Open Loop vs. Closed Loop Credit Cards
All of the earliest credit cards were “closed loop” cards. That meant that a three-way relationship existed between one specific bank, the consumer, and the merchant.
Diners Club and American Express cards, for instance, were issued to a select group of consumers and could be used only at merchants who chose to participate in the program. Early cards issued by banks were available only to that bank’s customers and were good only at local establishments.
While Diner’s Club remains in the closed loop, American Express has chosen to join the open loop system, which requires interbank cooperation and funds transfers.
Discover Card, first introduced at the 1986 Super Bowl, also began as a closed loop card. Originally a part of the Sears Corporation, Discover Card Services sought to create a new brand with its own merchant network.
These three, in an effort to boost revenues, expanded into the open loop network, but not without some trials along the way. Although these cards were gaining merchant acceptance, individual banks were locked into an exclusive agreement with Visa and MasterCard.
Finally the U.S. government and the Department of Justice became involved, and a 2004 antitrust court ruling against Visa and MasterCard allowed banks and other card issuers to provide customers with American Express and Discover Cards.
Not all establishments choose to accept American Express and Discover because of the additional set up and maintenance fees. But consumers carrying these cards can rest assured that their cards will be accepted anywhere the logos are displayed.
Now, although Visa still holds over 50% of the market share of credit card transactions, Discover Card is a major player in the Open Loop credit industry. Discover boasts a wide variety of cards for consumers with poor to excellent credit and offering a variety of rewards cards for students, businesses, frequent travelers, and more.
So who offers “Closed Loop” cards?
Gas companies and retailers such as Sears, Staples, and others whose cards are accepted only at their company outlets. These closed loop cards can be beneficial to both the stores and the consumers who use the cards regularly. The rewards, which can be substantial, give added incentive to use that brand rather than another.
For instance, Staples offers a rewards program (for those cardholders who apply) which gives money back on purchases – and gives extra when Staples own brands are purchased.
