Four differences between open- and closed-loop payment systems
Open- or closed-loop payment system? These terms are starting to turn the heads of savvy business owners across South Africa. As technology continues to drive consumer adoption of new and more convenient methods to interact with companies and pay for products and services, business owners who want to stay competitive are looking for smarter ways to attract more consumers and increase wallet spend.
And all of this makes sense. Why wouldn’t you want to position your business for optimal growth?
Open-loop payment systems have been around since the 1980s. Card industry titans including MasterCard and Visa created a straightforward way for businesses to accept electronic card payments.
But there’s more to be considered when it comes to how open- and closed-loop payment systems compare to each other. Questions surrounding the way in which both systems are modelled and what benefits merchants gain are usually at the top of the list for business leaders eager to drive bottom line growth.
How open- and closed-loop payment systems compare
Having a firm grasp of the difference between open- and closed-loop payment systems puts you at an advantage. As you’ll learn below, both payment systems offer certain benefits. Each is uniquely positioned to give businesses a certain degree of insight and flexibility – important elements that sustainable enterprises need to not only keep their doors open, but also to grow and to be competitive.
Open-loop payment systems are based on banking institutions that facilitate consumer payments. Because consumers are bank customers, payments made for purchases are deducted directly from the banking customer’s account.
In closed-loop payment systems, consumers preload funds into digital wallets. As purchases are made, funds from the digital wallet are deducted in real-time.
Open-loop payment systems have long been highly regulated. Much of the regulation is to prevent criminal activity, particularly money laundering. As such, with the bulk of open-loop systems users being banking clients, many of the regulation headaches are managed by the bank account creation process. Proving that a new customer can be held accountable for any fraudulent activity related to their bank account is achieved by capturing personally identifiable information as well as place of residence.
In a closed-loop payment system, on the other hand, are less regulated due to their design. They allow cash to be deposited with and without the need for cards or bank accounts being linked to the digital wallets, depending on how the payment system has been modelled.
In closed-loop payment systems where a user’s digital wallet is funded with a credit card, the user account creation process involves the collection of very basic information (first and last name, a contact number, and email address) along with the credit card number, expiry date and CVV digits.
While you don’t have to prove that you are who you say you are as you would when creating a bank account, because you’re funding your digital wallet with a credit card, tracking suspicious spending activity back to a specific user would be simple to do because personal identifiable information was used to create the bank account with which the credit card is associated.
Modern closed-loop solutions, like TuYu’S B2B offering, allow businesses to preload funds into a digital wallet via a secure online platform without the need to link any credit cards.
Beyond the ability to make purchases on credit, open-loop network reach – or the ability for a consumer to purchase with a credit or debit card almost everywhere – makes open-loop payment networks popular. Open-loop networks are largely backed by banking institutions which enable businesses to accept credit and debit card transactions using devices like speed points.
Closed-loop payment networks are not typically as large; however, they are growing rapidly. Like the open-loop business customer acquisition model, closed-loop payment providers acquire business customers to join their networks as well as create mechanisms for consumers to transact with businesses. This model saw American Express, the largest closed-loop payment network in the world, grow their credit card circulation to an estimated 57.6 million in 2015.
Image source: WalletHub
In the more rigid open-loop payment systems, financial institutions are not able to share datasets that could help businesses design better customer experiences, or capitalise on unique consumer needs. On the other hand, one of the most attractive features of closed-loop payment systems is their ability to provide merchants with more data on consumer buying patterns and behaviour.
Closed-loop solution also allow merchants to control consumer spending by issuing funds that can only be used with a single merchant. This model is one of the most popular for merchants as they can drive sales through discount offers and value added services.
Another factor increasing the adoption rate of closed-loop payment systems by merchants is the upsurge of mobile phone growth. The use of mobile applications by retailers has increased as they’ve quickly found that customer engagement rates are higher.
One such example comes from local coffee store and restaurant, Vida Cafe. Vida wanted to find a new way to build a stronger loyalty programme for their customers. Having tried physical loyalty cards, the coffee outlet learned that customers either tend to lose them or just didn’t find them as valuable to use. So, Vida decided to build their own mobile application based on wiGroup’s wiCode Platform.
The merchant is now able to gather real-time reporting on customer transactions which allows them to provide better service, distribute coupons and offers to drive sales and reward customer behaviour, and communicate and engage directly with their customers across South Africa.
But it doesn’t stop there. Vida customers are able to go beyond just buying coffee; they can also earn instant cash-based rewards and share vouchers with friends – growing Vida’s footprint with a simple tap on a smartphone.
How Vida Cafe leverages closed-loop payments technology and a mobile app to build stronger relationships and drive engagement with their customers.
More sophisticated payment solutions
Corporates looking to take advantage of the best of both payment solutions wouldn’t be scoffed at for thinking it possible. TuYu offers corporate clients access to either an open- or closed-loop solutions. With the open-loop solution, businesses can open up consumer digital wallet spending at over 70,000+ till lanes across major SA retailers; using the closed-loop solution, consumer spending can be linked to certain merchants that can also provide additional discounts to consumers, offering more controlled and guaranteed spending at partner merchant stores.
As businesses search for smarter ways to grow and engage their customers, it’s clear that technology will be at the heart of sustainable growth. Open-loop payment systems have been around since the 1980s, however, rapid adoption rates of mobile phones and applications, as well as the integration with efficient closed-loop payment systems are helping merchants bypass the old ways of servicing customers to create closer, more personal engagements and stronger brand experiences.