Open-Loop Card Scheme

An open-loop card scheme is a card payment network that is open to many independent issuers and acquirers. Banks and other licensed institutions join the scheme as members, issue cards carrying the scheme's brand to their customers, and sign up merchants to accept those cards. Because all members follow the same rules and connect to the same switching network, a card issued by any member works at any merchant signed by any other member, whether in the same country or abroad. Visa and Mastercard are the best-known examples, alongside many national schemes.

The term "open loop" refers to the fact that money flows out of one institution's system and into another's, rather than staying within a single company. The general concept is described under open-loop. Open-loop schemes are contrasted with a closed-loop card scheme, in which a single company issues the cards and accepts them, or controls both sides of the network.

Open-loop schemes are built on the four-party card model. The cardholder holds a card from an issuer; the merchant has an agreement with an acquirer; and the scheme sits between them. When the cardholder pays, the acquirer sends an authorisation request through the scheme's network to the issuer, which approves or declines it. Later, the transaction is cleared and the scheme arranges settlement between issuers and acquirers, usually on a net basis through settlement banks.

The scheme itself does not normally hold cardholder accounts or merchant relationships. Its role is to set the rules, run the network that routes messages, manage the brand and settle positions among members.

Open-loop schemes rely on detailed card network rules that every member must follow. These cover who can become a member, how cards must be issued and identified, which data must be sent with each transaction, how disputes and chargebacks are handled, what security standards apply and how members settle. The rules allow strangers to trust each other: a merchant in one country can accept a card from an issuer it has never heard of, knowing the scheme guarantees the process.

Major international schemes were originally owned by their member banks and later became publicly listed companies, while many national schemes are still owned by banks, central banks or governments. Regulators in many regions oversee the larger schemes, and some impose limits on fees or require competition between networks.

The main price in an open-loop scheme is the interchange fee, which is paid by the acquirer to the issuer on each purchase and set by the scheme. Interchange compensates issuers for providing the card, the credit or account, fraud protection and rewards, and it is passed on to merchants as part of their acceptance cost. The scheme also earns its own network fees from both issuers and acquirers.

Because interchange shifts costs from cardholders to merchants, it has been the focus of competition cases and regulation. The European Union capped most consumer interchange in 2015, the United States capped debit interchange for large issuers through the Durbin Amendment, and many other countries regulate interchange or scheme fees.

• International schemes. Networks such as Visa and Mastercard operate in almost every country and support cross-border acceptance.
• Domestic schemes. A domestic card scheme, such as a national debit network, serves one country, often at lower cost, and may be co-badged with an international brand on the same card.
• Regional schemes. A regional card scheme serves a group of countries, sometimes as part of efforts to reduce dependence on international networks.

Some networks that began as closed loop, such as American Express and Discover, have moved partly toward open-loop models by allowing third-party banks to issue their cards or acquirers to sign merchants.

Open-loop branding is also used for prepaid products. An open-loop prepaid card carries a scheme logo and can be used anywhere the scheme is accepted, unlike a closed-loop gift card that works only at one retailer. Open-loop prepaid cards are regulated more strictly, with identity checks and anti-money laundering controls, because they behave much like debit cards.

Open-loop schemes offer very wide acceptance, competition among issuers and acquirers, and a common set of rules that supports innovation such as contactless and tokenised payments. Their limitations include fees that merchants often consider high, complex rules, reliance on many intermediaries and slower change, since updates must work for thousands of members. These trade-offs have encouraged alternatives such as account-to-account payments and domestic instant payment systems.