What Is a Closed-Loop Card?

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, but it will not have the logo of a major payment processor like Visa or MasterCard.

Key Takeaways:

  • A closed-loop card is an electronic payment card for use with a single company, such as a gift card with a prepaid balance.
  • The card will usually display a company’s logo, but may not have the logo of a major payment processor like Visa or MasterCard.
  • Closed-loop cards are often issued via a company's website.
  • Closed-loop cards usually require lower processing costs for merchants, which can be one advantage in marketing them to customers.

How a Closed-Loop Card Works

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. By contrast, an open-loop card is a card type more commonly associated with all types of standard transactions. An open-loop card can generally be used anywhere the card brand is accepted.

Closed-Loop Card Issuance

Closed-loop cards are usually issued by the merchant 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 usually 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 type of card that a customer is approved for is based on information from their credit inquiry as well as income details provided in their credit profile. 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.

Card Processing

Transaction processing for closed-loop cards is slightly less complex than it is for 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.

Special Considerations

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.