Closed vs. Open Loop Payments

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With all of the daily tasks that small business owners must perform, the intricacies of accepting credit cards, debit cards, and other electronic payments are often lost in the mix. Yet we believe that a fundamental understanding of basic merchant service terms and concepts can go a long way. Closed-loop payment methods and open-loop payment methods are both commonly accepted by modern businesses to allow for a more convenient customer experience. Where closed-loop payments are focused on single company usage, open-loop payments are more traditional personal banks and/or credit cards which can be used everywhere.

Yet this single distinction fails to tell the entire story. Today we will review the similarities and differences between closed loop cards and open-loop cards, how businesses can accept both closed and open-loop payments, and much more.

What is a Closed Loop Card?

What is a Closed Loop Card?

Closed-loop payment cards are any type of electronic payment card that can be used only from a single organization. Closed-loop cards are generally issued through the business itself (the merchant) in conjunction with a backing agent such as Discover or Visa. Closed-loop payment methods can be used in one of two ways:

  1. As a debit card. These types of closed-loop cards are generally pre-loaded with funds like a gift card, however, they may also be linked to a separate account.

  2. As a credit card. Closed-loop cards which function as credit cards are applied for through the business or organization, and credit limits, spending power, and perks will all be maintained through that single entity.

Closed-loop payment methods are generally simple and more secure than open-loop cards. This is primarily due to the fact that closed-loop cards will not work in any other locations, therefore payments are more of an internal process than a process of accepting an outside electronic payment. Closed-loop payments are also frequently able to be made on propriety apps or other mobile payment solutions.

What is an Open Loop Card?

What is an Open Loop Card?

Open-loop payment cards are much more common than closed loop cards and can be thought of as any electronic payment card which can be used to make purchases at a multitude of organizations. Where closed loop payment cards are limited in scope, open-loop cards cover the realm of traditional credit cards, debit cards, gift cards, EBT cards, and just about every other electronic payment method. Open-loop cards are issued by major financial organizations such as Visa, American Express, MasterCard, Discover, and so forth.

Open-loop card payments are more complex, but they are also more adaptable and able to be used for a much wider range of purposes. Open-loop payment systems can range from POS purchases to mobile payments to e-commerce transactions. When it comes to small businesses and open-loop cards, working with a reputable merchant service provider is the key to making sure that your business is prepared with all of the hardware and software required.

How Businesses Accept Closed Loop and Open Loop Payments

How Businesses Accept Closed Loop and Open Loop Payments

So how does all of this work? We have already covered open-loop card processing in a nutshell in another post which can be accessed here. As for closed-loop payments, that is a fundamentally different process. Many closed-loop cards function with the card issuer as the same entity as the merchant acquiring bank. This greatly simplifies payment processing as payment verifications are essentially a one-step job.

Despite all of the technical differences, both forms of payment are processed by business owners in very similar ways. Merchants must have the necessary hardware like a POS system, mobile payment solution, or wireless credit card machine that is backed by a payment processor/merchant service provider to authenticate, process, and settle the payment.

Finally, while payment security is always a high priority, it is especially so for open-loop credit and debit cards. Payment security services such as CardSecure work to ensure that data is encrypted during transactions, kept safe after transactions, and data management software is malware resistant. By following security best practices and using reliable security software solutions, businesses can protect themselves when processing closed and open-loop payments.

True Merchant Helps Small Businesses Accept Electronic Payments from a Wide Range of Sources

True Merchant is proud to offer a wide range of merchant account services including mobile payment solutions. Our mobile devices and technology allow businesses to accept digital signatures, track inventory, process offline transactions remotely and even customize digital and paper receipts. Our inventory of mobile payment solutions is backed by our secure payment processing software known as CardPointe Mobile. At True Merchant, we believe that security, convenience, affordability, and transparency are the keys to building a strong merchant/merchant service relationship.

To learn more about how we can help your business start accepting or improve the way in which you accept mobile payments, please contact a member of our qualified sales staff today. We will be happy to walk you through the process and even offer a complimentary price review.