"What Kind of Card Is This?" A Tale of Open Loop, Semi-Closed Loop & Closed Loop Cards

If you've ever bought a gift card, you've probably used one of three types of card systems without even thinking about it. The terms "open loop," "semi-closed loop," and "closed loop" come up a lot in fintech, but they're rarely explained in plain English.

Here's our attempt to change that.

The Three Types of Cards

Open Loop Cards

An open-loop card carries a network brand - Visa, Mastercard, Amex. It works wherever that network is accepted, which is basically everywhere. Think of a Visa prepaid gift card you'd pick up at a supermarket.

How it works:

• Load money onto the card
• Use it at any merchant that accepts the card network
• Works online, in-store, and sometimes at ATMs

What to keep in mind:

• Interchange fees reduce the value (the card network and issuing bank both take a cut)
• Usually requires KYC (Know Your Customer) verification
• Broader fraud exposure - if someone gets the card number, they can use it anywhere
• Slower settlement - transactions go through the card network's clearing process

Open-loop cards are fantastic when you need flexibility. The trade-off is that flexibility comes with higher fees, more compliance requirements, and a larger surface area for fraud.

Semi-Closed Loop Cards

A semi-closed loop card works at a defined set of merchants, but not everywhere. Think of a shopping mall gift card that works at any store in the mall, or a corporate expense card restricted to approved vendors.

How it works:

• Load money onto the card
• Use it at any merchant within the approved network
• Can't be used outside the defined group

What to keep in mind:

• Lower fees than open-loop (no card network interchange)
• Still requires merchant onboarding and management
• Smaller fraud surface than open-loop, but still multi-merchant
• More complex to set up than closed-loop

Semi-closed loop cards are a solid middle ground. They work well for ecosystems - a group of restaurants, a university campus, a corporate travel program - where you want some flexibility without opening things up to the entire card network.

Closed Loop Cards

A closed-loop card works with exactly one merchant or service. A Starbucks gift card. An iTunes card. An Octopus Card.

How it works:

• Card is tied to a specific product or service
• One code, one redemption, one purpose
• Value is applied directly to the target platform

What to keep in mind:

• Zero interchange fees - no card network involved
• No KYC required in most cases (lighter regulatory footprint)
• Minimal fraud risk - single-use codes can't be redirected or reused
• Instant settlement - no clearing house, no waiting

Closed-loop cards trade flexibility for simplicity. You can't spend them anywhere, but they're cheaper to issue, faster to deliver, and much harder to defraud.

Side by Side

Why We Chose Closed Loop

Each card type has its strengths. For what we do - digital gift cards, mobile top-ups, gaming credits, and utility vouchers - the closed-loop model made the most sense. Here's what led us there:

What About Flexibility?

A fair question we hear sometimes: "If the card only works for one thing, isn't that limiting?"

It's a reasonable concern. An open-loop card lets you spend anywhere - and that's genuinely useful when you don't know what someone wants.

But for the products we work with, specificity is actually an advantage. You buy a Steam card, you get Steam credit. You buy a mobile top-up, that specific phone number gets recharged. The value goes exactly where it's supposed to - no guessing, no extra steps.

And from a security perspective, that specificity helps too. A single-use code for a specific product and denomination doesn't have much value to a fraudster. There's no secondary market for a one-time mobile top-up code tied to a particular carrier.

Picking the Right Type

There's no universally "best" card type - it depends on what you need:

• Open loop - When you need maximum flexibility and the recipient should choose how to spend (corporate bonuses, general gifting, travel expenses)
• Semi-closed loop - When you want to restrict spending to a group of merchants (campus cards, mall cards, corporate programs)
• Closed loop - When you want speed, security, and purpose-built value delivery (gift cards, game credits, mobile top-ups, utility vouchers)

We went with closed-loop because it's the right fit for digital value distribution. It lets us keep things fast, secure, and simple - which is what matters most to the people using our cards.

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Want to see how our cards work in practice? Read our step-by-step guide to digital gift cards, or check out the engineering behind the platform.