Gift cards are a simple and effective way for businesses to drive revenue, attract new customers, and encourage repeat visits. But many business owners still ask the same question: How do gift cards work?

In simple terms, a gift card works by linking a unique card number to a balance stored in a gift card system or point-of-sale system. While the card itself may include a barcode, magnetic stripe, or printed number, the actual dollar value is typically tracked in a database rather than stored on the physical card.

Magnetic stripe technology has been around for 40+ years, and more magnetic stripe cards are produced today than ever before. However, there is still widespread misunderstanding about magnetic stripes and their role in bank and gift card transactions.

Magnetic stripes are thin layers of ferrous oxide applied to the surface of the card. Each oxide particle has a magnetic north and magnetic south pole. When first applied to the surface of the card, the arrangement of these particles is totally random, the stripe is magnetically neutral and is said to be “un-encoded” or blank. To add information to the magnetic stripe, the oxide particles are forced to align with their magnetic poles in the same direction. By periodically reversing the direction of the alignment this “encoding” creates a pattern of transitions between north south magnetic fields. It is these transitions that are read and interpreted as data.