This article is dedicated to gift cards; it describes several approaches to closed loop gift card processing. Gift cards are gaining popularity in different industries. Companies that want to support closed loop gift cards can choose one of the two options.
Particularly, if a payment gateway wants to support gift cards, it can do it on two levels.
Levels of Closed Loop Gift Card Processing
On the one hand, a gateway can support third-party gift cards. Third-party issuers of gift cards constitute a separate group of companies. Examples include Blackhawk, ValueLink, and others. The processing model is similar to processing of Amex and Discover cards. The third-party company issues the cards and facilitates the acquiring process. Such companies allow for white-labeling of their cards. A merchant can give cards, bearing its logo and corporate credentials, to its customers, but in reality the card is issued and acquired by the third party.
On the other hand, the “closed loop” can be “tighter” and involve fewer parties. I.e., gift card processing can be organized at the level of the gateway itself, or inside the merchant’s payment system. The process is basically the same as in the case of a third-party processor, but balancing and management of the accounts, as well as issuance of the cards, are performed by the gateway or the merchant, and no third parties are involved.
Advantages of Closed Loop Gift Cards
The advantage of using the third-party is that the approach is less labor-intensive for the merchant/gateway. For a gateway it is much simpler to implement an integration for gift cards, adding several gift-card-specific operations (card activation and money transfers between cards), than to implement the whole account balancing logic in-house. A merchant, delegating the task to a third party, doesn’t have to implement account balancing process (as in the case of in-house processing) and organize the process of card issuance, coding, and tracking.
The in-house approach, however, has a considerable advantage as well. Many gift cards are never redeemed, or never fully redeemed, which means, that there is a certain percentage of money, consistently remaining with the gift card issuer. If the third party is the issuer, then this third party is the holder of the funds remaining on the cards. If the closed loop system is controlled by the merchant, then it is the merchant who gets the revenues from the unclaimed funds remaining on the cards.
The global advantage of closed loop gift cards (for merchants) is that they allow the cardholder to use the cash from these cards, while the merchant does not have to pay merchant fees to the associations. Another advantage (for cardholders) is that gift cards provide an opportunity to conduct online payments to people, who have no access to any other payment cards due to their credit history.
If you are a merchant or a payment gateway provider, and you want to support closed loop gift cards, you have to assess all the pros and cons of the two possible approaches to gift card processing in advance, and choose the approach, which suits your business model from budgeting perspective.