Gyft, a Redwood City-based virtual gift card provider has agreed to an acquisition by payment giant First Data, Pando has learned. The terms of the transaction were undisclosed, although early Gyft investor, Karlin Ventures managing director TX Zhuo calls it “a great outcome for everybody involved.” The transaction is expected to close next month.

The two year old startup has raised a total of $6 million through its Series A round of funding with backers including Karlin, Google Ventures,A-Grade Investments, Canyon Creek Capital, The Social+Capital Partnership, and angels David Sacks and Haas Portman.

Digital gift cards is a small but rapidly growing segment of the $100 billion overall prepaid card market, popular among merchants and consumers alike for their flexibility. Traditional plastic gift cards can be cost prohibitive to deploy and manage, meaning that most small- and mid-sized businesses avoid the hassle entirely. Gyft allows consumers to purchase, send (aka, gift), manage and redeem gift cards digitally via their mobile devices, making it cheaper and more efficient for both consumers and merchants.

Gyft addresses another common problem in the prepaid card sector, which is the cards that are lost or forgotten and which ultimately go unredeemed. Contrary to popular perception, these unspent funds do not go to the merchant, but rather eventually end up in state unclaimed property funds, making it a loss for both the merchant and the processor. All parties involved stand to benefit from getting these cards “out of the drawer” and onto the mobile device, where they are more visible and intelligent alerts and reminders can be used to increase the likelihood they they are ultimately redeemed.

Gyft is the latest in a long line of technology acquisitions by First Data as the company aims to modernize its offering around mobile and the cloud. The company snapped up mobile payments and point of sale (mPos) startup Clover in December 2012 for a reported $54 million and subsequently added cardless customer loyalty startup Perka in October 2013 for an unreported sum rumored to be closer to $30 million.

The Gyft acquisition has been in the works for at least two months according to sources close to the transaction and clocks in north of Clover, but shy of $100 million. The deal grew out of a partnership between Gyft and Clover, announced in April, aimed at providing access to digital gift cards to First Data’s SMB clients.

Historically, First Data has sold its own hardware terminals but as the company is moving toward mPos, it makes sense that it would look to address the full life-cycle of a merchant’s processing needs needs, hence the acquisition of assets in the digital loyalty sector in Perka, and now prepaid cards in Gyft.

For Gyft, this acquisition marks an admission that building a dominant gift card brand across top merchants is a difficult undertaking and one best accomplished with the backing and scale of a company like First Data. The company could have gone out and raised another round of funding, and there were other acquisition offers, according to co-founder and CEO Vinny Lingham.

“We have been building this relationship for a while, and the way I look at it is, once you get to the point where the relationship is good, you ask ‘Why don’t we just do this together?,” Lingham says in an interview with Pando. “We started the company with a mission to digitize and transform the plastic gift card space. The inspiration for this was really Starbucks, and the question, why can’t I do that for all the merchants? But as we were going through the process, it was a lot more complicated than it seemed. Onboarding merchants was a real grind.”

Lingham adds later, “We don’t see this as an exit. We see this as a continuation of what we’re already doing but with a lot more resources.”

Gyft will continue to operate as a standalone brand and the company's 18-person team will stay intact, working out of the company’s current San Francisco office.

The young company has seen a ton of momentum in the last year thanks to Apple’s introduction of Passbook and the realization among consumers and merchants alike that digital wallets are inevitable. The company has also ridden a wave of adoption from the bitcoin community, as its prepaid cards for merchants like Amazon have long been one of the most flexible ways to transact using the crypto-currency.

We feel like we’ve won the space by focusing 100 percent on gift cards, while too many mobile wallets tried to go too horizontal. As a result, we nailed the customer experience,” Lingham says. “Facebook shut down their gift card business yesterday. And although Google recently launched their Wallet, we actually integrate with them and they view us as a solution to the gift card problem.”

For First Data, this acquisition is a means of quickly and convincingly entering the digital prepaid card space and closing the loop, so to speak, on the full payments lifecycle, according to Mark Putman, the company’s SVP of Prepaid Solutions.

“Speed to market was a big consideration for us [in this transaction],” he says. “We could have built this internally, but we think that as fast as we’re moving in digital there’s value in the speed of acquiring an existing technology an consumer audience. They have addressed a large piece of the technological problem not to mention developed a really simple and intuitive user interface. That’s one area where I think we can say to them, you’re smarter than us. Finally, Gyft is a really powerful and descriptive brand that people remember and relate to.”

First Data, which has long been considered the world’s largest card processor at over $1 trillion in card transactions processed annually across more than 6,000,000 merchants and 3,500 financial institutions. The company is dominant in the gas and groceries categories, processing more than 80 percent of all transactions in these two markets.

It’s these relationships, and the operating scale that underpins them, that should be the biggest benefit to Gyft. As Lingham notes, onboarding merchants has been among the most difficult challenges for Gyft to date. Plugging into an existing customer roster and gaining access to an mature sales and customer success team should accelerate Gyft’s assault on its targeted top 200 merchant list.

“This business is really about coverage,”Lingham says. “For example, if you upload five cards but balance inquiry only works on three of them, it defeats the purpose of having all your cards in one place. In this business, you need to get as close to full coverage as possible. We have around 80 percent of the top 100 retailers already on our system, but those other 20 will take some time”

Gyft has more than 200 merchants in total, while First Data has 300 of its own national retail prepaid clients, according to the company.

“Both merchants and consumers are eager to go digital and plastics may or may not go away fully over time,” Putman says. “Personally I think people will always have a propensity to physically give something and for merchants, the ability to physically touch someone is important. But There’s no doubt that digital saves money, makes distribution easier, and allows merchants to regularly refresh the message delivered to consumers.”

This last piece about ongoing messaging is a key piece of the value proposition for merchants in digital prepaid cards. Retailers use Gyft as a means of driving customer engagement, including offering incentives or promotions, as simple reminders to use a languishing gift card.

Despite its scale, First Data is in the process of a lengthy and often ugly turnaround of its own, having been purchased and taken private by Kohlberg Kravis Roberts & Co. (KKR) in a 2007 transaction, and in the processed laiden with high yield debt that almost killed the business. The company has since slashed several thousand jobs and relocated from Denver to Atlanta amid a PR crisis resulting from pushing its once-hometown airline Frontier into bankruptcy. The company will release its second quarter financial results later this morning.

This is not quite the rosy scenario every startup aspires to enter, but given the limited venture capital it raised and the time the team put in, this should be considered a moderate win for Gyft. And ultimately, the deal may mean that the company is more successful in achieving its ultimate vision of creating the ubiquitous gift card brand. But at the same time, it’s disheartening to see a young, disruptive company like Gyft sell so early – to a legacy institution no less – and rob the technology ecosystem of a larger stand alone player.

Putman acknowledges that maintaining Gyft’s culture and letting its team focus on their unique areas of excellence will be key to this deal turning out successfully. First Data, in this sense, hopes to serve as accelerant on an already roaring fire.

“I have built and sold companies previously, so I understand the importance of balance and allowing autonomy and those creative forces to flow,” Putman says. “Broadly speaking, the plan is to let them continue doing what they're doing while taking their best assets and adding scale to them by incorporating them assets into our closed loop system.”

Like Lingham’s early inspiration, every SMB merchant has looked at Starbucks, the gold standard of prepaid programs, and asked how do I get a piece of that. But the reality is, most companies are not Starbucks and lack the clout to land a dedicated mobile app on their customers devices – let alone deliver a world class experience should they do so.

Gyft is the answer to this problem, by offering a single elegantly designed app that works across merchants. From that perspective, given First Data’s position in the market, the deal makes perfect sense.

“Our number one priority is to build a gift card brand that consumers can know and trust,” Lingham says. “Our team is super excited and we see this as an amazing outcome."