Open Loop Card: What It Is and How It Works

An open loop card is a general-purpose payment card that can be used anywhere that accepts its payment network. These cards typically display a major network logo—Visa, Mastercard, American Express, or Discover—and may also show the issuing bank or credit union. Open loop cards include credit cards, debit cards, gift cards, and prepaid cards.

How open loop cards work

Open loop cards operate through a payment network that processes transactions between the merchant and the issuer. When you use the card, the network routes authorization and settlement messages so funds or credit are transferred. Some networks (American Express, Discover) both issue cards and operate the network; other cards are issued by banks that partner with a network processor (Visa or Mastercard).

Open vs. closed loop

• Open loop: Usable at a broad range of merchants that accept the card’s network (example: a Visa credit card).
• Closed loop: Usable only at a specific retailer or company (example: a store-specific gift card).

Types of open loop cards

Credit cards

Standard open loop credit cards let cardholders make purchases in person or online and receive a monthly statement. Cardholders can pay balances in full or carry a balance subject to interest. Issuers often partner with a network (Visa, Mastercard) or act as both issuer and network (American Express, Discover).

Debit cards

Debit cards linked to checking accounts deduct funds immediately from the account when purchases are made. They carry the network brand and can be used wherever that network is accepted.

Prepaid and gift cards

Prepaid open loop cards are loaded with funds and can be reloadable for ongoing use, including recurring payments. Gift cards are open loop when usable across any merchant that accepts the network rather than being restricted to a single store. Other examples:
– Flexible spending account (FSA) cards for eligible health-care purchases.
– Public assistance or benefits cards that let recipients buy eligible items at participating merchants.

Prepaid open loop cards grew at roughly 2% annually through 2023.

Payroll cards

Employers may issue payroll open loop cards to pay workers without bank accounts or direct deposit access. These cards allow employees to access wages and make purchases wherever the network is accepted, though some cards charge fees for certain services.

Co-branded cards

Co-branded cards pair a retailer’s brand with a card network (for example, an Amazon Visa or a SaksFirst Mastercard). They function as open loop cards—usable broadly—but typically provide extra rewards or perks when used at the co-branded retailer. Co-branded cards may carry annual fees and other terms set by the issuer.

Advantages and considerations

Advantages:
– Wide acceptance across merchants and online.
– Flexible forms (credit, debit, prepaid).
– Useful for payroll, benefits, and recurring billing.

Considerations:
– Fees vary by card type (especially some payroll and prepaid cards).
– Terms, rewards, and protections depend on the issuer and network.
– Co-branded cards may offer retailer perks but sometimes include annual fees.

Key takeaways

• An open loop card is a general-purpose payment card accepted wherever its network (Visa, Mastercard, AmEx, Discover) is accepted.
• Types include credit, debit, prepaid/gift, and payroll cards.
• Closed loop cards are limited to a single retailer; open loop cards are broadly usable.
• Co-branded cards combine broad acceptance with retailer-specific rewards and perks.