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The Power of Closed Loop Cards: Boosting Business Success and Customer Loyalty

Updated: Aug 28

Businesses have come to understand how crucial it is to build and maintain customer loyalty because of the profound impact this has on the bottom line of any business – and providing customers with rewards for their custom allows companies to earn their loyalty over time.

Harvard Business Review calculates that an increase of 5% in customer loyalty can translate into anything from 25% to a 95% increase in profitability. This significant multiplier can set a business apart in an increasingly competitive world.

So, it’s little wonder that more and more customer-facing businesses are issuing private-labeled prepaid credit or debit cards that give customers access to rewards, discounts, or other incentives when they do repeat business with the company.

These cards can be structured as closed- or open-loop systems. The former gives customers access to only the issuing business’s offerings, and the latter provides access to an unlimited payment universe. Each has its pros and cons, and thus it’s crucial to understand what each alternative offers and how they work.

What are closed-loop cards?

Closed loop cards, also known as single-purpose cards, give customers access to a single company’s incentive programs and prepaid payment functionalities. They have been designed to retain customers by offering them discounts and loyalty program points that can be redeemed in the future. These incentives encourage the merchant’s customers to become repeat and loyal customers.

Closed loop cards are issued by a financial institution, usually a bank, but are branded by the merchant, which accepts the cards. The cards differ from the typical credit card, which features the logos of the card payment network, such as Visa or Mastercard, and the bank.

Customers can only use the credit or debit card at the issuing retailer’s physical locations or digitally on their website, unlike traditional credit cards that can be used anywhere there is a credit card machine. Examples of closed-loop cards include Amazon, Starbucks, and Diner’s Club.

What are open loop cards?

Open loop cards differ from closed ones because they can be used anywhere, across many merchants and locations, instead of being tied to a single merchant, such as Amazon.

They are co-branded with the other participants in the open loop system, including the merchant, the card payment network, and the issuer. Examples include the Hilton Honors American Express Aspire Card and the Costco Anywhere Visa® Card by Citi. Costco’s card is a good example of how co-branding works; namely, the retailer (Cosco), the card payment network (Visa), and the card issuer (Citi) are all given visibility.

Why closed loop gift cards have become more popular?

From a customer visibility and loyalty perspective, a closed-loop system generally keeps your customers closer to your brand because they are only exposed to your company’s products and services and the incentives offered.

Meanwhile, while open-loop cards may give customers greater flexibility because they can be used more widely, they water down the customer’s association with and recall of a single brand.

Types and use cases of closed loop cards

Closed loop cards come in various forms, including gift cards, prepaid cards, store credit cards, and loyalty cards.

Gift cards are prepaid debit cards that allow customers to load funds onto them, and the holder can then spend the fund available on the issuing merchant’s products and services. Prepaid cards are similar in that money is loaded onto the card for spending at a later stage.

Store credit cards allow customers to buy goods on credit and pay them off as they would a regular credit card – either in full at the end of a month or over time. Interest is charged on outstanding balances if the customer doesn’t repay what is owed before the payment date.

Loyalty cards offer customers access to rewards, discounts, and other incentives on the card or online. They are designed to attract and retain customers by encouraging repeat business.

Why adopt a closed-loop payment system?

If you want to build customer loyalty by issuing your own branded cards at lower costs, it’s worth opting for a closed-loop payment system because you don’t have to pay for the services of a credit card network, such as Visa or Mastercard. By reducing the number of third parties involved in the system, it also becomes a tighter and simpler system to manage, with the merchant maintaining control.

In a closed-loop card system, unclaimed funds on gift cards also accrue to the merchants, not the card payment networks, as would be typical in an open-loop system, which gives the card issuer an additional source of revenue.

Another advantage of a closed-loop system in which the merchant balances and manages the accounts is that a rich database provides valuable insight into customer behavioral patterns and preferences. Companies can put this information to good use by providing customers with more informed and targeted incentivization.

Given the many advantages closed-loop systems offer merchants, there has been an exponential increase in gift card systems established by customer-facing businesses across the retail, entertainment, and travel industries.

Benefits of Having a Closed-Loop Card System

Before we dive into some of the top closed-loop cards in the United States, we figured we would take a look at some of the benefits of a closed-loop system, both from a consumer and a business perspective.

Benefits to Consumers

Customers can enjoy several advantages from a closed-loop card system.

  • Convenience

If you shop at the same stores repeatedly, it is always so much more convenient to have a store-specific card at your disposal. It means that you don’t have to worry about the payment method you use. You just use the closed-loop card that you already have.

  • Rewards

Many of the top closed-loop card systems are also tied to reward or discount systems e.g. the Lowe’s Advantage Card, or the Target RedCard.

If you’re shopping at the same places repeatedly, then these rewards can add up. You can save a decent amount of cash too. For example, Target offers a 5% discount whenever you use the Target RedCard online or in one of their stores.

  • Easier to Budget

Again, a major benefit if you are shopping at the same stores, for example, grocery stores.

Many of the closed-loop cards are top-up cards. You can only spend what you have put on the card. If you only ever plan to spend a certain amount, it stops you from going over budget. You can save yourself a lot of money.

  • More Secure

These cards are much, much more secure since they can only be used in one or a few locations. So, there are fewer issues with people just stealing them and using them. Even then, many businesses have a few protections in place to help counter this.

Benefits to Businesses

It isn’t just customers that benefit either. Businesses stand to benefit from closed-loop cards, and we mean both gift cards and closed-loop credit cards here.

  • Customer Loyalty

Closed-loop cards are tremendous for pulling in loyal customers. After all, when a customer has a card in their pocket for a specific store (particularly one that offers loyalty points or other benefits), then they are much, much more likely to use it.

  • Data Collection & Better Marketing Opportunities

When customers apply for a card (or buy a gift card), it provides ample opportunity for a business to collect data on their customers. This can lead to better marketing and stock planning.

If you have ever had a closed-loop card before, then you’ll know that you’ll often receive offers specific to products that you have purchased in the past, or at least very similar to products. This is all down to the business collecting information from you and using it for marketing purposes.

  • Increased Spending for Customers

Customers with closed-loop cards tend to spend more in stores, even if it is a pre-loaded gift card.

  • Interest

Cash from gift cards will often spend a bit of time sitting in the account of a business, collecting interest.

Most closed-loop credit cards will often have a higher interest rate than standard credit cards, and this is extra cash for the business.

  • Easy to Implement

While a smaller business is unlikely to implement the big closed-loop card systems that the massive corporations have, it is still far easier to implement a closed-loop system than you may think. There are ‘off-the-shelf’ solutions out there, or a business can have one programmed for them.

Remember, while it costs a little bit of money to get this sort of system set up, the benefits are hard to ignore. A good business will earn way more cash than it ever cost to set up that closed-loop system.

The Top Closed-Loop Cards

In this section, we want to go through a few of the closed-loop cards that you may have encountered before. Some of these are credit cards, while others are pre-loaded gift cards.


This is one of the most popular closed-loop cards in the United States. Starbucks originally started life as a simple loyalty system, but it is now a complete mobile wallet.

The Starbucks closed-loop card has gained success from the advantages that it offers. People top up their Starbucks accounts whenever they wish. They can then pay for drinks using their mobile device. As they do, they can collect loyalty points. These loyalty points can lead to free coffee. It really encourages people to only shop at Starbucks.

Target RedCard

Target offers two versions of the Target RedCard - a credit card version, and a debit card version.

Most of their options are closed-loop cards. This means that you can only use them at Target or their online stores. When the RedCard is used, the purchaser gets 5% of all their purchases and, if used online, faster shipping.

Lowe’s Advantage Card

The Lowe’s Advantage Card has been a massive hit amongst those dabbling in some home renovation. The Lowe’s Advantage Card is a closed-loop credit card that not only offers a 5% discount on purchases at Lowe’s but provides a low-interest way to pay back anything that has been spent. This is very important as many of the home renovation purchases are going to be on the more expensive side, and Lowe’s is able to keep those buyers in their ecosystem with their cards.

Nordstrom Retail Credit Card

This is another company that offers both an open-loop and a closed-loop credit card. However, even the open-loop credit card has some closed-loop features. All purchases made with the Nordstrom Retail credit card, even if not made at Nordstrom, qualify for loyalty points known as ‘Nordstrom Notes’ which can be used to make a purchase of clothing.

This is an incredibly good system, as Nordstrom benefits from customers gathering their Nordstrom Notes, ultimately spending them at Nordstrom. When they do spend their Nordstrom Notes, chances are that they’ll be spending much more than they would have done!


The GapCard is a closed-loop credit card that can be used in any of the stores owned by Gap, including:

  • Gap

  • Old Navy

  • Athleta

  • Banana Republic

So, it gives customers options for their clothing without them leaving the Gap family of stores. Remember, each store offers something different, so all members of the family will have somewhere that they can purchase their clothing!

Closed-loop credit cards work especially well for clothing since everybody will need to buy clothes at some point, but they often don’t want to make big heavy purchases at once. They just want to make a few smaller payments over a few months.

Kohl’s Charge Card

The Kohl’s Charge Card is the perfect card for those who do a lot of regular purchasing at Kohl’s. You get 7.5% cashback on all your purchases (so, effectively a 7.5% discount). Of course, you can’t use it outside of Kohl’s, but since Kohl’s is a huge department store, chances are that you’ll find everything that you need within their walls.

How to launch a closed-loop card program

Businesses looking to get to market quickly with a closed-loop card system can do so with Velmie’s new card module that was recently added to our composable white-label fintech platform.

The comprehensive and customizable card program offers a full set of features. These include both physical and virtual cards with one or many of Velmie’s card-issuing partners. The program can also integrate with Google Pay and Apple Pay, facilitating easy mobile device payments.

Businesses get access to a range of card management tools, including the ability to issue, activate, and deactivate physical and virtual cards. Businesses can also set spending limits and control transaction types, providing them with greater control over their card program.

The card module is highly safe and secure against fraud. It includes 3D Secure, an advanced security feature that provides an additional layer of protection against fraudulent transactions.

Velmie also provides BIN sponsorship services, allowing businesses to issue their own branded cards without having to go through the lengthy and costly process of becoming a licensed issuer.

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