Square Wallet offers gift cards with Passbook integration

UPDATED: Just in time for the holidays, Square is getting into the gift cards market with Apple Passbook (AAPL) integration for iOS 6 users. Now, users can send gift cards for merchants that accept Square Wallet, just like Starbucks (SBUX) app users.

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.

Square, gift cardsThe 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.