Gift cards are a popular way for businesses to reward employees, clients, and customers, and they’re a useful tool for reaching consumers in cash-heavy or unbanked markets. But gift cards are regulated, and the rules differ depending on whether a card is open-loop or closed-loop.
What’s the difference?
An open-loop gift card is issued by a financial institution such as Visa, Mastercard, or American Express, and carries that network’s branding. It can be used anywhere the network is accepted, not just at one retailer, which gives the recipient flexibility in how and where they spend it.
A closed-loop gift card can only be used at a specific merchant or group of affiliated merchants, and typically carries that merchant’s own branding. These cards are common for promotions and loyalty rewards, and in cash-heavy markets they also give consumers without credit cards or digital payment access a way to pay.
How open-loop cards are regulated
Because open-loop cards work broadly and carry real financial value across a wide network, they’re subject to more comprehensive rules:
Federal oversight
In the US, open-loop cards fall under the Electronic Fund Transfer Act (EFTA) and Regulation E, which require clear disclosures, limited fees, and other consumer protections.
Expiration and fees
Rules generally require minimal or no expiration dates, and restrict fees such as dormancy charges.
Anti-fraud measures
Given the higher fraud risk, additional security requirements often apply.
Unclaimed property laws
In some states, unused balances count as unclaimed property, meaning businesses may need to hand over unredeemed funds to the state after a set period.
How closed-loop cards are regulated
Closed-loop cards carry less regulatory weight, since their financial scope is limited to a single merchant or group. Rules typically address:
Expiration dates
Cards should have a reasonable window for redemption. This varies by region, for example, in Germany vouchers are valid for three years by law.
Fees
Maintenance or dormancy fees are less common and typically lower than on open-loop cards.
Consumer protection
If a card is lost or stolen, many rules require the remaining balance to be replaced, provided the consumer has proof of purchase or redemption.
Transparency
Terms and conditions must be clearly disclosed so consumers know their rights.
What this means for businesses
Closed-loop cards offer more flexibility and simpler compliance, which makes them an easier choice for corporate gifting. Open-loop cards involve more regulatory overhead, and businesses using them need to stay on top of federal rules and fee restrictions to avoid legal exposure.
In short
Closed-loop and open-loop gift cards sit under different regulatory regimes. Closed-loop cards are simpler to manage, with rules mainly covering expiration, fees, and consumer protection. Open-loop cards carry a heavier compliance burden, including federal oversight and stricter fee and fraud rules. Understanding which regime applies is essential for any business using gift cards as part of a rewards or gifting strategy.
