Economic Growth – Any country with a solid, stable, and growing economy always has a very strong payment system. The impact of electronic payments, i.e., money in the form of bits and bytes rather than tangible items like paper or coins, on economic growth is much higher, and it’s a proven fact. Payments and monetary and financial stability make a powerful economic foundation, and it’s proven in many European countries.
This post was originally published on May 26, 2015, on LinkedIn. To read its original post, click here. This post will help to have a basic and fare understanding of payment intelligence.
Payment Intelligence & National Payment Systems
Payment intelligence around national payment systems is extremely critical and important to know. Normally, we have two types of payment systems in economies and the payment industry. Enabling digital payments for economic and personal development Economic power, ranking, and payment environments, as mentioned below, have their own benefits and shortcomings.
- “CLPS” – Closed Loop Payment Systems
- “OLPS” – Open Loop Payment Systems
Cash is the most widely accepted payment method. This designates cash as the king, but mobile payments prove themselves to be economic freedom. Although it (Mobile Money) had been designed as a peer-to-peer payment system, it has gone much beyond the basic idea, and as of today, it helps with utility bill payments, airtime top-ups, micro-savings, microloans, etc., and this forms mobile payment ecosystems.
Africa, especially the eastern and southern parts, is the home of mobile money. Mobile payments are the most frequently used and widely accepted technological payment instruments. Mobile Payment Service Providers (MPSP): A company or organization that partners with or develops their own open- or closed-loop payment instrument or card issuer to provide its business customers with a commercial payment tool
Payment Intelligence & Its EcoSystems
Payments Ecosystem: The payments market has mainly two types of them, i.e., open loop and closed loop. There is no fixed definition for open-loop payment systems (OLPS) and closed-loop payment systems (CLPS). Different players, as per their needs and markets, design and define an open and closed dichotomy 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 payment 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 its own open or closed loop” market.
Intelligent Payments – A New Face of CashLess Payments
How the bundle of machine learning (most people loosely interchange ML with Artificial Intelligence though) technologies are changing and will continue to change our Mobile Payments experience? The demand for easy and hassle-free services around payment channels will continue to accelerate. We have seen the transformation of our payment methods from barter to now mobile payments.
“Open Loop Payment System” is an ecosystem where multiple parties are involved for every transaction for an example – Bank as an Issuers deals with the 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, for 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 the small group without middle-man partners example mobile money in any MNO is a mostly closed loop.
Benefits – “Open Loop Payment System”
- Cost-effective/efficient implementation – Difficult to manage but once done and setup gets process-driven thereafter 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 the flexibility and power of the 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 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 – Inline with the last point
Shortcomings – “Closed Loop Payment System”
- Merchant qualifications & credential checks – 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 a 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 changes between the issuer and the acquirer.
- Since it is a franchise setup, there is only one franchise 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.
On the other hand, when it comes to saying no to Cash, every merchant finds it difficult for many reasons. Responses to valid argument on (if any) “if not Cash” then why not mobile or digital payments will cover in upcoming posts.
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” or very useful with potential (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 in which you operate and synchronized with your strategies and goals? Another mixed version of open and closed is coming to market. Google Android M with built-in fingerprint support and Android Pay at I/O 2015
Points to Note:
it’s time to figure out when to use which tech—a tricky decision that can really only be tackled with a combination of experience and the type of problem in hand. So if you think you’ve got the right answer, take a bow and collect your credits! And don’t worry if you don’t get it right.
Feedback & Further Questions
Do you have any burning questions about Big Data, “AI & ML“, Blockchain, FinTech,Theoretical PhysicsPhotography or Fujifilm(SLRs or Lenses)? Please feel free to ask your question either by leaving a comment or by sending me an email. I will do my best to quench your curiosity.
Books & Other Material referred
- AILabPage (group of self-taught engineers/learners) members’ hands-on field work is being written here.
- Referred online materiel, live conferences and books (if available)
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