The two categories
A closed-loop card is redeemable inside one merchant or one family of brands. The retailer is the issuer, the money is a liability on their books, and redemption is a bookkeeping entry against their own inventory. Because they want you spending with them, they almost never charge you to hold one.
An open-loop card carries a payment network logo and behaves like a prepaid debit card. A bank issues it, and it is accepted anywhere that network is accepted. The flexibility is genuine, but you are now paying for a financial product rather than a merchant’s promise, and the fee structure reflects that.
Where the money goes on each
On a closed-loop card, the retailer earns by keeping your future spending captive, and by the slice of value that never gets redeemed at all. There is rarely a purchase fee because the product is a customer-acquisition device, not a revenue line. The cost to you is flexibility, not cash.
On an open-loop card, nobody is capturing your future spending, so the economics have to come from somewhere else. That somewhere is fees — typically a purchase or activation fee scaled to the load amount, and often a monthly service fee that begins after a period of inactivity. You are effectively paying a small premium to convert cash into cash that works nearly everywhere.
How they fail differently at the till
Open-loop cards introduce a failure mode closed-loop cards do not have: the authorisation hold. Restaurants, fuel pumps, and hotels routinely authorise more than the final amount to cover a tip or a top-up. On a card with a fixed balance, that hold can decline a transaction you could comfortably afford, and the held amount can stay locked for days.
Split payments are the other divergence. Most retailers handle a closed-loop card with an insufficient balance gracefully, taking the remainder on another method. Open-loop cards at automated terminals frequently just decline. If you are down to the last few dollars on a network card, plan to use it somewhere with a human operating the register.
Legal protection is not symmetrical either
Federal rules on expiry and dormancy fees apply broadly across both categories, which is why neither type should be expiring on you within five years of funds being loaded. But the rules governing unauthorised transactions and error resolution are a different body of law, and gift cards are largely carved out of the protections that cover ordinary prepaid accounts.
Practically, this means the flexibility of an open-loop card does not buy you debit-card-grade fraud rights. Some bank issuers extend voluntary zero-liability policies to these products, and those policies are worth reading before you buy, because they are the actual protection — not the network logo on the front.
Choosing between them honestly
If you know where the recipient shops and they shop there regularly, closed-loop is the better product. No purchase fee, no dormancy risk in the ordinary case, and often a slightly better experience at the till. The one exception is a retailer whose survival you would not bet on.
Open-loop is worth its fee in a narrow band of cases: you genuinely do not know the recipient’s preferences, the amount is large enough that a few dollars of fee is immaterial, or the recipient needs to spend it somewhere unpredictable. Outside that band, you are paying a conversion fee on cash — and cash has no fees, no expiry, and no dormancy clause.