Loyalty Register glossary
Open loop
A rewards or gift card model where value can be earned or spent across many unrelated merchants, usually through a payment card network.
Open loop describes rewards or stored value that can be earned or spent across many unrelated merchants rather than with a single brand. The most familiar examples are payment card rewards, where a cardholder earns points or cash back wherever the card is accepted, and the open loop gift card, a prepaid card carrying a network logo that works at almost any store. The opposite is closed loop, where value is earned and redeemed only with the business that runs it.
Updated · By Loyalty Register Editorial TeamRelated terms
How does an open-loop rewards program work?
The program is usually run by a card issuer, a payment network or a rewards operator, not by the merchant where the member shops. Earning is tied to a payment method, so almost any purchase on the card can count. The rewards are typically funded from the economics of the card itself, such as interchange, interest and annual fees. Redemption is broad by design and often includes cash-equivalent options.
What is an open loop gift card?
It is a prepaid card on a payment network that can be used at many unrelated merchants. US rules draw the same line: under Regulation E, a store gift card is redeemable at a single merchant or an affiliated group of merchants, while a general-use prepaid card is redeemable at multiple, unaffiliated merchants or at ATMs. Funds on either type generally may not expire earlier than five years after the card was issued or last loaded. Cards given through a loyalty, award or promotional program are excluded from those rules if they carry the required disclosures, including a statement on the front that the card is promotional and the expiration date of the funds.
Some cards run on network rails but work only at a defined group of merchants, such as a shopping mall or campus. These are often called restricted open loop cards. Programs use open loop cards as rewards because recipients value the flexibility, but the reward carries no link to the brand that paid for it, and the brand learns nothing about where it was spent. Compare the card provider’s fees with the cost of rewarding in your own currency.
How does open loop compare with closed loop and coalition models?
In a closed-loop program the brand owns the currency, the data and the relationship, and every reward brings the member back to the same business. An open-loop reward is flexible and easy to understand, but it does not favor any one merchant. Coalition programs sit between the two: several partner brands share one currency, and members earn and redeem only within that group. A closed-loop program also sees each member’s purchases in detail, while an individual merchant may see nothing about an open-loop reward earned at its checkout.
Why does the model matter to a merchant?
An open-loop reward earned at your checkout builds loyalty to the card, not to your store. A merchant can still take part, for example by funding card-linked offers or launching a co-brand card that adds extra earning on its own purchases. Both try to recover some closed-loop benefits: a reason to choose this merchant over another that accepts the same card, and data on how members respond.
What should you watch?
Be clear about who owns the customer data and what you receive in return for funding offers. A statement credit from a bank is rarely remembered as a gift from the store. And measure behavior at your own business, because a member can be very active on a card while their visits to you do not change at all.