What's the Difference Between Open Loop, Restricted Open Loop and Closed Loop Gift Cards?

I've been in the gift card industry since 2000, when I was producing gift cards for Blockbuster Video — back when plastic cards were just beginning to replace paper certificates. For the last 15 years, our company, eGiftify, has provided closed loop white label gift card solutions to merchants. In nearly three decades, I've watched this industry evolve from a novelty at the register into a multi-billion dollar channel that can make or break a brand's loyalty strategy.

And in all that time, one conversation keeps repeating itself. A merchant comes to us convinced that an open loop or restricted open loop card program will be easier, cheaper, and better for their business. It won't be. It's usually a costly mistake — both in dollars and in how much their customers end up disliking the experience.

Before I explain why, let's define the three types.

The Three Types of Gift Cards

Open loop gift cards run on a major payment network — Visa, Mastercard, American Express, or Discover. They can be spent anywhere that network is accepted, which is why they're often marketed as "the gift of choice." A bank or financial institution is the issuer, not the merchant.

Restricted open loop gift cards also run on network rails, but redemption is limited to a defined group of merchants — think mall cards, campus cards, or multi-brand shopping district cards. They look like a Visa but only work inside the fence.

Closed loop gift cards are issued by a single merchant or brand family and can only be redeemed there. Your favorite restaurant's gift card, a hotel group's card, a Starbucks card — these are closed loop. The merchant is the issuer, controls the program, and captures all the economics.

Those are the textbook definitions you'll find in a hundred other articles. Here's what those articles won't tell you.

The Misconception That Costs Merchants Real Money

Merchants gravitate toward open loop and restricted open loop programs because they seem simpler — no program to run, no liability to track, a familiar network logo on the card. The reality is the opposite. You pay more, you give up the most valuable economics of a gift card program, and your customers get a worse experience.

Let's break down where the money actually goes.

Fees. Open loop cards typically carry activation fees of $3 to $6 per card, charged at purchase. Then there's the part most people assume can't be legal: feeing down the balance. Under the federal CARD Act of 2009, an issuer can charge a dormancy or inactivity fee on a gift card once it has sat unused for 12 months — up to one fee per month, as long as it's disclosed. Network-branded cards use this. A typical cardholder agreement runs around $4.95 per month after the one-year mark, which means a $50 card that sits in a drawer for two years can lose more than half its value without ever being swiped. (Some states ban these fees outright — California among them — but plenty don't.) Closed loop cards generally carry no activation, redemption, or maintenance fees at all. The full value gets spent as intended, because the merchant doesn't need to make money on the card itself. The merchant makes money when the card is redeemed — and usually when the customer overspends past the card's value.

Breakage. Some percentage of every gift card program goes unredeemed. On a closed loop program, you are the issuer, so that unredeemed value works in your favor (subject to your state's unclaimed property laws — some states like California, Florida, and Texas exempt gift cards from escheatment entirely, while others like New York and Illinois require remitting dormant balances after several years, so know your jurisdiction). On an open loop card, the bank is the issuer. Any breakage economics flow to them, not to you. Those activation and inactivity fees? That's the issuer monetizing value that could have been yours.

Float. From the day a closed loop card is sold to the day it's redeemed, you hold the funds. On an open loop program, someone else does. For a restaurant or small business, this is not an accounting footnote — cash flow is king. Margins are thin, payroll hits every two weeks, food costs and rent don't wait, and the difference between a good month and a bad one often comes down to timing of cash. A closed loop program puts cash in your account today for goods and services you'll deliver weeks or months from now. It's one of the only ways a restaurant gets paid in advance. December gift card sales fund your slowest quarter. Hand that program to a network issuer and you've given away the single best cash flow instrument in the business — and paid fees for the privilege. Losing out on breakage and float is not a rounding error; it's one of the primary financial reasons to run a gift card program at all.

Loyalty. This is the one that can't be measured on an invoice. A closed loop card guarantees the spend comes back to your business, frequently brings in a new customer someone else paid for, and typically drives a ticket larger than the card's face value. An open loop card guarantees nothing. You sold a payment product and sent the customer to spend it anywhere — possibly at your competitor.

The Consumer Experience Problem Nobody Warns You About

Merchants assume network-branded cards mean a smooth, familiar payment experience. They don't. Open loop and restricted open loop cards pretend to be debit cards, but they fail at exactly the moments debit cards work.

Split tender. When the purchase exceeds the card balance, the transaction should split between the card and another payment method. In the real world, this fails constantly — the card declines instead, the cashier doesn't know what to do, and the customer walks away embarrassed and annoyed.

Tipping. Restaurants pre-authorize above the check amount to cover the tip. If that pre-auth exceeds the card balance — decline. For a restaurant group, this is poison: your gift card fails at your own table.

Authorization holds after reversals. Here's the one almost nobody outside the industry understands. When a transaction is reversed or declined, the authorization hold on the card doesn't release immediately. The value is locked — sometimes for days — and the customer can't use their own money until the hold falls off. Try explaining that to a guest standing at your host stand with a card you sold them.

Every one of those failures happens with your brand in the customer's hand. They don't blame Visa. They blame you.

Restricted Open Loop: The Worst of Both Worlds

If open loop has problems, restricted open loop compounds them. You inherit the network fees, the decline issues, the split tender and tipping failures — and you give up the one thing open loop actually offered, universal acceptance. You've paid for the drawbacks of both models and captured the benefits of neither.

Here's my honest observation after 28 years: when a merchant chooses a restricted card program because it's "easier," that tells me they aren't really marketing or trying to grow a program. They're just enabling gift card sales. And if that's the posture, it will show in the customer experience — and frankly, they probably shouldn't offer the product at all. The card type you choose is a signal of how seriously you take your program.

Is Open Loop Ever the Right Call?

I'll steelman it. If you're issuing rebates or incentives where there's no natural merchant relationship — a corporate disbursement, a promotional payout with no store to send someone to — I can see a world where open loop makes sense. But even then, I'd argue the loyalty potential of a closed loop card has more upside. A rebate delivered as a branded card pulls the recipient into a relationship. An open loop card is a transaction that ends the moment it's spent.

The Multi-Location Problem: Why This Matters Most for Restaurant and Hotel Groups

If you operate a restaurant or hotel group with multiple locations, multiple owners, and multiple bank accounts, you're facing a problem the generic articles never address: a card sold at the location owned by Partner A gets redeemed at the location owned by Partner B. Now someone owes someone money, and at quarter-end, two partners are arguing over a spreadsheet.

An open loop or mall-card program doesn't solve this. It just layers network fees on top of an unsolved reconciliation problem.

A proper closed loop platform is built for it. On our platform, every card carries its sale location and its redemption location. Online sales pool into a central account, and the platform net settles funds to each location based on what it sold versus what it redeemed — automatically, with full reporting. Nobody argues. Nobody chases money. The program becomes an asset shared fairly across the ownership group instead of a source of friction inside it.

A Real-World Example

A 16-location restaurant group came to us after being sold a restricted open loop card program. They were having tremendous problems — consumers couldn't tip properly, cards were declining at the table, and the guest experience was suffering at their own restaurants. They switched to a closed loop program with us, and the program grew 300% in the first six months.

Same restaurants. Same customers. Same gift card concept. The only thing that changed was the rails the program ran on — and removing the friction unlocked the growth that was there all along.

Where Gift Cards Are Headed

After nearly 30 years in this space, here's what I see coming: gift cards are becoming increasingly tied to loyalty programs and strategic offers. Merchants work hard and spend tremendous money to promote their brands and get customers in the door. Gift cards are one of the few tools that can compound that investment instead of leaking it away — creating repeat visits, richer experiences, and stronger relationships.

And the product itself is evolving. Gift cards will increasingly be redeemed for experiences and specific products, not just monetary value — a tasting menu, a spa night, a room upgrade. That future only works on closed loop rails, because only the merchant-issuer can attach experiences, offers, and loyalty mechanics to the card. A network-branded piece of plastic can't do any of that.

The Bottom Line

Open loop cards enrich the issuing bank. Restricted open loop cards combine the costs of open loop with the limits of closed loop. Closed loop cards keep the fees out, the breakage and float in, the customer experience clean, and the loyalty compounding — and for multi-owner restaurant and hotel groups, a modern closed loop platform solves the settlement problem that would otherwise turn your gift card program into a partnership dispute.

If it seems like the "easy" option is the network-branded card, look closer. Easy for whom?

About the Author: Dan Farrell is Chief Growth Officer and Head of Operations at eGiftify. He has worked in the gift card industry since 2000 and is part of the team at eGiftify that has been providing closed loop white label gift card solutions to merchants for over 15 years.