What Are Gift Certificates and How Do They Work?

Gift certificates represent a popular and convenient method for gifting or offering payment. They function as a prepaid monetary value redeemable for goods or services. These instruments provide flexibility, allowing recipients to choose items they desire from a specific merchant or across a broader network. From a financial perspective, the sale of a gift certificate initially creates a liability for the issuer, as revenue is only recognized when the certificate is redeemed, signifying the fulfillment of the obligation to provide goods or services. This mechanism makes gift certificates a valuable tool for businesses to secure future sales and enhance customer loyalty.

Different Kinds of Gift Certificates

Gift certificates come in various formats. Physical gift cards are traditional plastic cards, similar to credit or debit cards. They are purchased directly from a store and redeemed by presenting the card at the point of sale. Digital gift certificates, also known as e-gift cards, are electronic alternatives, delivered via email or text message, and usually contain a unique code or barcode for redemption. These digital versions offer convenience for remote gifting and usage.

Another important distinction lies in their acceptance. Store-specific or closed-loop gift certificates are redeemable exclusively at the issuing merchant or a defined group of affiliated businesses. In contrast, open-loop gift certificates are backed by major payment networks such as Visa, Mastercard, American Express, or Discover, enabling their use anywhere these payment networks are accepted. These provide greater versatility for the recipient, functioning much like a prepaid debit card.

Using Gift Certificates

Acquiring gift certificates involves purchasing them in-store, online directly from a merchant, or through third-party retailers. Once obtained, redeeming a gift certificate involves presenting it as payment. For in-store purchases, this means swiping a physical card, scanning a barcode, or manually entering a card number at checkout. When shopping online, the gift certificate’s code or number is entered during the digital checkout process, similar to other payment methods.

Upon redemption, the purchase amount is deducted from the certificate’s balance. If the purchase total is less than the certificate’s value, any remaining balance stays on the card for future use. If the purchase exceeds the certificate’s value, the recipient needs to cover the difference with an additional payment method. Checking the remaining balance on a gift certificate is straightforward, with common methods including visiting the issuer’s website, calling a toll-free number provided on the card, or inquiring at the merchant’s customer service desk.

Common Features of Gift Certificates

Gift certificates often come with specific terms and conditions. While some gift certificates may have expiration dates, federal law, specifically the Credit Card Accountability Responsibility and Disclosure (CARD) Act of 2009, mandates that most gift cards cannot expire less than five years from their issuance or the date funds were last loaded. The CARD Act also limits dormancy or inactivity fees; these are generally prohibited unless there has been no activity for at least one year. Even then, only one fee can be charged per month, with clear disclosure to the consumer.

Gift certificates are typically not redeemable for cash, unless explicitly required by law. Some jurisdictions may require cash redemption for small remaining balances. Policies regarding lost or stolen gift certificates vary by issuer; many retailers have procedures for replacement if proof of purchase and the card number can be provided, though some may not replace them. Certain gift certificates may have usage restrictions, limiting them to specific types of goods or services, or prohibiting their use for certain categories. These conditions are detailed in the terms and conditions.