Setting up a gift card program: A practical merchant guide

A gift card program can be a powerful tool to turn purchases into strategic opportunities for growth and engagement. By offering gift cards, you provide a flexible way to reward customers, celebrate special occasions, and drive sales both in-store and online.

In this guide, we will walk you through the basics of the gift card program, including various methods for setting up your own gift card program, common mistakes to avoid, and the best practices that drive the best results.

The gift card program is one of the most popular gift ideas in the world. According to Capital One Shopping Research, the global gift card market is expected to reach $2.31 trillion by 2030.

Here is what you need to know about gift card programs.

A gift card program allows businesses to issue their own gift cards or sell gift cards from other brands, each with a stored value. This value is typically a fixed monetary amount or a predefined credit that customers can redeem later for products or services.

Gift card programs can be issued as rewards or incentives for customers, employees, or partners. They are common as part of many brands' promotional strategies during occasions like holidays, birthdays, anniversaries, customer milestones, or special promotional events.

In general, gift card programs fall into two different forms: closed-loop and open-loop.

These gift card programs serve different purposes. Most small and medium businesses will issue or sell closed-loop gift cards for their customers, since open-loop gift cards will result in higher fees for merchants.

On the other hand, many companies use open-loop gift cards as flexible employee incentives, as they can be redeemed almost anywhere and feel closer to cash.

Before setting up your own gift card program, it's important to understand how a basic program works.

Customers can acquire gift cards either in person or online.

In-store (physical) gift cards: When purchasing a physical gift card, your sales associate will activate it with a specific amount through the POS system. The customer receives the card along with a printed receipt showing the card balance. Once activated, the gift card is ready for redemption at your store.

Online (digital) gift cards: For digital gift cards, customers select the amount, enter the recipient's email address, leave a note if they wish to, and complete the payment. The system then emails the gift card to the recipient, including the amount, the note, and instructions for redemption.

Customers can redeem their gift cards either in person or online.

In-store redemption: Customers present their physical gift card to a salesperson, who then selects the gift card option on the POS and scans or swipes the card for payment.

Online redemption: On your digital storefront, customers can enter their unique gift card code in the checkout field. Some gift cards may also include a barcode or QR code for scanning at the POS or for mobile wallet use.

Your payment processor will check whether the card has sufficient balance. If approved, the purchase amount is deducted from the card. If the balance is insufficient, the POS may either prompt for an additional payment method or decline the payment method.

If a small balance remains and your store doesn't support split payments, your customers are left with unused funds on the card.

After validation, the POS will print out the receipt of the purchase, with information such as the total purchase amount and the remaining balance of the gift card. If no balance remains, staff can recycle the plastic card for future use.

For online customers, an email will be sent with a confirmation of the purchase and the remaining gift card balance.

After understanding how a gift card program works, here are 3 main ways you can set up a gift card program for your own store:

This method involves gift card programs that operate through major payment networks, such as Visa or Mastercard.

How it works: You work with your issuing bank to set up a gift card program of this type. They will handle issuing the cards, payments, and compliance. Your customers purchase this card with a set value. They can use it anywhere the card network is accepted. Each transaction is authorized in real-time, and the purchase amount is deducted from the card's balance until it is fully depleted.

With this gift card program, you work with a third-party gift card vendor to manage the creation, distribution, and redemption of your own gift cards.

How it works: You sign up with a third-party gift card vendor to launch your program. Similar to the first method, the vendor will handle card setup, activation, and compliance requirements. Customers redeem the cards according to the program rules, while the vendor manages transactions and settlement.

As the e-commerce landscape grows, you now have built-in tools that make gift card programs easier to manage. Platforms like Shopify, WooCommerce, and BigCommerce let you offer store-branded gift cards without relying on external providers or banks.

How it works: From your platform's admin, you can create gift cards, set values, and define redemption rules. You can send them to specific customers or make them available for purchase in your store. Many platforms also let you sell gift cards in person using physical cards. Customers can buy gift cards as a product, then redeem them online or in-store through your POS. All gift card activity is tracked in your analytics dashboard alongside other key customer data.

Before launching your gift card program, pay attention to these key considerations:

• Fraud or security risks: Gift cards are a great target for fraud due to their ease of transfer and resale. Merchants may also face chargebacks when gift cards are purchased with stolen payment details. To reduce potential fraud, monitor your program for any unusual purchasing behavior. At the same time, implement strict procedures that require card activation and clear communication with customers.

• Tax and liability tracking: Gift card sales are only recognized as revenue when they are redeemed. Until then, unredeemed gift cards, or breakage, are recorded as liabilities. Since the gift card programs are subject to accounting requirements, it is important to keep accurate financial statements to avoid tax penalties.

• Legal compliance: Make sure you follow your local and national laws on e-commerce gift cards. For example, the Canadian government requires that most gift cards cannot legally expire at all. Similarly, the federal law in the US prohibits gift cards from expiring for at least five years from the time of purchase. It is best to consult your lawyers before issuing your gift card program.

• Compatibility challenges: If you use a mix of third-party tools and e-commerce platforms, make sure they are integrated to redeem your gift card program. Poor integration can lead to redemption issues, inaccurate balances, or reporting gaps. Test the full purchase and redemption flow before launch for a seamless customer experience across all channels.

Before starting your gift card program, define what success looks like for your campaign.

Whether that is generating cash flows or driving repeat purchases, your goals should guide how you structure, distribute, and promote your gift card program.

To measure progress and evaluate performance, you need clear metrics that align with those goals. Here are some common metrics to track:

• Total sales: the number of gift cards sold.

• Total redemption: the number of gift cards used.

• Breakage rate: The percentage of card value that is never redeemed. Experts often place this rate between 10% and 20%.

• Time to redemption: The average time between purchase and redemption. You should aim for a duration of one month, ideally within the first week since purchase.

• Return on investment: The metric that indicates the overall profitability of the program.

Although a gift card program is a good option for rewards and payments, it comes with major disadvantages that affect customer experience and your e-commerce operations:

• Non-reloadable value: Gift cards can't be reloaded. If your customers have a few dollars on the card and you don't support split payments, they find the unused balance inconvenient. Moreover, they can not even take that remaining out of the card, which can interrupt the customer experience.

• Vulnerable to fraud: Gift cards expose you and your customers to scams. Since gift cards function like cash, it is easy for fraudsters to steal, resell, or misuse them. Gift cards also increase the risk of chargebacks when they are purchased with stolen payment details or redeemed before fraudulent transactions are detected.

• Limited insights: Because gift cards are transferable, it's often difficult to identify the actual end user. This limits visibility into customer behavior, redemption patterns, and purchase intent.

Therefore, you should consider switching to a solution that delivers a seamless shopping experience while preserving full visibility into customer behavior.

A modern alternative, like store credit, will benefit you the most for these particular reasons:

• Renewable: Each customer has an account with your store that holds their store credit balance. Whenever they earn credit through purchases, it's added automatically. This eliminates small leftover balances and split payments.

• Reduced fraud risk: Since store credit is linked to customer accounts rather than transferable cards, it's easier to monitor transactions and prevent unauthorized use.

• Full customer insights: Every transaction is tied to a known user, giving you valuable insights into your customer behaviour.

• Seamless shopping experience: Store credit works across your online and in-store channels, allowing customers to redeem effortlessly without friction.

A gift card program can drive real revenue when set up thoughtfully.

Whether you choose to work with banks, third-party vendors, or use your e-commerce platform's built-in tools, the key is selecting the approach that fits your business model and operational capacity.

Before launching, address the critical considerations around fraud prevention, legal compliance, and system compatibility. And as your program matures, track the metrics that matter.

For those who want to create a seamless shopping experience, store credit is the best fit for you. This payment method ties directly to customer accounts, eliminates the hassles of unused balances, and gives you complete insight into customer behavior.

Ready to boost revenue and increase sales?

For newbies, expect an initial setup investment of $200-$500. Continuous costs range from $50‑200 per month, covering software subscription, POS integration (if selling across both online and offline channels), or ongoing marketing campaigns.

Yes, you absolutely can. You simply need an e-commerce platform capable of handling order fulfillment, inventory tracking, and shipping logistics. As long as your business can manage the card stock, selling physical cards online allows you to significantly reach a wider audience.

At the Point of Sale, gift cards are redeemed either by scanning the code or manually entering it. The POS system then automatically updates the remaining balance, records the liability change, and integrates all redemption data into your sales reports.

Under U.S. federal law, most gift cards are legally required to remain valid for at least five years from the date of issue or the last time value was added. Dormancy or inactivity fees are allowed, but the Consumer Financial Protection Bureau enforces strict rules requiring clear disclosure of all terms.

Definitely. Gift cards are commonly issued as a form of loyalty reward. More advanced systems even permit the integration of both loyalty balances and gift card credit onto a single card for unified customer engagement.