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Definition

open loop / closed loop payment cards

Open loop and closed loop, in the context of payment cards, are categories that stipulate whether a card can be used in businesses other than that of the card issuer.

An open loop payment card is one that can be widely used. The most common example is a credit card from a major payment processor, such as Visa or Mastercard. Somewhat confusingly, American Express (AmEx) and Discover are considered closed loop payment cards despite being fairly widely accepted for payment because the card issuer also processes payments. In contrast, a Visa card might be issued by a particular bank or retailer but Visa processes the payments.

Closed loop payment cards are limited in terms of where they can be used. The most common examples of a closed loop payment card are store-specific credit cards and gift cards. Store credit cards are generally limited to purchases from the issuing retailer. These cards typically offer customers benefits such as discounts and loyalty program points that can be redeemed on future purchases. For the retailer, the cards help to foster customer loyalty and incentivize purchases. Gift cards are convenient for the purchaser, quick and easy to buy. The retailer may benefit from the tendency for people to spend in addition to the card amount and the fact that many gift cards are never redeemed.

Stores may offer both open and closed loop cards, such as a store-branded Visa card in addition to a store-specific credit card.

This was last updated in November 2017

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