Loyalty Register glossary
Closed loop
A gift card, prepaid card or loyalty currency whose value can be used only with the business that issued it or a defined group of partners.
Closed loop describes a gift card, prepaid card or loyalty currency whose value can be used only with the business that issued it, or with a defined group of businesses. A closed loop gift card from a coffee chain works only at that chain, and the chain’s reward points work the same way. The opposite is open loop, where the value runs on a payment card network and can be spent at almost any merchant that accepts it.
Updated · By Loyalty Register Editorial TeamRelated terms
How does a closed loop gift card work?
The business issues the card and keeps the balance in its own system, so no card network is involved. The holder spends the value in the issuer’s stores, app or website. US federal rules (Regulation E) call this a store gift card: one redeemable at a single merchant or an affiliated group of merchants, while a general-use prepaid card works at many unaffiliated merchants or at ATMs.
The rules matter for rewards. Funds on a store gift card may not expire earlier than five years after the card was issued or last loaded. A card given through a loyalty, award or promotional program is excluded from those rules, but only if it says on the front that it was issued for that purpose, gives the expiration date of the funds, discloses any fees and gives a toll-free number for fee information.
How does a closed-loop loyalty program work?
The business issues the currency, sets the earn rate, the rewards and the value of a point, and accepts the currency only in its own channels or with partners it chooses. Members cannot take the value elsewhere or, in many programs, pass it to anyone else. Starbucks Rewards terms, for instance, say Stars are personal to the member and may not be transferred to or shared with family, friends or others.
Value that can only be spent with you brings members back to you. Rewards can be your own products, which usually cost less than their retail value, and the business keeps the rules and the customer data.
What are the downsides of closed loop?
The currency is only as attractive as the business’s own offer. Members who buy rarely may never collect enough to redeem, and value that cannot be used elsewhere feels less useful than cash. Because the business sets prices alone, members watch closely for devaluation. The full points liability also stays with the business, with no partners to share it.
When should a closed loop add partners or open loop rewards?
When members cannot earn fast enough to reach meaningful rewards with one brand, or when a partner adds rewards the brand cannot offer. A few earn or burn partners keep most of the control while widening the appeal. A coalition program shares one currency across many businesses. Open loop rewards, such as prepaid cards, suit incentives where the recipient’s choice matters more than return visits.