What’s the Difference Between Open Loop and Closed Loop Gift Cards?

Gift cards aren't just a convenient gift solution, they're a strategic asset for businesses aiming to elevate customer engagement and loyalty.

This article aims to help businesses understand the differences between closed loop and open loop gift cards by detailing their pros and cons. It also provides proven tips on marketing and managing gift card programs for maximum impact.

Key Takeaways

• Open loop cards are flexible and appeal to a wide customer base. Closed loop cards are exclusive and can strengthen brand loyalty.
• Businesses must strategically plan their implementation to make the most of gift cards. They must take customer preferences, market trends, and the competitive landscape into account.

It’s not easy to come up with the perfect gift idea for friends and family, even when you know their preferences and interests. That’s one reason gift cards are a popular alternative to traditional gifts and cash. 

Gift cards represent a wider trend in consumer behavior, especially among the financially savvy Gen Z. Recent data indicates that 58% of individuals who celebrated the 2023 holidays received a gift card as a present, while over 30% received multiple cards.

For businesses, gift cards are a strategic tool that can be used to enhance customer engagement, loyalty, and retention. One survey found that 85% of consumers are inclined to join loyalty programs that offer gift cards as rewards. 

In other words, gift cards make good business sense. 

Brands and businesses keen on starting a gift card program, however, are faced with a choice between two types of gift cards. Closed loop cards are retailer-specific and can be availed only at the issuing store or chain. They typically come with lower fees and minimum purchase requirements - features that give businesses more control over their branding and promotion. 

Open loop cards, on the other hand, come branded by major credit card companies and can be used anywhere that brand of card is accepted. While this type of gift card offers consumers more flexibility, they often have higher fees and may not provide the same branding opportunities for businesses as closed loop gift cards do.

Understanding Closed Loop Gift Cards

Closed loop gift cards offer a powerful tool for driving sales and enhancing customer loyalty. 

What is a Closed Loop Gift Card?

As mentioned above, a closed loop gift card can only be used at the issuing retailer.

For instance, you can only use a Home Depot gift card at one of their locations or on their website. 

The great thing about closed loop gift cards is that they're usually free to activate. You only need to pay the amount you want to load the card with. Once it’s loaded, the card can be used for purchases until all the money is spent or the card expires. 

Most businesses offering such cards let you check your card balance online or via customer service.

What’s in it for the Customer?

Closed loop gift cards offer customers a range of benefits that enhance the overall shopping experience. Here's a closer look at why customers are drawn to closed loop gift cards:

• Flexibility: Closed loop gift cards give customers control over how they wish to spend their money, whether it be treating themselves to a coffee at Starbucks or splurging at a home improvement store. They can choose to spend it all in one go or stagger it over multiple purchases. 
• Budgeting Tool: Closed loop gift cards are a fantastic budgeting tool for customers looking to control their spending, especially during the holiday season. Buying gift cards for others instead of spending time buying physical merchandise allows them to stay within their budget and avoid overspending.
• Attractive Incentives: Retailers often offer promotions to customers who purchase or use closed loop gift cards. That can come in the form of percentage discounts, exclusive access to new products, free shipping, or loyalty points. 

Potential Disadvantages of Closed Loop Cards for Customers

The very nature of a closed loop gift cards makes them vulnerable to certain risks that customers must be aware of:

• Retailer Closure: The primary risk associated with closed loop gift cards is the possibility of the issuing retailer going out of business. If this happens, customers will lose the value stored on their cards. 
• Loss or Theft: If a gift card is lost or stolen, customers may not be able to recover the balance or get a replacement. This happens more frequently than you might think. A recent report from Credit Summit reveals that at least half of Americans have misplaced a gift card before using it. 

Businesses Advantages of Closed Loop Cards

Closed loop gift cards offer businesses a versatile tool to drive sales, enhance customer loyalty, and get more reviews. 

• They offer the ability to create exclusive offers and promotions that are only available to gift card holders. This exclusivity can incentivize customers to choose your brand over competitors and increase customer retention.
• Another benefit is the branding freedom they offer. Businesses can design their closed loop gift cards to reflect their brand identity and reinforce brand recognition. 
• Closed loop gift cards help businesses maximize the impact of their marketing strategies. Offering a discount or bonus for purchasing or using a gift card, for instance, can incentivize customers to buy more. 
• Businesses can also use these cards to drive customer engagement by offering rewards or special offers on their use. They can encourage customers to interact with the brand and make repeat purchases. 

Starbucks is the perfect example of a business using closed loop gift cards to increase sales and drive engagement.

In 2022, then-CEO Howard Schultz revealed the company was sitting on $1 billion in unused gift card value. He claimed that the sum was bigger than the entire gift card industry. 

Understanding Open Loop Gift Cards

Open loop gift cards are a versatile and more widely usable option for both gift-givers and recipients. Let's explore what open loop gift cards are and how they work.

What is an Open Loop Gift Card?

An open loop gift card is network-branded, which means it is issued by a financial institution or credit card company. It can be used at any merchant that accepts the payment network associated with the card. Open loop gift cards typically carry the logo of a major credit card company, such as Visa, Mastercard, American Express, or Discover, and can be used both in-store and online.

How Do Open Loop Gift Cards Work?

Open loop gift cards work much like a traditional credit or debit card. They can be loaded with a particular amount of money and used for purchases at accepting merchants. The cardholder can simply swipe or scan the card, enter a PIN, or sign a receipt to use it.

Open loop gift cards may have associated fees, such as activation fees or fees for checking card balances. Some of them do not have an expiry date and customers must confirm the terms and conditions of their specific cards. 

What’s in it for the Customer?

Let us see what makes open loop cards click with the customers.

• Wider Usability: Open loop gift cards are not tied to a particular retailer or chain. They can be used at restaurants, for online purchases, and to book airline tickets. The flexibility and variety of options available with open loop gift cards make them an enticing choice for customers.
• Better Security: Unlike closed loop gift cards, most open loop gift cards offer enhanced security features to help prevent theft, abuse, or fraud. You can also get real-time data on where and when the card is being used, making it easy to track expenses. 

Potential Disadvantages of Open Loop Cards for Customers

While versatile and convenient, open loop gift cards come with their own set of disadvantages.

• Network Limitations: Although open loop gift cards are more widely usable than their closed loop counterparts, they are still subject to network limitations. They cannot be used at businesses that are not part of the payment network of the issuing credit card company or financial institution.  This limits their usefulness in certain situations.
• Hidden Fees: Some open loop gift cards may have hidden fees that reduce their overall value. That can include activation fees, transaction fees, and inactivity fees. Customers must read the terms and conditions of the gift card carefully to understand these charges.

Businesses Advantages of Open Loop Gift Cards

Businesses of all sizes can leverage open loop gift cards to drive sales, increase customer loyalty, and expand their customer base. 

• A 2024 report by Gitnux found that 20% of all impulse purchases are made with a credit card. Since open loop gift cards work pretty much the same as credit cards, businesses issuing them can tap into this impulse buying behavior and boost their sales.
• Open loop gift cards help businesses attract new customers. When customers purchase gift cards for friends or family, they provide a referral for the business and enable it to bring in new customers who may not have visited the store or shopped with the brand otherwise.

How to Leverage Open and Closed Loop Business Cards for Your Business

Businesses can implement several key marketing strategies to leverage open and closed loop gift cards effectively. 

• First, businesses must promote their gift card program through various channels, including social media, email marketing, and in-store signage.
• Offering promotions or discounts on the purchase or use of gift cards can be an additional draw for customers. 
• Businesses can partner with other businesses to offer joint promotions or gift card deals to further expand their reach and attract new customers.

The choice between open and closed loop gift cards is key to a well-thought-out marketing and customer loyalty strategy. It must be made with due consideration to factors such as short-term and long-term business goals, current market trends, competitor dynamics, and budget. A judicious assessment of all these facts is a must to ensure an effective and successful gift card program.

Elevate Your Gift Cards Program with DataCandy

Gift cards are more than just a way to drive revenue. They're crucial for enhancing your business's overall branding and reputation. 

With DataCandy, you can amplify this effect by seamlessly integrating our review-boosting services with your gift card program. Whether you prefer open or closed loop cards, our solutions will help you engage customers and build a stronger brand.