Do you know the difference between closed loop and open loop cards? Both of the gift and credit card variety? Ill be honest, I did not know there were special terms for this until recently. Now that I do, I figured I would pass along that information to you all.
Open Loop Cards
An open loop card is your traditional credit card. Generally you’re issued a card by a bank such as; Chase, Wells Fargo, Bank of America, etc. The card is issued in conjunction with a payment processor such as; Visa, MasterCard, or American Express. You’ll probably notice that some payment processors are also card issuers. Anyway, when you’re given an open loop card it means that you can use it wherever that payment processor is accepted. There are of course several types of open loop cards, lets look at them.
The most common open loop card is a credit card. These cards as issued by banks and work in partnership with a payment processor. You can use them anywhere the payment processor is accepted.
Also common are debit cards. Much like credit cards, they can be used anywhere the payment processor is accepted. Debit cards are tied directly to your bank account so you cannot run up a balance. Moreover, if you spend over your available balance you may incur an overdraft fee.
Gift Cards & Prepaid Cards
If someone buys you a $50 Visa gift card, that would be considered an open loop product. On the other hand if you’ve got a Green Dot debit card, thats an example of a prepaid card because you can reload it. Both of these card types can be used anywhere the processor is accepted.
Closed Loop Cards
What we’ve seen with open loop cards is that they’re rather flexible as they can be used anywhere, for anything. Closed loop cards on the other hand can only be redeemed at the merchant listed on the product. Examples of these types of cards would be things like Amazon or Starbucks gift cards. Once you purchase one of those products, you can only spend that card with Amazon or Starbucks.
Closed loop doesn’t just refer to gift cards either, some credit cards are closed loop as well. For example, Old Navy, Macys, and other big box retailers offer store cards. These function as credit cards meaning that you can carry a balance, and be charged interest. However, they’re only useable within the store itself.
Which type of card is best?
I’m not sure that one of these card types is better than the other, they’re just different. With open loop cards you have the freedom to spend whenever and wherever. If you’re thinking about buying someone a $50 Visa gift card you can do so knowing that they’ll not be locked in to a single store, and they’ll probably spend the whole balance. With closed loop cards you might be able to get them at a discount on a site like Raise.com, which is nice. The downside is of course that you’re locked into the store for which you bought the card, and you may not end up spending all the money.
From a rewards perspective, I don’t know of any closed loop card rewards programs. If you do, please reach out in the comments below. Its for that reason that we mainly talk about open loop products here, but thats not to say that there isn’t value in the closed loop arena.