A closed loop card is an electronic payment card that a cardholder can only use to make purchases from a single company. A closed loop card, also called a single purpose card, will usually have the company’s logo on it, indicating where the card can be used. It will not have the logo of a primary payment processor like Visa or MasterCard, or American Express.
How Does a Closed Loop Card Work?
Closed loop cards are an electronic payment card that can only be used with a specific payee. Generally, electronic payment cards can be either closed loop cards or open loop cards.
- Merchants issue closed loop cards for customers to use in-store or on-line as a form of debit or credit card.
A closed loop card is only valid for use with the single company that issued the card.
- Closed loop cards require lower processing costs for merchants, typically.
- Closed loop cards do not offer as much flexibility as other cards.
By contrast, an open loop card is a card type more commonly associated with all kinds of standard transactions. An open loop card can generally be used anywhere the card brand is accepted, like Visa or American Express.
Closed Loop Card Issuance
Closed loop cards are usually issued from the merchant, like Amazon or Starbucks, where the card will be accepted. Closed loop cards can be either debit or credit cards. Debit cards will usually be issued as a gift card with a prepaid balance. Credit cards are typically obtained by application either at the merchant’s location or online through their website.
When a customer applies for a credit card at a retailer, they may be approved for either a closed loop card or an open loop card. The approval process is based on their credit history and profile, plus their income, and it may be possible to be approved for both types of cards.
Both closed loop cards and open loop cards will usually offer rewards that can be obtained through each purchase.
Merchants partner with financial institutions to issue both closed loop and open loop credit cards. For example, Citibank is the primary issuer of credit cards for Best Buy. Terms governing the issuance of these cards is detailed in agreements between the merchant and the card issuer.
Closed Loop Card Processing
Processing on closed loop cards is a bit more simplified than open loop cards. Generally, large retailers will work with their merchant acquiring bank as the card issuer. This provides for consolidated services and a more efficient merchant account agreement.
Merchants who work with their acquiring bank as the card issuer can eliminate some added costs per transaction. In a closed loop card transaction at a merchant, the entities involved will include only the merchant and the merchant acquiring bank.
There is no need for a processing network since the merchant and merchant bank communicate directly. Thus, there is also no issuing bank involved since the merchant acquiring bank assumes that role.
Overall, closed loop cards usually require lower processing costs for merchants, which can be one advantage in marketing them to customers, but they do not have as much flexiblity as a traditional debit or credit card.