Closed Loop Card: Definition, How It Works, vs. Co-Branded Card

What Is a Closed Loop Card?

A closed loop card is a payment card that the cardholder can use only at a particular retailer or other company. The card will usually have the company's logo on it, indicating where it is accepted, but not the logo of a card network like MasterCard or Visa. Other names for closed loop cards include store credit cards, single purpose cards, and private label credit cards.

Closed Loop vs. Open Loop Cards

In contrast to closed loop cards, open loop credit cards can be used anywhere that cards in a particular network (such as Mastercard, Visa, American Express, or Discover) are accepted. An open loop card is what most of us probably picture when we think of credit cards.

Closed Loop vs. Co-Branded Cards

Co-branded credit cards are a type of open loop card. Like closed loop cards, they typically bear the logo of a particular brand, such as a store or gas station chain or even a sports league or nonprofit organization. However, co-branded cards are also linked to a particular card network, making them more widely accepted than their open loop counterparts.

Closed Loop vs. Loyalty Cards

Many retailers, such as supermarkets and drug stores, have loyalty programs offering discounts and other rewards to their customers (while also collecting useful data on those same customers). However, loyalty cards, unlike closed or open loop credit cards, don't extend credit.

How Closed Loop Cards Work

Closed loop cards are usually offered by the merchant, such Amazon, Starbucks, or Exxon Mobil, where the card will be accepted. Customers can apply at a physical location or online. In many cases, store clerks are encouraged to sign customers up for the cards, which often come with a one-time bonus, such as a discount on their first purchase.

Merchants partner with financial institutions to issue both closed loop and open loop cards. For example, Citibank is the primary issuer of credit cards for the electronics retailer Best Buy. That includes both the My Best Buy Credit Card (a closed loop card) and several different My Best Buy Visa credit cards, which are open loop cards.

When a customer applies for a credit card at a retailer, they often fill out a single application that may be approved for a closed loop card, an open loop card, or neither of the two. The Best Buy application, for example, notes that the individual is applying for a My Best Buy Visa Platinum card, but if they don't qualify for that card based on their creditworthiness, "you agree that Citibank may consider you for, in order, a My Best Buy Credit Card account and a My Best Buy Visa Gold account."

The approval process is based on the applicant's credit history and income, as with any regular credit card. The card issuer will also set their card's credit limit based on that information.

Pros and Cons of Open Loop Credit Cards

Generally speaking, closed loop cards are easier for applicants to qualify for. For that reason, they can help individuals with little or no credit history begin to build one and later qualify for open loop cards. On the downside, closed loop cards are very limited in where you can use them and also have higher interest rates, making them expensive if you carry a balance from month to month.

From the merchant's perspective, the processing of closed loop cards can be simpler than that with open loop cards. Generally, large retailers will work with their merchant acquiring bank as the card issuer, which eliminates some transaction costs. In a closed loop card transaction, aside from the customer, the only entities involved are the merchant and its acquiring bank. There is no need for a processing network since the merchant and merchant bank communicate directly. There is also no separate issuing bank involved, as there would be with an open loop card, since the merchant acquiring bank assumes that role too.

Beyond those advantages, closed loop cards can help companies build brand loyalty and capture more of their customers' spending than their competitors without such cards.

The Bottom Line

Closed loop cards are a boon to the retailers that issue them and can also be useful to consumers who frequent a particular chain and don't have access to a regular, open loop card. Open loop cards are far more flexible, however.