What Boomerang realized was that standing in the middle of consumer-to-consumer gift transaction was not the greatest business model, CEO Zach Smith said. It depends on massive scale, and other companies like Sweden’s Wrapp and Facebook’s Karma were coming to dominate the market while Boomerang tried to scale its local-merchant strategy.

“There’s a huge opportunity in social gifting, but it’s not in selling gift cards to consumers,” Smith said. “It’s in building viral ads.”

Smith discovered that businesses loved the idea of gift cards for spreading their brand awareness and luring in new customers, but they wanted communicate with customers directly — not just be an option in a growing menu of gift cards, Smith said. So Boomerang has been increasingly obliging them. It hasn’t abandoned its peer-to-peer gifting service, but it’s using it primarily as means of redistributing direct-to-consumer gift-card promotions.

Here’s an example: A customer like chocolatier Ghirardelli will send out an e-mail to its customer list embedded with a stylized $5 gift card redeemable on the company’s site or at one of its stores. If customers accept, they click a link where they’re taken to Boomerang’s site and given an electronic or printable gift card. Customers are then given the option to share that card with, say, five friends through on Facebook or over email.

There are some compelling reasons why brands like this approach, Smith said. First, one in five customers who receive a Boomerang promotion from a partner redeems their gift cards on the spot to buy goods online. “What other ad unit on the planet gets a 20 percent engagement rate?” Smith said.

Then there’s the viral distribution platform. People who receive the initial promotion re-gift the card on average to 3.1 friends. Though engagement rates can fall after that first wave, customers can spread a practically compelling gift card well beyond their initial friendship circles, creating what amounts to an ad hoc viral marketing campaign across a social network, Smith said.

The key is getting those gift cards into consumers hands (or inboxes), rather than depending on a consumer to initiate peer-to-peer transaction. To that end, Boomerang has been looking for more avenues to distribute those cards. It’s been working with a few online market research and promotion companies like Lab42 and Jebbit to make Boomerang gift cards rewards for completing questionnaires or engaging with their marketing content. This week Boomerang took the Rewards program out of beta, offering it to all comers.

One casualty of Boomerang’s new strategy, however, has been its initial focus on local business. National brands allow Boomerang to scale nationally. And while consumers say they like the hipness and flexibility of giving gift cards to a local bakery or coffee shop, Smith said, 90 percent of the gifts they actually give are for national brands like Starbucks(sbux) and Fandango.

Boomerang still offers gifts FOR about 100 local businesses in four cities, though most of them are in hometown Chicago. While Smith said it would continue to support those customers, it’s not pursuing any new ones. The startup has found that there is budding market for paid gifts — where customers actually buy a gift card rather than pass on a free promotion. But Smith said it’s not a business Boomerang will likely pursue for the simple reason that daily deal companies like fellow Chicagoan and Lightbank prodigy Groupon (see disclosure) have that premium coupon market locked down.

Having raised $1 million in July, Boomerang is still a small operation, working out of the Lightbank collective co-located in Grouping’s Chicago HQ building. Last month it had 300,000 unique users, but thanks to its new viral marketing approach, the company is growing quickly, adding some big national brands to its roster, including the Gap, Barnes & Noble and Wine.com.

Disclosure: The author’s spouse is employed by Groupon.

Related research and analysis from GigaOM Pro:
Subscriber content. Sign up for a free trial.

• Social media in Q1: commerce and discovery dominated
• Connected world: the consumer technology revolution
• The future of mobile: a segment analysis by GigaOM Pro

Here’s how it works:

Users who upgrade to Square Wallet 2.5 for iOS and Android (GOOG) find a merchant they like in the Square Directory in their mobile app. They can then choose to send a gift card to a friend for that business via email. Users can send cards for $20, $50, $100 or set their own amount. After including an optional note and choosing an envelope design, they can set which day they want to deliver the gift card.

The card is redeemed via email and is included in a recipient’s Square Wallet application. When a card holder goes to redeem it, the card is accepted through the Wallet app or they flash the card’s QR code to a merchant, who scans it with the camera on their phone or tablet. Merchants will also need to update to Square Register 2.5 to handle the new gift cards.

For iOS users, the interesting option is to redeem the gift cards via Passbook. The platform allows businesses to integrate tickets, coupons, boarding passes and gift cards, which show up automatically on the lock-screen when they’re ready for use. I haven’t been able to try this out but will update with some thoughts later.

Square doesn’t appear to be using Passbook to enable all payments, but the integration of gift cards is an interesting move. Starbucks currently supports Passbook and allows you to have your Starbucks card appear on your lock screen when going to favorite Starbucks locations so it’s ready for payment when you enter the store.

UPDATE: I chatted with Square COO Keith Rabois about the potential of gift cards. He said it’s a great way to introduce Square to new users. But he said the bigger impact is enabling consumers to use Square to reward any friends, colleagues or family with a gift good at 250,000 merchants who take Square Wallet transactions. He said merchants are always looking for ways to acquire new customers and gift cards provide an opportunity for their best fans to introduce their service and products to others.

Rabois said Square is looking at Passbook just for gift card redemption right now. Users can also redeem right through the Square Wallet app or print out a QR code to present the card in store. He said there’s no immediate plans for further Passbook integration.

I also got some interesting details about how the gift cards work. Merchants only get paid when the card is redeemed and only for the amount redeemed. In the event that a recipient doesn’t redeem their card within 90 days, the sender will get the gift amount refunded. But until that time or if a recipient uses some portion of the gift card, the balance remains with Square, which holds it in reserve. That’s similar to how some big gift card systems work with big retailers but the difference is that a Square merchant doesn’t hold on to the reserve money. Rabois, however, said any interest made from that money is expected to be immaterial and trivial and the overall goal is to encourage redemption.

“We really want senders to get the gratification of sending a gift and we want recipients to enjoy it and go into local shop and have a great experience,” said Rabois.

If someone uses part of their Square gift card within 90 days, there is no expiration date for the card, outside of some local laws that might apply. Merchants do not pay any extra to run the gift cards, which are processed at Square’s standard 2.75 percent rate.

The gift cards, I imagine, will help Square accelerate the amount of money it’s processing, which is now on a $10 billion annualized rate. But it won’t have as a big effect right off the bat, I imagine. Most of the merchants who use Square are small and very local, so outside of Starbucks, I can’t send a gift card to people outside of my immediate area. But as Square builds out its merchant base with bigger businesses, gift cards could be even more powerful because you can send a gift card to more people, knowing that they’ll be able to redeem it easily at a lot of locations.

Related research and analysis from GigaOM Pro:
Subscriber content. Sign up for a free trial.

• NFC will be driven by marketing and loyalty, not payments
• The future of mobile: a segment analysis by GigaOM Pro
• How consumer media will change in 2013

The startup, which has raised nearly $1 million from Lightbank, MediaBank, InnerWorkings and Echo Global Logistics, launches Tuesday to let Facebook users send digital gifts, including vouchers for restaurants, spas, sporting companies and other local businesses, to friends in their network.

“We think gifting is a massive space where [local merchants] have traditionally been left out of the equation,” said founder and CEO Zachary Smith. “We think there’s a huge opportunity and we’re ready to jump on it.”

American consumers spend $100 billion a year on gift cards, he said, but the lion’s share of that goes to national retailers because local businesses haven’t been able to get distribution on the platforms centered around gifting. Through Boomerang, local merchants can offer unique packages of goods and services, from free options (which get new customers in the door) to full-price dinners, movie tickets, spa packages and more.

Much like Karma, the social gifting platform acquired by Facebook in May, Boomerang scans a user’s Facebook network for gift-worthy special occasions, like birthdays, anniversaries, promotions and more, and then it personalizes options based on location and interest data. Swedish social gifting startup Wrapp also delivers gifts, in the form of gift cards, to Facebook friends. But Smith said Boomerang’s focus on local merchants makes it distinct.

The gifts are delivered digitally via links through email or Facebook and can be redeemed by showing a merchant the offer on a smartphone screen. While Smith wouldn’t disclose the exact percentage of the transaction taken by Boomerang as a fee, he said it was in the low double digits.

In addition to working with local business, he said Boomerang will partner with at least one non-profit in each city to let gift-givers make donations in recipients’ names. For now, the 10-person startup has partnered with 40 merchants in Chicago, including the Navy Pier IMAX Theater, Metropolis Coffee and Bike and Roll Chicago, but Smith said they have started hiring teams in two other cities and plan to go live in those areas later this month.

Related research and analysis from GigaOM Pro:
Subscriber content. Sign up for a free trial.

• Social 2013: The enterprise strikes back
• Social media in Q1: commerce and discovery dominated
• NewNet Q4: Platform mania and social commerce shakeout

Giftly, a San Francisco-based startup that launched to the public last month, is bringing serious innovation to how gift cards work.

How it works

Here are the basics: Giftly lets you buy gift cards that work at any place of business in the U.S. that is listed on Yelp — restaurants, bars, spas, clothing stores, you name it. A Giftly card can be customized to work at up to three different locations, so the recipient can have a choice of how and where to spend it.

This is possible for two main reasons: Giftly utilizes Yelp’s open API, and it does some really cool stuff at the point of redemption. When a recipient wants to use his Giftly, he goes to Giftly.com on a mobile phone. Once Giftly verifies that the recipient is at one of the places on the gift card by checking the phone’s location data, the user can pay for something there exactly like he normally would, with cash or a credit card. Giftly immediately reimburses the designated amount immediately to a registered credit card, debit card or PayPal account. For its part, Giftly makes money by charging a small fee to the gift card buyer.

What’s under the hood

Creating a Giftly screenshot (click to enlarge)

Giftly has developed some serious technology and business methods to make this work seamlessly, says founder and CEO Timothy Bentley (who is best known for being employee number one at Aardvark, the social search startup acquired by Google for $50 million in 2010.) After all, it’s not for nothing that large-scale innovation has not yet happened in the gift card space, Bentley said in an interview this week:

“This is a heavily regulated space, and we’ve spent months working with banks and lawyers so that we could become experts in the payment space. The same challenges that Google Wallet has, we have. The way we’ve structured the product has been very innovative.”

Not surprisingly, Giftly plans to protect that innovation: The company has filed two patents, one concerning the way the gift card is created and one on how the financial side of the product works. Giftly has 12 employees and has raised $1.8 million in a seed round of funding from Baseline Ventures, RPM Ventures and Lightspeed Partners. Bentley says the company will likely raise some more funding after the holiday season is over.

Personal gift cards: No longer an oxymoron

The coolest part about Giftly cards to me is that they can truly work everywhere. For example: I live in San Francisco. This Christmas, rather than buying my sister in Chicago a gift card to a chain like American Apparel or Starbucks, I can get her a Giftly to spend at a local shop there, such as Eskell clothing boutique or Ipsento Cafe. It’s still a dead easy thing to buy, but it has the potential to come across as a far more personalized present than gift cards are known to be.

The gift card market is tough to break into, as it’s currently dominated by huge players such as Blackhawk Network (a subsidiary of grocery giant Safeway) and Incomm, which reportedly brings in more than $300 million in revenue annually. But the industry could clearly stand to be brought up to speed with our increasingly mobile and social world, and who better than a tech industry startup to do it? Giftly is giving it a solid try, and it will be interesting to see how it grows in the months ahead.

Related research and analysis from GigaOM Pro:
Subscriber content. Sign up for a free trial.

• 11 steps for scaling a startup
• Crowdfunding’s rapid growth and future opportunity
• Web startups: How to guard against security breaches

Details about the deal are scarce: Cardpool co-founder Anson Tsai declined to tell me how many staff his startup has, only saying that the team will grow significantly now that its part of a larger company. In regards to how much money Cardpool sold for, Tsai said, “Unfortunately we are not disclosing financial terms at this time, but all our investors (there are a lot of them) are quite happy.”

When we first wrote about Cardpool in March 2010, the company had raised $130,000 in angel funding from a variety of individual investors, including Mitch Kapor and Y Combinator, which is where it was first incubated. Cardpool has apparently grown very quickly since then: The company says it is now processing more than $100,000 in gift cards every day.

And as for Safeway’s Blackhawk Network? From Cardpool’s blog post announcing the deal:

“Blackhawk Network is the world’s leading provider of gift card, prepaid, telecom, and financial products. Every week, they reach more than 200 million consumers spanning 17 countries in a network of leading grocery, big box, convenience, pharmacy, and specialty stores including Safeway, Kroger, Tesco, Giant Eagle, Ahold, and GiftCardMall.com.”

Related research and analysis from GigaOM Pro:
Subscriber content. Sign up for a free trial.

• What the VC Industry Upheaval Means For Startups
• Social 2013: The enterprise strikes back
• Facebook’s IPO filing: ideas and implications