Gift Cards 101: The Basics
Gift cards typically fall into two categories:
“Closed-loop” cards – These cards are generally sold by retailers and are branded with the retailer’s logo. They can only be used to buy merchandise or services from the retailer who sold the card. Consumers purchase these cards for the face value of the card. They tend to have few or no fees or expiration dates since the retailer makes their profit not from the sale of the cards, but on the markup they charge on the merchandise or service sold.
“Open-loop” cards – Also known as “network branded prepaid cards,” these cards are typically sold by credit card companies, malls, and banks and can be used at any merchant location where the card is accepted. All of the major credit card companies (American Express, Discover, Mastercard, and Visa) sell these cards directly. Banks and other third-party vendors also sell “closed-loop” that work on the credit card companies’ networks. Card issuers profit from the sale of closed-loop cards in several ways. First, an up-front fee on top of the value of the card is typically charged at the point of sale, which higher denomination cards charging a correspondingly higher fee. Second, these cards also tend to have more post-sale fees, in the form of maintenance, dormancy, or inactivity fees that get charged after a given amount of time (typically 6-12 months). Finally, card issuers profit whenever the cards at swiped via transaction fees that merchants pay to accept the cards at their businesses.
The Bottom Line: “Closed-loop” cards offer less flexibility but are generally less expensive to buy and use. “Open-loop” cards can be used in many more places, but consumers pay for the convenience in add-on fees.