What is meant by a Closed-Loop system?

A Closed-Loop system specifically refers to a payment mechanism designed for use within a defined set of merchants or for specific service providers. In this system, funds are preloaded onto a card or account and can only be used at designated locations, which can include specific retailers or a limited chain of establishments. This structure allows businesses to control where and how the funds are spent, often providing added benefits or incentives to consumers while ensuring that transactions occur within their ecosystem.

This closed nature enables the issuer to gather detailed transaction data and enhance customer loyalty through targeted promotions. It also limits exposure to broader payment networks, offering a more streamlined experience for both consumers and merchants within that specific network. The options involving consumer data storage, open transactions, or anonymous transactions do not align with the defining characteristics of a Closed-Loop system, as they pertain to different types of payment frameworks or privacy considerations.