Abstract – This post was originally published on 26-May-2015 on Linkedin (https://www.linkedin.com/pulse/payment-environments-vinod-sharma). Any one looking for some meaning out of closed loop payments systems or open loop payments systems environment and benefits & shortcoming for both then this article can help but only on very high level and understanding purpose only. Readers who are interested to know some high-level basic information on the subject of payments especially mobile payments environments will find this useful. Experts in any form of payments like mobile, Internet, paper or card may find this article at a very high level and too basic but that’s the real idea here and in case needs detailed information, welcome to get in touch directly
Introduction – Since time immemorial, cash has been the most widely accepted method designating cash as the king but mobile payments to prove it self as economic freedom. Although it (Mobile Money) had been designed as a peer-to-peer payment system but it has gone much beyond the basic idea and as on date it helps Utility bill payments, Airtime topup, micro savings, micro loans etc. and this forms Mobile Payments ecosystems. Africa especially the eastern / southern part is the home of Mobile Money. Mobile Payments are most frequently used and widely acceptable technological payment instruments
Main Story – Payments Ecosystem – Payments market has mainly 2 types of them i.e. Open Loop and Closed Loop. There is no fixed book definition for Open Loop Payment System (OLPS) and Closed Loop Payment System (CLPS). Different players as per their needs and markets they design and define open and closed dichotomy and have proliferated their business and markets for decades. All developments for both open systems and closed systems are in play and in parallel define by business strategies and market dynamics. Mobile payments space also on same track and this article focuses on the matter of open vs. closed loop mobile payments solutions.
Before start our ride on this subject and talk about advantages and disadvantages of these respective options, Lets take a small clarification on what exactly is meant by “open loop” and “closed loop” in the mobile payments domain. Each payment service provider normally defines their own “Open / Closed Loop” market. “Open Loop Payment System” is an ecosystem where multiple parties are involved for every transaction for an example – Bank as an Issuers deals with consumer, Brands are the cards: Master, VISA, American Express, etc., Processors an inter-mediatory; who process transactions, Acquirers are the banks who the merchant deals with and Merchants normally consumer interface for transactions, example A general purpose card carrying the Visa, MasterCard, Discover or American Express logo that can be used anywhere those cards are accepted. “Closed Loop Payment System” is an ecosystem where customer experience is in focus program and can be a complement to Open-Loop, well defined and small group without middle-man partners example Mobile Money in any MNO is mostly closed group. Mobile Payment Service Providers (MPSP)-A company or organization that partners with/develop their own an open- or closed-loop payment instrument or card issuer to provide its business customers with a commercial payments tool.
Benefits – “Open Loop Payment System”
- Cost effective / efficient implementation – Difficult to manage but once done and setup gets process driven there after Mobile payment services increasingly interconnect with other payment services. MNOs are partnering with electronic funds transfer networks to allow domestic customers to access ATMs for cash withdrawals by entering a code, rather than swiping a payment card. To allow customers international access to cash, MNOs are partnering with payment card issuers to offer open-loop prepaid cards.
- Customer loyalties – Customer/subscriber gets more and more loyal as they start tasting the service and experience the best with flexibility and power of product.
- Incremental sales – Sales for merchant started incrementing due to customer experience, ease of use and convenience & flexibility.
- Marketing opportunity – Brand establishment happens automatically in slow but very strong foundation
- Guaranteed payment – Payments are guaranteed to the acquirer from issuer no matter what happens at merchant or subscriber level.
- Minimal credit risk – Inline with last point
Shortcomings – “Closed Loop Payment System”
- Merchant qualifications & credential checks – More bigger and wider it gets, more problematic and near impossible are not possible to get credentials validation for your merchants.
- The inability to turn a merchant on / off at will.
- Geographic controls and reach: If not controlled well this can create issues on legal, brand and business front
Benefits – “Closed Loop Payment System”
- Control over merchant qualifications and credentials
- The ability to turn a merchant on / off at will.
- Limited reach. – Less risk & assured security between these two cases, there can be a range of mobile payment services offered
- Financial institutions and MNOs who have partnered to create agent networks to reach new customers in geographic areas which are typically underserved by the banking system.
- MNO retail outlets and other storefront retailers offer similar services to those of limited purpose bank branches, signing up customers, taking in deposits, and paying out cash to settle mobile payment transactions.
- Branding the payment service may be branded under the name of the bank or under the name of the MNO.
Shortcomings – “Closed Loop Payment System”
- Limited acceptance to specified merchants / service availability – Under the MNO-centric mobile payment model, MNOs offer mobile payment services as a means to add value to their core communications service. Commonly, customer funds are held in a prepaid account by the MNO itself or a subsidiary.
- Time / cost to implement merchant & agent network and card acceptance – Mobile payment services that are offered for purchases & transactions from a single, or limited number of merchants & agents, with limited value for products related to the use of a mobile phone. The operation in this model, the issuer / wallet provider (having the relationship with the cardholder or Mobile Money Wallet holder) and the acquirer / wallet related service point (having the relationship with the merchant or agents) is the same entity. This means that there is no need for any charges between the issuer and the acquirer.
- Since it is a franchise setup, there is only one franchisee in each market location, which is the incentive in this model. There is no competition within the brand; rather you compete with other brands. Mobile payment services are comparable to closed-loop prepaid cards and the guidance on AML/CFT measures and regulation envisaged here are not intended to apply to these services. However, this guidance may apply where ‘airtime’ funds can be transferred and are accepted for payments or an alternative currency.
Another mixed version of open & closed coming to market Google Android M with built-in fingerprint support and Android Pay at I/O 2015
Conclusions: What are the implications of your choice? Is it going to change the world (unlikely), be a significant “win”, be a nice hack, or simply serve as a road sign indicating that this path is a “waste of time” / “ Very useful with potentials ” (all of the previous results are useful). Are your results general, potentially generalizable, or specific to a particular case? Which system is useful and needed for the business considering the market you operate and synchronised with your strategies and goals.
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