Navigating gift card processing: a deep dive into closed-loop systems

October 16, 2023

In the dynamic world of professional gifting, gift cards have risen as a versatile tool that empowers businesses to engage with their customers, motivate employees, and boost sales. But how does gift card processing work, especially within the closed-loop system, and what benefits does it bring to the brand offering them?

In this in-depth exploration, we will uncover the intricacies of closed-loop gift card processing and how it can be a game-changer for businesses targeting the 18-44-year-old demographic through mail-in programs.

Gift card processing in a nutshell

Gift card processing is the engine that drives the smooth operation of gift card programs. It involves a series of steps that ensure the secure and efficient management of gift card transactions. Understanding this process is essential for businesses looking to leverage the potential of gift cards, particularly in a closed-loop system.

Closed-loop gift cards

Closed-loop gift cards are those that can only be redeemed within a specific network or at particular merchants. They are usually issued by a single retailer, brand or a group of affiliated businesses. These cards are not branded with major credit card logos, making them exclusive to the issuing brand or group.

The role of gift card processors

Gift card processors play a pivotal role in closed-loop gift card systems. These processors are specialized in facilitating and securing gift card transactions. Their responsibilities include:

Transaction authorization

When a customer purchases or redeems a gift card, the processor verifies the card’s authenticity and checks the available balance. This step ensures that the card is valid and has sufficient funds for the transaction.

Balance tracking

The processor continuously monitors the remaining balance on the gift card. This real-time tracking allows customers to know how much value is left on their card after each purchase.


Once a gift card is used for a purchase, the processor facilitates the transfer of funds from the business to the merchant where the redemption occurs. This ensures that the retailer is compensated appropriately.


Gift card processors generate detailed reports, offering businesses valuable insights into their gift card program’s performance. This data can be used for strategic decision-making and refining the program.

    The gift card transaction process

    Here’s a step-by-step breakdown of how a gift card transaction works in a closed-loop system:


    A customer buys a closed-loop gift card from the issuing retailer, either online, in-store, or through a mail-in program. The customer specifies the card’s value and looks during the purchase.


    After purchase, the gift card is activated by the gift card processor. The card is linked to the purchased value, and has a unique identification code.


    When the recipient decides to use the card, they present it for payment at the point of sale (POS). The gift card processor verifies the card’s authenticity and the available balance.


    The processor checks if the funds are available and confirms the purchase amount. If the balance covers the transaction, the processor authorizes the purchase.


    The processor ensures the funds are transferred from the business to the merchant. This step completes the redemption process.

    Balance update

    The processor updates the gift card’s balance, reflecting the amount spent after each transaction. This enables the customer to track their remaining balance.


    The processor records transaction details, offering businesses a comprehensive view of their gift card program’s performance.

      Benefits of closed-loop gift card processing

      Now that we’ve dissected the mechanics of gift card processing within a closed-loop system, let’s explore the benefits it brings to the brand offering these cards.

      Enhanced customer engagement

        Gift cards provide an opportunity for brands to engage with customers. The convenience of using gift cards in both online and physical stores fosters brand loyalty, keeping customers coming back for more.

        Brand exposure

          Closed-loop gift cards serve as miniature billboards in customers’ wallets. The design and branding on the gift card are visible each time the customer checks their balance or uses the card, reinforcing brand visibility and recognition.

          Increased sales

            Gift cards often lead to increased sales as customers tend to spend more than the card’s face value. It encourages customers to make purchases they might not have considered otherwise, driving revenue for the brand.

            Valuable customer data

              Closed-loop gift card processing offers a wealth of data about customer behavior and preferences. Businesses can leverage this data for targeted marketing campaigns, promotions, and customer insights.

              Customer retention

                Gift cards facilitate repeat business and customer retention. Once a customer has a gift card, they are more likely to return to the brand to redeem it. This continued engagement builds a loyal customer base, also acting as brand embassadors.

                Streamlined operations

                  Gift card processors integrate seamlessly into the brand’s point of sale systems and operational processes. This integration makes transactions efficient and secure, simplifying accounting and reporting.

                  Cash flow control

                    Gift card sales allow brands to maintain control over their cash flow. The funds loaded onto gift cards are considered a liability, ensuring that the brand retains the cash until the cards are redeemed.

                    Flexibility in gifting

                      Closed-loop gift cards offer flexibility in gifting options. They are available in various denominations, making it easy for customers to choose a gift card that suits their budget.

                      Embracing the power of closed-loop gift cards

                      Closed-loop gift card processing is an invaluable tool for businesses looking to engage with their customers, boost sales, and enhance their brand image. Brands can leverage this powerful tool to target their demographic through mail-in programs, reaching a significant and diverse audience.

                      To maximize the benefits of closed-loop gift cards, businesses should consider:

                      • Customizing gift cards to match the brand’s image and message
                      • Incorporating gift cards into marketing strategies and promotions
                      • Analyzing the data gathered through gift card transactions to gain insights
                      • Offering digital and mobile gift card options to cater to the tech-savvy demographic
                      • Using gift cards for employee incentives to motivate the workforce

                      In conclusion, closed-loop gift card processing offers brands a wealth of opportunities to engage with customers, drive revenue, and gain valuable insights. When harnessed effectively, it becomes a powerful asset for brands.