While most gift cards are still made of plastic, digital cards are increasing in popularity among consumers because of the many options to customize the cards.

"Mobile and virtual cards have an advantage in that they can be instantly delivered, purchased quickly and bought from anywhere," says Ben Jackson, a senior analyst at the Mercator Group. "There's still the problem about whether it is a real gift or if it's thoughtful…but among people who are comfortable with technology or people who need a last-minute gift," e-gifts are growing.

The companies that make digital gift cards are adding features to make them more palatable. For example, Kiind doesn't charge purchasers for its cards until the recipient activates it, usually at the point of sale, says Leif Baradoy, cofounder and CEO of Kiind. "This solves the problem of waste in unused gift cards, which account for 14% to 18% of all gift cards," he says.

Kiind offers a digital gift card platform that allows businesses to send money to recipients who then choose which merchant's gift card they'd like to fund.

Another digital gift card vendor, Gyft, is carving a niche among Bitcoin users who purchase the cards for themselves. Gyft began accepting Bitcoin as a payment method in May and later announced its loyalty program, Gyft Points, which rewards users more for favoring alternative payment methods such as Bitcoin and PayPal instead of credit cards.

Digital gift cards also see a spike in popularity during the holiday season, says Render Dahiya, CEO of Arroweye, which creates custom physical and digital card products.

"There's still an overwhelming preference to buying physical gifts … but a few days before the holiday,  e-gift purchases go up as people that have procrastinated buy gifts," Dahiya says. "The e-gift has certainly one big benefit in that it extends the buying season."

Virtual gift cards can be customized with video or audio attached to them as well, adding a more personal touch, Jackson says.

"Gift card companies are getting smarter about new technology to open up distribution channels and make redemption easier," he says.

Wrapp is another mobile gifting provider that allows businesses to promote their brand by offering users free gift cards to give to their friends and family.

Wrapp helps merchants take advantage of direct word-of-mouth marketing to capture new customers, Jackson says. For example, Gap or Office Depot could send several $5 gift cards to a customer to send to friends, plus Wrapp also lets merchants tap into users' Facebook accounts and send alerts about friends' birthdays.

"We'll start seeing more use of digital and mobile gift cards in connection with loyalty and in connection with promotions," says Jackson. "For a long time retailers were in the mindset that gift cards were the same as the paper gift certificate but now gift cards are a tool for customer engagement."

Depending on the size of the campaign and the value of the gift cards given, Kiind can save businesses between 8% and 12% on their return on investment, Baradoy says. Kiind also collects data on recipient choices to share with its business customers.

"The real value of digital gift cards is the additional features and functionality that physical gift cards just can't give," Baradoy says. "I think the reason digital gift cards haven't grow as quickly as people projected five years ago is because companies have just copied what already existed in the physical world and haven't made their products more valuable."

Kiind launched across North America in July and has since picked up more than 50 retailers. The company has between 15,000 and 20,000 users and is seeing "medium six-figure volumes in revenue," says Baradoy.

While there's speculation that companies don't want consumers to redeem gift cards, Jackson says this isn't true, especially since escheatment laws don't allow gift cards to expire. Instead, if a card goes unused for a certain amount of time, it's viewed as abandoned property and the issuer is supposed to turn the money over to the state.

"Plus customers usually spend more than the face value on the card," Jackson says.

Closed-loop gift cards, which can only be used at a specified retailer, are more popular for consumers and more profitable for issuers, says Jackson. Open-loop cards, which can be used anywhere the card brand is accepted, are being "squeezed in a regulatory vice," he says.

Also some companies are instead calling gift card products "incentives cards" or "trial cards," because these are treated differently under the law, Jackson says. These products can have expiration dates, which will be advantageous to merchants that want their offers to be time-sensitive, he says.

While "digital gifting is going to continue to grow, especially as issuers see that they can keep doing sales even on Christmas [and other holidays] and get more gifts out there…plastic still dominates," Jackson says.

InStore, a mobile point of sale provider, is focusing more attention on physical gift cards. The company recently launched a free mobile app for Apple devices called Gift Card Merchant, which allows users to design physical gift cards to be printed on paper.

InStore built the app to allow merchants that don't want to change their point of sale systems, says Matt Niehaus, InStore CEO. Merchants instead can use their personal iPhones or iPads to scan unique QR codes on the paper gift cards through the app, he says.

While marketing the system as free may seem unsustainable, Niehaus says, InStore makes money off its mobile point of sale product and doesn't need to immediately make money off the gift cards. After "merchants see how elegantly we develop software it might inspire them to try some of our other [monetized] products," he says.

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