Prepaid cards operate within either an “open” or “closed” loop system. It is an important distinction, as different compliance and reporting regulations apply to sellers of prepaid access, and different thresholds are in effect, abiding by which exempts the sellers from the requirements to collect purchasers’ data, file suspicious activity reports (SAR), and so on.
Open loop prepaid cards can be used for purchases at any merchant that accepts cards issued for use on the payment network associated with the card. “Closed loop” is defined in FinCEN’s July 2011 Prepaid Access Final Rule as “access to funds or the value of funds that can be used only for goods or services in transactions involving a defined merchant or location (or set of locations), such as a specific retailer or retail chain, a college campus, or a subway system.”
Prior to 2011, FinCEN did not interpret the definition of stored value to include closed system products such as a mall-wide gift card program, and some ambiguity remained even after. In its 2016 FAQs, FinCEN indicated “defined merchant” is broader than entities linked through common ownership or corporate affiliation. Specifically, “defined merchant” includes “additional unaffiliated partner merchants” joined for the “limited purpose of providing a closed loop prepaid access program.”
This would cover shopping mall-wide cards accepted by various merchants located there. What about multi-brand gift cards? The answer seems less clear: “As long as the universe of merchants is identifiable and articulated to the purchasing public, and the partner merchants are joined for the limited purpose of providing a closed loop prepaid access program, such an arrangement falls within the term ‘defined merchant.'” But is the merchant consent required for declaring them “partners” – that is, do they need to be “partners” among themselves in some way, or can a third party that each of them has partnered with group them arbitrarily?
There are some gift cards operating on an open loop payment network, but restricted for acceptance only at select merchants. For example, “Go Shop” card featured above runs on VisaNet and even contains instructions for the cashier on the front, to enter it as credit card, yet it is restricted to the six retailers pictured on the front: Aerie, American Eagle, Bed Bath & Beyond, Lowe’s, Macy’s and Ulta. Attempts to use it at other merchants are automatically declined. What does it fall under?
Lastly, what about the recent trend of “swappable” gift cards, which are not accepted at any merchant at all “as is”, but need to be converted (or “swapped” or “redeemed”) for a specific merchant’s gift card, which in turn may be used? Do these fall under “open” or “closed” loop rules? Please share your thoughts!