The regulatory landscape of gift cards: The distinction between closed-loop and open-loop cards 

November 28, 2023

An open-loop gift card is a type of gift card that is issued by a financial institution (such as Visa, Mastercard, or American Express) and can be used at any merchant that accepts that type of card, typically anywhere credit or debit cards are accepted. These gift cards are not limited to a specific retailer or brand, hence the term “open-loop.”

They usually have a predetermined value set by the purchaser or the card issuer, and recipients can use them to make purchases until the balance runs out or until the expiration date, if applicable. Open-loop gift cards offer flexibility and convenience for both gift givers and recipients, as they can be used in a wide variety of locations.

In today’s fast-paced corporate world, businesses and professionals are constantly seeking innovative ways to reward their employees, clients, and customers. One of the most popular choices for gifting is the humble yet versatile gift card. Branded gift card solutions, offered by companies like epay, have become a go-to option for professionals looking to express appreciation and create lasting impressions. Besides that, gift cards are a great tool to address consumers in cash-heavy or even unbanked markets. However, have you ever wondered if gift cards are regulated? And, if so, how do these regulations differ for closed-loop and open-loop gift cards? In this blog, we’ll explore the intriguing world of gift card regulations with a focus on the distinctions between closed-loop and open-loop gift cards. 

Understanding gift card regulations 

Gift cards have evolved significantly over the years, transforming from traditional paper vouchers to modern, digital and highly customizable instruments. These changes have led to a complex regulatory environment that ensures fairness, consumer protection, and financial stability. When we speak of gift card regulations, we’re referring to the laws and rules that govern the issuance, use, and redemption of gift cards. 

For professionals and businesses looking to utilize gift cards effectively, it’s essential to understand these regulations and how they differ depending on the type of gift card. However, the terms closed loop and open loop are not at all used in a uniform manner but describe card systems in more detail with regard to card acceptance. 

Open-loop gift cards 

Open-loop gift cards, on the other hand, are those that carry a payment network (card schemes like Visa, Mastercard, American Express) and can be used at a wide range of merchants, both in-store and online. These cards provide recipients with the flexibility to choose how and where they spend the gifted value. 

Regulation of open-loop gift cards 

Open-loop gift cards are subject to more comprehensive regulations due to their broader usability and financial implications. Key regulatory aspects for open-loop gift cards include: 

Federal oversight

In the United States, open-loop gift cards are subject to federal regulations under the Electronic Fund Transfer Act (EFTA) and Regulation E. These regulations require clear disclosures, limited fees, and other consumer protections. 

Expiration and fee restrictions

Open-loop gift cards are often regulated to ensure that they have minimal or no expiration dates and restrict or prohibit certain fees, such as dormancy fees. 

Anti-fraud measures

Due to their increased potential for fraud, open-loop gift cards may be subject to additional security and anti-fraud measures to protect consumers’ funds. 

Unclaimed property laws

Some states consider unused open-loop gift card balances as unclaimed property, which may require businesses to escheat the unused balances to the state after a certain period. 

Closed-loop gift cards

Closed-loop gift cards are those that can only be used at a specific merchant or group of affiliated merchants. These cards are typically branded with the merchant’s logo and are redeemable solely at their establishments. Closed-loop gift cards are often used for promotional purposes and can be an excellent way to boost sales or reward loyal customers. In cash-heavy markets, Closed-Loop gift cards also grant access to credit card or digital payment averse consumers and act as a form of payment.  

Regulation of closed-loop gift cards

Closed-loop gift cards are subject to less stringent regulations compared to their open-loop counterparts. This is primarily because they represent a financial transaction with a limited scope. The regulations governing closed-loop gift cards generally address: 

Expiration dates

Regulations often dictate that closed-loop gift cards should have reasonable expiration dates. This ensures that customers have a reasonable period to redeem their card’s value. Expiration can vary depending on the region, e.g. in Germany vouchers are legally valid for three years. 

Fees

While some closed-loop gift cards may have maintenance or dormancy fees, these fees are usually less common and less costly than those associated with open-loop cards. 

Consumer protections

Consumers are usually protected against losing the full value of a closed-loop gift card due to loss or theft, as many regulations require a replacement for the remaining balance. This is under the assumption, that the consumer already redeemed the voucher or has proof of the voucher purchase. 

Transparency

Regulations often require clear disclosure of terms and conditions to ensure consumers are fully aware of their rights and restrictions. 

Summary

Professionals who choose closed-loop gift cards for their corporate gifting needs benefit from flexibility and the ability to customize their offerings while adhering to relatively simple regulatory requirements. 

Professionals should be aware of these more stringent regulations when considering open-loop gift cards as part of their corporate gifting strategy. Compliance with these regulations is essential to maintain a positive reputation and avoid legal issues. 

Conductor, powered by epay, gives your brand all the tools to run a Gift Card program, whether its issuing, code creation, reporting or connectivity to all the major distribution networks. With our experience we can guide you through the increasingly complex regulatory landscape. 

Gift cards have become indispensable tools for professionals looking to express appreciation, motivate employees, and retain loyal customers. Understanding the regulations that govern gift cards is crucial to ensure compliance, consumer protection, and a positive gifting experience. 

In summary, gift card regulations differ significantly between closed-loop and open-loop gift cards. Closed-loop gift cards come with simpler regulations that mainly focus on expiration dates, fees, and consumer protections. Open-loop gift cards, on the other hand, are subject to more comprehensive regulations due to their widespread usability, including federal oversight, stricter fee restrictions, and anti-fraud measures. 

Professionals who choose gift cards, whether closed-loop or open-loop, as part of their corporate gifting strategy can do so confidently by partnering with companies like epay that understand and adhere to these regulations. This way, businesses can provide thoughtful and compliant gifting solutions, making a lasting impact on recipients and staying on the right side of the law.