Closed-Loop Card Scheme

A closed-loop card scheme is a payment card system in which a single organisation controls both ends of the transaction: it issues the cards to cardholders and contracts with the merchants that accept them, as well as running the network that connects the two. The term is also used, more broadly, for cards that can be used only within one company's own network of shops or services, such as store cards, fuel cards and many gift cards.

Closed-loop schemes contrast with open-loop card schemes, in which many independent banks issue cards and many separate acquirers sign up merchants, all connected through the network's rules. The classic closed-loop design is the three-party card model, used historically by American Express and Diners Club, as opposed to the four-party card model of Visa and Mastercard. In practice, the boundary has blurred, because several three-party networks now license banks to issue their cards or acquire merchants in some markets.

In a pure three-party system, the scheme itself is the card issuer and the acquirer. When a cardholder pays, the merchant sends the transaction to the scheme, which checks the account, approves the payment and later pays the merchant, keeping a fee known as the merchant discount rate. Because the scheme sits on both sides, there is no separate interchange fee paid between an issuing bank and an acquiring bank. The scheme sets its own merchant prices and cardholder fees and uses the revenue to fund rewards, travel benefits and credit risk.

Owning both sides gives the scheme full data on cardholders and merchants, which it can use for marketing, fraud detection and targeted offers. It also lets the scheme control the customer experience, for example by guaranteeing certain dispute rights or service standards.

In the retail sense, a closed-loop card is accepted only by the business that issued it or by a defined group of related businesses. Examples include department store credit cards, coffee shop prepaid cards, transit cards, fuel cards limited to one brand of station and most gift cards. These are often simpler to run, do not need a card network licence and can be cheaper for merchants, since no network fees are paid. They help retailers build loyalty and collect data, and stored value on prepaid closed-loop cards gives the issuer a float of customer funds. A digital equivalent is the closed-loop wallet found in many retail and ride-hailing apps.

• Control. The scheme decides pricing, rules, rewards and dispute handling without negotiating with member banks.
• Data. Seeing both cardholder and merchant data supports analytics and fraud prevention.
• Brand and service. A single owner can offer consistent premium services.
• Limited reach. Acceptance depends on the scheme's own merchant sales efforts, so coverage can be lower than open-loop networks, particularly among small merchants and outside home markets.
• Higher merchant cost. Premium three-party schemes have historically charged merchants more than open-loop networks, which has discouraged some merchants from accepting them.
• Growth limits. Issuing every card on its own balance sheet constrains how quickly a scheme can expand.

Regulation of card fees has often focused on interchange in four-party schemes, which raised questions about how to treat closed-loop networks. In the European Union, the Interchange Fee Regulation treats a three-party scheme as a four-party one when it licenses other providers to issue cards or acquire merchants, or issues co-branded cards with partners, so that caps can apply. Elsewhere, closed-loop schemes are regulated mainly through general payment, consumer credit and competition law. Retail closed-loop prepaid cards are often exempt from e-money licensing under limited network exclusions, while gift cards are covered by consumer rules on expiry and fees in many countries.

American Express has long been the best-known three-party network, though it has partnered with banks to issue its cards in many countries. Discover in the United States operated its own network with direct issuing and acquiring for much of its history. Many national networks, such as some domestic card schemes in Asia, started with closed or semi-closed structures before opening to other banks. The trend has been for closed-loop networks to open up partially, using bank partners to widen acceptance while keeping central control of the brand.