By Thish De Zoysa of Their Perfect Gift
Ever wonder why you have to pay a premium for a Mastercard or VISA Gift card, but you pay face value or even negotiate a discount for a retailer-specific gift card?
Well, let me try and enlighten you. I’ll try and keep it brief and keep jargon to a minimum.
This is a complex topic, but let’s start from the beginning.
So what exactly is an “open loop” gift card?
“it’s a general-purpose cash card, that can be used anywhere that the payment rails of the card are accepted”,
And only to the balance originally loaded to the card!
This essentially means anywhere Mastercard, VISA, American Express, Diners Club, Union Pay, etc are welcome. Such gift cards are non-reloadable and have no access to ATMs.
Such cards that ARE reloadable and therefore have access to ATMs, are more commonly called “general spend prepaid cards” and are what many “neo banks” provide to their users.
The Opposite of an “open loop” Gift card is one that can only be used at a specific retailer. These are known as “closed loop”. These can also be reloaded.
Open Loop Gift card “Programmes” operates in a complex and costly supply chain environment.
The supply chain
Unlike closed loop cards, open loop cards are regulated products.
The technology and regulatory environment required to operate open loop Programmes is very similar to that of a bank debit card. There is:
1) “The Scheme” (e.g. Mastercard, VISA);
2) The “Issuer” (another regulated entity that is ultimately responsible for the card);
3) The “Processor” (the folks who provide the tech that allows the Scheme to talk to the retailer’s tills, the Issuer and Programme Manager);
4) The “Programme Manager” (the folks who manage the relationships with parties 1, 2, 3 and 5); and last but not least
5) The Printer (as even these guys must have Scheme approval, that means not just any printer can be doing this).
The Gift Card “Programme” (which could be a different company altogether) can buy services from all the above players or they can be all these players (except the Scheme). This is a great example of DeFi (Decentralised finance) in action.
The funds loaded to an Open Loop card is held in a ring-fenced account provided by a Tier 1 Bank, with the Issuer being regulated not only by the scheme but also by the financial regulatory body of the country where the card is Issued. In the case of the UK, it’s the FCA.
The commercial structure
The first thing to remember is that all the parties in the provision of an open loop card must be paid when the card is used. That means folks 1 – 5 above, all make a charge before, during and sometimes after the transaction. If operating on a DeFi model, then it’s a variable cost. If it’s centralised, then it can be quite a heavy Fixed Costs (but the Scheme always gets paid).
The supply chain partners are usually contracted to receive a monthly level of income from the Programme irrespective of how the Gift card programme makes its money.
In addition, the Issuer will require a “float” from the Programme. The more cards/load the Programme has in distribution, the larger the float.
This massively differs from a Retailer’s own Gift cards where the funds are not required to be ring-fenced and can be mixed together with its own trading money.
As such the retailer is able to offer their product at a discount. The Gift card for a retailer provides them with:
- a source of upfront working capital;
- the benefit of any non-spend (or “breakage”); and
- the overspend when the cardholder is in the retailer’s environment.
So it is in the interest of ALL retailers to not only have a gift card programme but to get as many of them out there as possible.
In contrast, funds loaded to open loop cards cannot be utilised or loaned. This is the security feature that is embedded in the product. A pure open loop programme does not make money from retailers.
The “interchange” people often referred to on open loop cards is negligible and is only 0.2% in Europe. Legally it also belongs to the Issuer and not the Programme. The costs significantly outweigh any revenue here.
Gift cards in all their forms rock!
They’re a store of value and can really add huge value to any reward, recognition or loyalty programme.
But open and closed loop offerings are not the same and if you want to give the recipient the freedom and security of an open loop gift card, then be prepared to pay a premium for it.
Their Perfect Gift’s “sign-up” page is now open to purchasers and recipients of our Gift Card – 3% return to you, and 50% profits donated to good causes (UK only currently)