The Complete Handbook of Gift Cards & Certificates

Chapter 1: Understanding Gift Cards & Certificates

Gift cards and certificates are a form of prepaid stored value—a promise from a merchant or payment network to honor a specific dollar amount toward a future purchase. A physical gift card is typically a piece of plastic roughly the size of a credit card, embedded with a magnetic stripe, chip, or barcode that stores a unique identifier. A digital gift card is the same stored value delivered electronically, via email or through a merchant's app, without a physical object. Certificates refer to physical or printed instruments—usually cardstock, sometimes with security features—that a bearer can exchange for goods or services. All three are functionally similar: they represent a liability on the merchant's balance sheet (a promise to deliver product or service) and an asset in the hands of the holder (purchasing power that can be exercised later).

To understand why gift cards matter as a business tool, it helps to start with the basic economics. When a customer buys a $50 gift card from a retailer, the retailer receives $50 in cash immediately but incurs no immediate cost of goods sold. The retailer's only cost at that moment is the physical card itself (a few cents), the activation and fulfillment infrastructure (a few more cents), and the merchant services fees paid to the card processor (typically 1-3% of the card value). The retailer then holds that $50 as a liability—a promise to deliver $50 in merchandise or service—until the gift card is redeemed.