An open loop card is a versatile charge card that can be used wherever the brand of the card is accepted. These cards often display the logo of their card brand or network, such as Visa, Mastercard, American Express, or Discover. Open loop cards can also include the name of the issuing financial institution such as a bank or credit union.
Open loop cards come in various forms, including credit cards, debit cards, gift cards, or prepaid cards. The structure of these cards can vary based on the partnership model of issuance.
On the other hand, a closed loop card is limited to purchases at a single company or retailer, like a specific department store.
The Basics of an Open Loop Card
Any charge card that is widely accepted at a variety of merchants and locations qualifies as an open loop card. These cards can take multiple forms to match diverse user needs.
Key Takeaways
- An open loop card is a general-purpose charge card that can be used anywhere the brand is accepted.
- In contrast, a closed loop card is limited to a specific retailer.
- Open loop cards include credit cards, debit cards, gift cards, and prepaid cards.
Credit Cards
Credit cards are one of the most common types of open loop cards. Issued by banks, credit unions, or financial service companies, these cards allow consumers to purchase goods or services at numerous outlets, both online and offline. Monthly, cardholders receive a statement detailing their charges, which they can pay off either entirely or partially.
These cards are typically issued by a financial institution in partnership with processing networks such as Visa or Mastercard. American Express and Discover, however, manage their own issuance and network processing.
Debit Cards
Linking directly to your checking account, a debit card is another example of an open loop card. These cards deduct funds immediately upon making a purchase and usually feature the branding of a network processor. They can be used wherever their brand is accepted.
Gift Cards and Prepaid Cards
Open loop cards also include prepaid cards pre-loaded with funds. They can be consistently used for payments and may even offer recurring billing options. Gift cards are considered open loop if they are not tied to a specific store and can be used until their balance depletes.
Prepaid cards can also serve specific purposes like public assistance benefits, allowing purchases at general grocery stores. Flexible spending account cards are another example of open loop prepaid cards aimed at eligible health care purchases. Payroll cards, which can be used by employees as an alternative to checks, are another type that fits into this category.
Co-Branded Cards
Retailers often partner with banks and credit card networks to offer open loop credit cards, known as co-branded cards. Notable examples include Amazon Visa and SaksFirst Mastercard. These cards bring together the benefits of both branding, enabling cardholders to use them anywhere while allowing them to collect rewards and gain perks specific to a retailer.
Co-branded cards often include annual fees, which stand in contrast to proprietary store cards.
Growth of Open Loop Cards
The use of open loop prepaid cards has been growing remarkably. According to forecasts by the Mercator Advisory Group, open loop prepaid cards are expected to grow at an annual rate of 2% through 2023.
Open loop cards offer unprecedented flexibility and convenience, making them a popular choice for various payment needs.
Related Terms: closed loop cards, financial institutions, payment networks, co-branded cards.
