Payment Environments – If anyone is looking for some meaning out of closed loop payments systems or open loop payments systems environments and the benefits and shortcomings of both, then this article can help, but only on a very high level and for understanding purposes. Readers who are interested in knowing some high-level basic information on the subject of payments, especially in mobile payment environments, will find this useful.
Experts in any form of payment, 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 you need more detailed information, please get in touch directly.
Payment Environments – Outlook
Since aeons, the preferred method of payment has been cash, and it has been dubbed the ruler. However, mobile payments have emerged as a means of financial liberation. Despite its initial purpose of enabling peer-to-peer transactions,
Mobile Money has evolved into a comprehensive payment solution, providing services such as utility bill payments, airtime topup, microsavings, microloans, and other offerings, resulting in the creation of mobile payment ecosystems. Mobile money has its roots in Africa, specifically in the regions of the east and south. Mobile payments have become the go-to option for technological payment methods that are frequently utilized and accepted globally.
Mobile Payment Service Providers (MPSPs) refer to companies that collaborate with or create their own payment instruments or card issuers, both open and closed-loop, to provide their commercial clientele with a reliable payments system.
Payments Ecosystem
The payments market has mainly two types: open loop and closed loop. There is no fixed book definition for open loop payment systems (OLPS) and closed loop payment systems (CLPS). Different players, as per their needs and markets, design and define open and closed dichotomies and have proliferated their businesses and markets for decades. All developments for both open and closed systems are in play and are defined in parallel by business strategies and market dynamics. Mobile payments are also on the same track, and this article focuses on the matter of open vs. closed-loop mobile payments solutions.
Before we start our ride on this subject and talk about the advantages and disadvantages of these respective options, let’s 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 loop” or “closed loop” market.
- “Open Loop Payment System” is an ecosystem where multiple parties are involved in every transaction. For example: Banks as issuers deal with consumers; brands are the cards: Master, VISA, American Express, etc.; processors are intermediaries who process transactions; Acquirers are the banks that the merchant deals with, and merchants normally provide the consumer interface for transactions. 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 the focus and can be a complement to Open-Loop, a well-defined and small group without middle-man partners, for example. Mobile money in any MNO is mostly a closed group.
Open Loop Payment System – Benefits and Shortcomings
Some of the benefits and shortfalls are listed below.
- Cost-effective and efficient implementation: difficult to manage, but once done and setup gets process-driven, 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 loyalty: the customer or subscriber gets more and more loyal as they start tasting the service and experience the best flexibility and power of the product.
- Incremental sales: Sales for merchants started incrementing due to customer experience, ease of use, convenience, and flexibility.
- Marketing opportunity: brand establishment happens automatically on a slow but very strong foundation.
- Guaranteed payment: Payments are guaranteed to the acquirer from the issuer no matter what happens at the merchant or subscriber level.
- Minimal credit risk—in line with the last point
Shortcomings – “Closed Loop Payment System”
- Merchant qualifications and credential checks The bigger and wider it gets, the more problematic and near impossible it is to get credentials validated for your merchants.
- The inability to turn a merchant on or off at will
- Geographic controls and reach: If not controlled well, this can create issues on the legal, brand, and business fronts.
Closed Loop Payment System – Benefits and Shortcomings
Some of the benefits and shortfalls are listed below.
- Control over merchant qualifications and credentials
- The ability to turn a merchant on or off at will.
- Limited reach, less risk, and assured security Between these two cases, there can be a range of mobile payment services offered.
- Financial institutions and MNOs have partnered to create agent networks to reach new customers in geographic areas that 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 done under the name of the bank or under the name of the MNO.
Shortcomings – “Closed Loop Payment System”
- Limited acceptance to specified merchants and service availability: Under the MNO-centric mobile payment model, MNOs offer mobile payment services as a means to add value to their core communications services. Commonly, customer funds are held in a prepaid account by the MNO itself or a subsidiary.
- Time and cost to implement merchant and agent networks 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 providandr (having the relationship ith the cardholder or Mobile Monandy Wallet holder) and the acquirer / wallet related service point (having the , lationship 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 is 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.
Conclusions:What are the potential outcomes of the decision you make? Will it have a significant impact, be a helpful solution, or simply indicate that the approach is ineffective or beneficial? All of these outcomes have value. Are your findings applicable universally, potentially transferable, or specific to a certain scenario? Which system aligns with your company’s objectives and market demands? At I/O 2015, a new version of a mixed open and closed platform with Android Pay and fingerprint recognition, called Google Android M, is set to launch.
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Excelent read….very informative