is lost. In this way, some gift cards are safer than cash.
Depending on the card in question, a reload fee may apply to add money each time.
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 generally can be used only 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. is one such corporation: Its cards usually can be used interchangeably at any of its affiliated stores, including Gap, Banana Republic, Old Navy, and Athleta.
Closed-loop gift cards usually will not require any activation fees. These cards will not include a processor’s logo but do include the merchant’s logo, acting 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, urging the user to utilize the card within a set 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. The global gift card market is expected to achieve a compound annual growth rate of more than 12% through 2031.
Open-Loop Gift Cards
Open-loop gift 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, such as 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 when the card is purchased.
Digital Gift Cards
Gift cards debuted in 1994. Increasingly, merchants are opting to offer digital gift cards to customers as an incentive to encourage spending.
Upscale department stores, such as Saks Fifth Avenue and Bergdorf Goodman, send bonus gift cards to their loyalty program members who have spent a certain amount during a promotion or over a specific time period. However, physical cards still dominate the market, accounting for 75% of gift card program redemptions versus 25% for digital gift cards.
Gift Card Scams
Gift cards are increasingly a target for scammers. Consumers reported gift card scam losses of $148 million in the first nine months of 2021.
These scams primarily involve scammers asking consumers to purchase gift cards as a form of payment. The consumer provides the gift card number to the scammer, believing they are making a legitimate payment. The scammer then absconds with the money.
Another scam involves tampering with physical cards in-store. Scammers compromise the cards to obtain the gift card number. When a consumer purchases the card and loads money onto it, the scammers can then steal those funds by using the card to make purchases.
Target gift cards are particularly popular among scammers, accounting for $35 million of the losses reported in 2021.
To avoid these scams, avoid purchasing gift cards that look damaged or tampered with, and only use gift cards to make payments to people you know and trust.
FAQs About Gift Cards
What is a gift card?
A gift card is a prepaid card that can be used to make purchases and execute other types of financial transactions. Gift cards can be open loop or closed loop, determining where and how the card can be used.
Can I use a gift card to withdraw cash at an ATM?
Yes, it’s possible to use a gift card to withdraw cash at an ATM if the card allows it. Typically, this is only an option with open-loop cards that are not affiliated with any specific store or merchant brand.
Do gift cards expire or have fees?
Depending on the card, it’s possible that a gift card may expire if the money loaded onto it is not used within a certain period. You may also pay fees to activate a new gift card or reload money onto an existing gift card. Some prepaid gift cards may also charge monthly or dormant-account fees.
The Bottom Line
Gift cards can be useful for shopping online or in stores. You may purchase them to give as gifts to friends and family. Understanding how gift cards work and where you can use them is important for avoiding fees or the risk of expiration. Be cautious to avoid scams, especially during the holiday season.
Related Terms: prepaid debit card, stored value card, credit card, debit card.
References
- Consumer Financial Protection Bureau. "§ 1005.20 Requirements for Gift Cards and Gift Certificates."
- Consumer Financial Protection Bureau. “Choose the Right Card for Your Situation”.
- Persistence Market Research. “Gift Card Market”.
- Mageplaza. “Gift Card Statistics 2020”.
- National Gift Card. “Even in Digital Age, 3 Out of 4 Redeem Loyalty Points for Plastic Gift Cards”.
- Federal Trade Commission. “FTC Data Show Major Increase in Gift Cards as Scam Payment Method”.
