Friday, April 06, 2012

Closed Loop vs Open Loop Models in Card Processing

Found this good article on the internet that describes the differences between closed loop and open loop models.
Excerpts from the article:

"Open-loop payments networks, such as Visa and MasterCard, are multi-party and operate through a system that connects two financial institutions—one that issues the card to the cardholder, known as the issuing financial institution or issuer, and one that has the banking relationship with the merchant, known as the acquiring financial institution or acquirer—and manages information and the flow of value between them.
In a typical closed-loop payments network, the payment services are provided directly to merchants and cardholders by the owner of the network without involving third-party financial institution intermediaries. Closed-loop networks can range in size from networks such as American Express and Discover, which issue cards directly to consumers and serve merchants directly."


The site also has another interesting link on how companies such as American Express make money and the competitive advantage they gain because of the closed loop model.