If you talk to insiders from the payment industry about prepaid card systems, they inevitably use terms such as closed loop, open loop and restricted open loop or semi-closed loop.
What does closed loop, open loop, restricted open loop and semi-closed loop mean?
In practice, the terms closed loop, open loop, restricted open loop and semi-closed loop are not at all used in an uniform manner. Colloquially, they are used to describe card systems in more detail with regard to card acceptance. The term “closed loop cards” refers to cards that can only be redeemed at the retailer who issued them.
In contrast, “open loop cards” are payment instruments that can be redeemed at a large number of different merchants. In the case of “open loop cards”, you therefore have the card issuer as well as a large number of acceptance points. Examples are prepaid credit cards issued by the major credit card organisations Visa and Mastercard.
“Semi-closed loop cards” or “restricted open loop cards” are somewhere in between. These are cards that can only be redeemed at a more or less limited number of merchants. Examples include shopping centre cards that can only be redeemed at the merchants in the shopping centre.
What does closed loop, open loop, restricted open loop or semi-closed loop not mean?
Now comes the great, big BUT. The terms should – as unfortunately often happens – not be used to make statements about the admissibility of such cards. In the regulatory context, the terms regularly cause more confusion than they are useful. This is mainly due to the fact that whereas the question of card acceptance may well play a role from a supervisory law perspective, supervisory law, or more precisely the German Payment Services Supervision Act (Zahlungsdiensteaufsichtsgesetz – ZAG / German), is unfortunately somewhat more complicated.
The legal question as to whether prepaid cards can be issued without authorisation is essentially whether the cards constitute e-money. Prepaid cards can be issued without authorisation if a prepaid card either does not already meet the criteria for e-money or if an exception applies.
- What is meant by e-money is stipulated in the ZAG. According to this, e-money is any electronically stored monetary value in the form of a claim against the issuer which is issued against payment of an amount of money in order to carry out payment transactions and which is also accepted by persons other than the issuer. The last characteristic in particular shows that the question as to whether something constitutes e-money also depends on who the cards can be redeemed with. If a card is not accepted by any third party, this does not constitute e-money.
- If, on the other hand, the characteristics of e-money are present, including third-party acceptance, the issuance of prepaid cards is only possible without authorisation if the issuer falls within one of the statutory exceptions. In practice, the limited network exception and the limited range exception are of particular relevance here. The applicability of prepaid cards must either be limited in such a way that they can only be used to purchase goods or services on the issuer’s premises or within a limited network of service providers (limited network exception). However, the limitation of usability may also apply to the range of goods or services (limited range exception). The German financial supervisory authority BaFin has specified the exact prerequisites for the exceptions in more detail in its Information Sheet – Notes on the Payment Services Supervision Act (as of November 2017 / German).
Main takeaway …
The terms closed loop, open loop, restricted open loop and semi-closed loop all have their justification, as they help to roughly classify payment instruments from an acceptance point of view. In the regulatory context, however, the terms create more confusion than they are useful. In this respect, it is advisable to stick to the legal terminology.
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