Open vs. Closed Loops
When a financial institution serves as a broker between the user of its cards and the merchants who accept their card via transaction processing, they''re called closed loop systems. American Express, Discover, and Diners Club are examples of closed-loops. There is one American Express franchise, 1 Diners Club franchise (now owned by CitiBank), and one Discover Card company.
When a Cardholder with a bankcard from Bank A uses their card to transact with a Merchant whose account is at Bank B and their transaction is processed through a different third-party, it''s called an Open-Loop system. Bankcard systems using VISA and MasterCards are examples of open-loops.
In reality, neither the Visa nor MasterCard companies issue credit cards directly to consumers. Rather, they rely upon their member banks to establish the lines and set the terms for consumer credit within their own portfolios. They also rely on the banks to offer the merchant services to enable retailers to accept their cards as forms of payment. Typically a merchant''s bank will provide such services in addition to the other banking services retailers need.
Visa and MasterCard serve as Brand Association authorities that establish and maintain the by-laws that frame the uses of their logos and the accompanying agreements between their member banks. Both Visa and MasterCard claim they have over 20,000 member banks throughout the world that form their franchises
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