What Are Gift Cards: Basics, Types, and Fraud to Avoid

A gift card is a kind of prepaid debit card that has money on it that may be used for a range of transactions. Store gift cards are intended to be used at certain shops, while general-use prepaid gift cards are not tied to any particular store and may also be used to withdraw cash from ATMs.

What Does a Gift Card Do?

A gift card is a kind of prepaid debit card that may be loaded with money for future usage. Gift cards typically come in two varieties: closed loop and open loop. Typically, both kinds can be utilized offline and online. Thus, gift cards have become stable in the world of transactions thanks to their convenience to sellers and customers.

There are often minimum and maximum initial loading amounts for gift cards. There may be a minimum of $10 and a maximum of $500, for instance. Gift cards may be used to cover a part of a transaction in certain cases, with cash, debit, or credit being used to cover the remaining amount.

Many gift cards may also be registered online, which enables the remaining balance to be monitored and locked in the event that a card is lost, as a precaution to reduce the risk of losing money.

Types of Gift Cards

Let’s look at the most popular types of gift cards one can encounter in the wild.

Closed-Loop Gift Cards

Stores often promote closed-loop gift certificates that may be used to make any purchase at that particular seller. In general, closed-loop cards may only be used with one retailer, either in-person or online.

A company may, however, offer gift cards that may be redeemed at any of its many stores if it owns a number of them. One such company is Gap Inc. (GPS), whose cards may typically be used at any of its associated shops, including Old Navy, Banana Republic, Gap, and Athleta.

Open-Loop Gift Cards

Open-loop gift cards provide the same value as cash, or more specifically, a credit or debit card that may be used offline as well as online at any retailer that accepts that card.

Open-loop gift cards are available from a large number of the top charge or credit card issuers/processors, including Discover, Visa, American Express, and MasterCard. These cards will include the logo of the payment processor and may be used in almost any place to make any kind of electronic payment.

Digital Gift Cards

According to Mageplaza, an extension marketplace for the open-source Magento e-commerce platform, gift cards first appeared in 1994. Sellers tend to provide digital gift cards to clients as a perk to stimulate spending.

Gift Card Fraud

Scammers love themself some gift card fraud. Consumers reported $148 million in losses from gift card scams in the first nine months of 2021 alone, according to the Federal Trade Commission (FTC).

These frauds mostly included con artists demanding that their victims spend money on gift cards as a way of payment. A customer gives a fraudster their gift card information while thinking that they are making a genuine transaction. The con artist then flees with the money.

Another fraud includes stealing real cards from stores. To get the gift card number, con artists tamper with the cards. A fraudster may steal cash by using the card to make transactions after a customer buys a card and puts money into it. Target gift cards are especially popular among con artists; this scheme was responsible for $35 million of the recorded losses in 2021.