DEFINITION OF ‘CLOSED LOOP CARD’
A credit card or gift card that a consumer can only use to make purchases from a single company. A closed loop card, also called a single purpose card, will 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, and it cannot be used for general purchases. By contrast, an open loop card is what we typically think of when we think of a credit card: one with a major payment processor’s logo that can be used almost anywhere.
INVESTOPEDIA EXPLAINS ‘CLOSED LOOP CARD’
An example of a closed loop card is the Nordstrom store credit card. This card can only be used at Nordstrom and nowhere else. Another example is Target’s Red Card, which can only be used for Target purchases. Sometimes stores issue both closed loop and open loop cards. Nordstrom additionally offers a Nordstrom Visa card that rewards cardholders for shopping at Nordstrom but also lets cardholders use the card anywhere that accepts Visa cards.
American Express (AmEx) and Discover cards are also considered closed loop cards even though they can be used at numerous merchants. They are considered closed loop cards because AmEx and Discover both issue their own credit cards and process their own payments. By contrast, an open loop Visa card might be issued by Chase Bank, with the payments processed by Visa.
Closed loop cards usually have perks to entice consumers to apply. In addition to giving the cardholder the option of paying off purchases over time, they might offer a percentage discount on all purchases, as is the case with Target Red Card’s 5% discount at the register. Closed loop cards might also offer points based on amounts charged to the card, as the Nordstrom card does. These points can later be redeemed for dollar-amount discounts on future purchases.
Store gift cards are another type of closed loop card. A Gap gift card, for example, can only be used at the stores in the Gap family: Gap, Banana Republic, Old Navy, Athleta and Piperlime. Nordstrom will not accept a Gap gift card as payment, and Gap will not accept a Nordstrom credit card as payment unless it has a Visa logo. Some gift cards are open loop cards, however, with a Visa or MasterCard logo. Open loop gift cards often have an activation fee of $5 or so, while closed loop gift cards do not.
Open loop cards are also used for some public assistance benefits. For example, these cards allow qualifying individuals to purchase food at any grocery store that accepts the government cards.