Also called: Open-loop card, Open-loop payment, Closed-loop card, Closed-loop payment
What open loop and closed loop mean
An open-loop payment uses a shared payment network. A customer can use a card issued by one bank at any business that accepts that network, such as a shop accepting Visa or Mastercard. The bank, network and business's acquirer are separate participants in the transaction.
A closed-loop payment stays within the system run by the business or organization that issued it. A retailer's gift card, a transit card and a campus account are examples. Customers can use them only within the issuer's network, not wherever Visa or Mastercard is accepted.
Open loop brings broad acceptance; closed loop gives you control over where your own stored value can be spent.
How the two models work
With an open-loop card, the network routes the transaction between the cardholder's issuing bank and the business's acquirer. That shared infrastructure gives customers broad acceptance without requiring each business to build a separate payment network.
With a closed-loop card or account, the issuer manages the payment within its own system. A business controls where its balance is accepted and keeps the transaction record within that system. A retailer can issue a closed-loop gift card while still accepting open-loop credit and debit cards at checkout.
What it means for your costs
Open-loop card sales carry interchange, network fees and processor markup. Interchange goes to the issuing bank, network fees go to the card network, and only the processor markup is negotiable. Your statement may list these costs separately or bundle them into a rate.
A closed-loop redemption does not use the external card network, so it does not incur the interchange and network fees associated with that redemption. But if a customer buys your gift card with a Visa or Mastercard, that purchase is an open-loop card transaction and carries normal card-processing costs. Running a closed-loop program also requires you to maintain its account or card system.
Choosing where each model fits
Open loop suits checkout when customers expect to use their preferred bank cards or digital wallets. Closed loop suits a specific use, such as store credit, loyalty balances or campus purchases, where you want to control acceptance. A closed-loop balance is not a substitute for broadly accepted card payments, since customers cannot spend it outside your system.
What you can actually change
- Accept open-loop cards. Keep shared-network cards available for everyday checkout so customers can pay with cards issued by different banks.
- Use closed loop selectively. Consider a store gift card or loyalty balance when you want spending limited to your business. Account for the cost of maintaining the program.
- Separate the transactions. When reviewing your statement, distinguish card-funded gift-card purchases from later redemptions. The purchase uses open-loop processing; redemption stays within your closed-loop system.
Frequently asked questions
Is a gift card open loop or closed loop?
A store gift card restricted to that retailer is closed loop. A prepaid gift card carrying a payment-network logo can be open loop and usable wherever that card type is accepted. The card's acceptance rules determine which model it uses.
Can customers use a closed-loop card anywhere?
No. A closed-loop card or account works only within the issuer's network, such as a retailer's stores, a transit system or a campus. An open-loop card uses a shared network and works at businesses that accept that network.
Does closed loop mean there are no payment costs?
No. A closed-loop redemption avoids the external card-network interchange and network fees associated with that transaction, but the business still maintains the system. A gift card bought with a bank card also incurs open-loop processing costs at purchase.