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Open vs Closed Loop Payment Processing

rack of gift cardsIn our grandparents’ day, there were only a couple of payment options available: cash, check, or, in a few rare cases, credit with the merchant. For our generation, the array of payment options available can be staggering. The same dizzying number of payment processing choices can also overwhelm merchants. Let’s take a bird’s eye look at a couple of frequently used prepaid card payment options: Open loop and closed loop payment processing. We define open loop versus closed loop systems, and go on to provide benefits of each.

Open Loop Payment Processing

Open loop payment processing cards, also known as multipurpose cards, are prepaid cards carrying the MasterCard, American Express, Discover, or Visa logo. These cards may be used like cash wherever credit cards are accepted.

Open loop payment processing was born in the U.S. as EBT cards, which replaced food stamps according to federal welfare reform in 1996. Additionally, open loop payment processing was used for payroll cards in the late 1990s to pay workers who lacked bank accounts. Nowadays, multipurpose cards are available for general use as prepaid “credit” cards. They are also often used for Flexible Spending Accounts (FSA).

In general, open loop payment processing provides purpose; reloadable cards that may be used with a variety of merchants. Open loop cards may be cash accessible; the cardholder may be able to access funds through an ATM or at the POS (point of sale). Multipurpose cards may be anonymous, or they may be issued to a specific individual, such as when disbursing payroll.

Benefits of Open Loop Payment Processing

  • Provides oversight for employee and beneficiary spending. For instance, an employee may be given a multipurpose card for expenses at a tradeshow expo. Compared with traditional credit cards, open loop payment processing offers more control, as the employee may only spend the amount placed on the card.
  • Simplifies purchasing processes for employers and government agencies.
  • Managing class flow is easy for the cardholder with open loop systems. There’s no credit involved, so the cardholder cannot go into debt by overspending.
  • Marketing opportunity with minimal credit risk. Program sponsors can win marketing points with customers without worrying about credit.

Closed Loop Payment Processing

Also known as single-purpose cards, closed loop payment processing is limited to a specific vendor or location. For instance, customers may opt to upload money to their cards with a specific vendor. This makes it easy to track and limit spending. As an example, let’s say you have a closed loop payment processing account with Nordstrom’s. You can load the money you wish to spend onto the card before hitting the store, and your purchases will be limited by available funds.

Starbucks cards, mass transit cards, and prepaid telephone cards fall into the closed loop category. These cards first gained eminence as payment systems for telephone companies. Consumers could buy prepaid cards for international phone cards. As cards ran out of funds, they could be reloaded. Closed loop payment processing cards may be for fixed amounts, or they may be reloaded.

Benefits of Closed Loop Payment Processing

  • Easy to reward customers for purchases. For instance, Starbucks rewards customers with a star for every dollar spent on a registered Starbucks card. Stars add up to free drinks.
  • Customer captivity. Customers with a prepaid card for a certain vendor probably won’t take their business elsewhere.
  • Functional customization. With customers’ emails and phones included in card information, it’s easy for closed loop payment processing to translate to customized interactions.

Open loop and closed loop payment processing share some benefits: increasing customer loyalty, providing sales insight through sales tracking, guaranteed payments, and more. For the customer, both systems provide an easy way to make e-payments, as well as fast and easy payroll processing and cash flow management.

[Photo by: 401(K) 2012, via CC License]

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