As the first billion-plus payments startup since PayPal, I’ve been looking forward to watching Square deliver on those hefty expectations.

We got a glimpse today of where it’s heading as the company rolled out virtual gift cards. That’s a business with as much potential as anything it has done to date (note 1). 

And it’s available now at any of the 200,000 merchants that accept the Square Wallet.

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How it works
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Consumers can use their Square Wallet app to purchase a virtual gift card ($10 minimum; $1000 max) for any Square merchant. It can be sent immediately to any email address right from mobile app, which is integrated with iPhone contacts.      

As show in the inset, the gift card option is shown under each merchant’s "page" within the Square Wallet app (above the fold).

Square holds the funds until redeemed. The virtual card can only be used by the recipient at the designated merchant using Square’s processing services. In the event that the merchant stops taking Square, the funds will be cashed out and placed in the recipient’s Square wallet for use at any other Square merchant.

Recipients can potentially redeem in three ways, but the last two options only work for merchants that support bar-code scanning at the POS:

1. Square Wallet app
2. iPhone Passbook (if merchant accepts Passbook)
3. Printing or displaying the QR code sent in the original email to recipient (if merchant supports QR code scanning)

If the recipient does not accept the gift card within 90 days, the money is returned to the sender.

So far, there are no fees or expiration dates for the gift cards. But the company must comply with a thicket of state rules on abandoned property and escheatment, so dormant cards are not pure profit unless Square institutes some type of inactivity fee down the road (note 2).
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Bottom line
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While messy, gift card issuing is a great business that offers numerous monetization avenues (note 2). It demonstrates how potentially lucrative it can be to be both the transaction acquirer and wallet/card issuer. That’s what’s sending Square’s value to the stratosphere. 

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1. Email from Square to the gift card recipient

2. The Gift Card "wrapper"
Note: This is one of four designs the sender selects from

3. The Gift Card then needs to be "saved"

4. Non-Square customers are prompted to open a Square Wallet account
Note: For those that don’t want to open a Square account, an "print" option is offered (at bottom of screen), but the merchant must support bar-code scanning for that option to work (see next screenshot).

5. If the merchant does not support bar-code scanning, the gift card can only be redeemed through Square Wallet

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Notes:
1. Here are the current Square business initiatives:

• Merchant acquiring
• POS systems
• Merchant analytics
• Mobile wallet
• Merchant discovery/offers/ads
• Starbucks relationship
• Merchant loyalty business

2. Currently, Square tells users in the app that "Gift cards through Square have no fees and never expire." So, it doesn’t sound like they’ll be monetizing with inactivity fees anytime soon.