Types of Gift Cards: Open-Loop vs. Closed-Loop and More

Gift cards have surged in popularity as versatile payment methods, and today, countless brands are vying for a share of this digital market. From being a thoughtful present to a convenient payment solution, gift cards are loaded with value that can be redeemed at various establishments, including restaurants, gas stations, and retail stores. You preload a specific amount onto the card, which can then be used by you or the recipient at participating locations.

However, not all gift cards are created equal. They fall into distinct categories, each with its own set of functionalities and limitations. Let’s delve into the world of gift cards and explore the differences between open-loop gift cards and closed-loop gift cards, alongside other key distinctions.

Understanding Open-Loop Gift Cards

The term “open-loop” is commonly used within the gift card industry. Unlike closed-loop cards—which are restricted to specific stores like Walmart, Target, or Starbucks—open-loop gift cards are issued by major financial institutions and credit card networks such as Visa, Mastercard, American Express, and Discover.

The key characteristic of an open-loop gift card is its broad acceptance. Look for logos from Visa, Discover, Mastercard, or American Express; these are visual cues that the card is backed by a major financial network. Because of this affiliation, open-loop cards are accepted virtually anywhere that accepts debit or credit cards from these networks.

These cards often come in predetermined denominations, such as $25, $50, or $100, making them convenient for budgeting or gifting. Many individuals find open-loop cards useful for managing variable monthly expenses, particularly those who prefer not to use traditional bank accounts.

In essence, think of open-loop cards as prepaid debit cards from major banks. They function across diverse point-of-sale systems, offering greater flexibility compared to their closed-loop counterparts. Another advantage is the potential value capacity; theoretically, an open-loop card could hold significantly more value than many closed-loop gift cards, though practical limits usually apply.

Exploring Closed-Loop Gift Cards

Closed-loop cards, in contrast, are designed for use at a single retailer or a limited group of affiliated stores. Often referred to as “single-purpose cards,” these are essentially store-specific gift certificates in electronic form. When consumers think of a traditional gift card, they are often picturing a closed-loop card.

These cards are branded for specific businesses, such as Amazon, Apple, Starbucks, Home Depot, or local boutiques. Mobile gift cards, delivered via email or SMS and managed through phone apps, further enhance convenience, allowing users to shop without carrying physical cards.

small gift card image

A close-up of a generic gift card, emphasizing its simplicity and common form factor.

Different Forms of Gift Cards

Beyond the open-loop versus closed-loop distinction, gift cards also come in different formats:

1. Virtual Gift Cards

Virtual gift cards, also known as e-gift cards, are delivered electronically, typically via email, directly to the recipient. Their primary advantage is convenience. They eliminate the risk of loss or damage associated with physical cards and save the purchaser the time of going to a store to buy a physical card.

Virtual gift cards are also ideal for last-minute gifts, as they can be purchased and delivered almost instantly. Many businesses have adopted digital gift cards that customers can redeem directly from their mobile devices, streamlining the transaction process. These digital forms are often seen as a modern money transfer method, offering seamless transactions without the need for a physical card.

Gift cards, in both virtual and physical formats, are used for a multitude of occasions, from birthdays and holidays to weddings and employee recognition programs. The demand for gift cards from major retailers like Walmart, Apple, Amazon, and Target has grown significantly, reflecting the increasing globalization of commerce and the desire for flexible gifting options.

2. Physical Gift Cards

Physical gift cards are the traditional plastic cards you can purchase in stores. Similar in shape and size to credit or debit cards, they feature a magnetic stripe or barcode and often display the issuing company’s branding prominently. Physical gift cards contain unique card numbers or codes that are essential for validation and security, helping to prevent fraudulent use.

Unlike gift certificates, physical gift cards are not personalized with a name, making them easily transferable as gifts. Examples of popular physical gift cards include those from Amazon, Visa, and Mastercard, readily available at numerous retail locations.

What Are Gift Cards Useful For?

Closed-loop gift cards are redeemable at the specific retailer or affiliated businesses indicated on the card. This could be for purchases at department stores, clothing retailers, coffee shops, or restaurants, depending on the card issuer’s network.

Popular categories for gift cards include those for groceries, department stores, gas stations, and coffee shops, reflecting everyday consumer needs and preferences. Businesses utilize gift cards for various purposes, from customer loyalty programs to promotional incentives, recognizing their effectiveness in driving sales and enhancing brand engagement.

Gift cards serve as excellent tools for customer appreciation and for introducing new brands to established markets. The availability of wholesale gift cards also enables businesses to create cost-effective rewards programs that deliver long-term value to customers.

image of a gift card

A person holding a gift card, illustrating the act of gifting and the tangible nature of physical gift cards.

Functions of Gift Cards

Gift cards offer a range of benefits for businesses:

1. Customer Acquisition

Gift cards are particularly effective for businesses that accept credit cards and offer desirable products or services. They can attract customers who might typically patronize competitors, encouraging them to explore your offerings. This initial interaction can lead to repeat business and long-term customer relationships.

2. Brand Awareness Enhancement

Most gift cards are designed to incorporate the company’s logo and branding elements. This serves as a subtle yet powerful promotional strategy, turning the gift card itself into a miniature advertisement that recipients carry. As gift cards are given to others, brand visibility expands to new potential customers.

3. Sales Boost

While gift cards are pre-loaded with a specific value, many users often spend beyond that amount. The gift card acts as an entry point, encouraging customers to browse and explore products. Once in the store or online, they may find additional items that appeal to them, potentially exceeding the gift card’s value. Customers are often happy to cover the difference, resulting in increased sales for the business.

4. Fraud Reduction

Digital gift cards can help reduce fraud by enabling partial redemption, which results in a remaining balance and eliminates the need for cash back. Gift cards can also be used for store credit, mitigating fraud associated with expired refunds being exchanged for cash. Issuing gift cards instead of cash for returns can also stimulate further sales.

Conclusion

Understanding the different Types Of Gift Cards, from open-loop versatility to closed-loop brand loyalty, empowers consumers and businesses alike to leverage their advantages. Whether you’re looking for a flexible payment option or the perfect gift, gift cards offer a convenient and increasingly popular solution. As the gift card market continues to evolve, staying informed about the various types and their functionalities is key to maximizing their benefits.