Open-Loop Prepaid Cards

Open-loop prepaid cards are payment instruments that allow users to make transactions across a wide network of merchants and service providers, unlike closed or semi-closed prepaid instruments that are restricted to specific issuers or merchant locations. In India, open-loop prepaid cards form an important component of the digital payments ecosystem and contribute to financial inclusion, cashless transactions, and the formalisation of economic activity. These cards are typically issued by banks and authorised entities in partnership with card networks and operate within the country’s regulated financial framework.
Open-loop prepaid cards are pre-funded instruments, meaning users can spend only the amount loaded onto the card in advance. They are increasingly used for retail payments, online purchases, travel, corporate expenses, government benefit disbursement, and remittances, making them relevant to both banking operations and the broader Indian economy.

Concept and defining features of open-loop prepaid cards

Open-loop prepaid cards are payment cards that can be used at any merchant accepting the associated card network, both online and offline, subject to regulatory conditions. Unlike debit cards, they are not directly linked to a bank account, and unlike credit cards, they do not involve borrowing or credit risk for the issuer.
Key features of open-loop prepaid cards include:

• pre-funded value with no overdraft or credit facility;
• acceptance across a wide merchant network;
• usage for domestic and, in some cases, international transactions;
• suitability for users without traditional bank accounts;
• enhanced control over spending due to predefined limits.

These features make open-loop prepaid cards particularly useful for individuals seeking convenience and safety without exposure to credit.

Regulatory framework in India

In India, open-loop prepaid cards are regulated as part of the prepaid payment instruments (PPI) framework. Issuance, operation, and usage are governed by guidelines issued by the Reserve Bank of India, which lays down eligibility criteria, capital requirements, KYC norms, transaction limits, and consumer protection measures.
Only authorised banks and non-bank entities approved by the RBI are permitted to issue open-loop prepaid cards. These instruments are subject to strict rules relating to fund loading, redemption, interoperability, and reporting, ensuring systemic stability and user protection.

Types of open-loop prepaid cards

Open-loop prepaid cards in India can be classified based on usage and purpose. General-purpose prepaid cards are widely used for everyday retail and online transactions. Gift cards and payroll cards are issued for specific use cases such as employee benefits or incentives but remain usable across multiple merchants.
Government and corporate prepaid cards are used for subsidy disbursement, travel allowances, and expense management. Some open-loop prepaid cards are reloadable, allowing repeated use, while others are non-reloadable and designed for single-use or limited-duration purposes.

Role in banking and financial services

For banks and authorised issuers, open-loop prepaid cards offer an opportunity to expand their customer base beyond traditional account holders. They reduce the cost of servicing low-balance customers and enable the provision of payment services without full-fledged deposit accounts.
From an operational perspective, these cards support transaction-based revenue through interchange fees and enhance banks’ participation in the growing digital payments market. They also help institutions comply with financial inclusion objectives by offering simplified, low-risk payment instruments.

Contribution to financial inclusion

Open-loop prepaid cards play a meaningful role in advancing financial inclusion in India. They provide access to electronic payments for individuals who may not meet the requirements for opening bank accounts or who prefer limited financial exposure. Migrant workers, students, first-time users of digital finance, and beneficiaries of government schemes often rely on such instruments for secure and convenient transactions.
By familiarising users with digital payment behaviour, open-loop prepaid cards can serve as an entry point into the formal financial system, potentially leading to broader adoption of banking products over time.

Impact on the Indian economy

At the macroeconomic level, open-loop prepaid cards support the shift towards a less-cash economy. Increased use of digital payment instruments improves transaction transparency, reduces the costs associated with cash handling, and strengthens the efficiency of payment systems.
These cards also facilitate smoother flow of funds in sectors such as retail, travel, e-commerce, and services. In government and corporate use cases, they improve targeting, reduce leakages, and enhance accountability in fund disbursement.