Closed-loop mobile payments and the benefits for retailers

The battle for more accurate, usable data on consumer spending is growing every day. Retailers are looking for new ways to learn about consumer buying habits, buying behaviours, and demographical information which helps them devise smarter ways to engage consumers and influence buying behaviour.

However, there are very few systems out there that work well enough and new consumer behaviour is adding complexity to this already hard to crack data challenge.

Today, consumers are finding new ways to spend their money without using physical cash. Mobile payments and mobile money, ideas now gaining traction in South Africa, were only dreams a mere five years ago. Using mobile phones, consumers are turning to mobile cash for grocery shopping, petrol and even prepaid airtime.

So then, what’s a retailer to do? What opportunities are available for the retailer who wants to get ahead of the information deficit curve? In this blog post we share what a closed-loop mobile payment is and the opportunity available to retailers that adopt the technology.

Understanding Closed-Loop Payment Networks

Closed-loop payment networks facilitate transactions between consumers and merchants – without the need for bank interactions. This means that a consumer transacts directly with a merchant during a transaction, often eliminating typical transaction fees incurred had a bank been part of the transaction.

This distinction is significant for merchants. Typical open-loop network transactions include service fees that merchants incur for every transaction; fees that can erode long-term profitability fast. Transaction fees are not the only fees that merchant are subject to. Banks provide point of sale devices at rates starting anywhere from R600 to R800 per month, all of which are usually subject to a once-off setup fee.

On the other hand, some implementations of closed-loop networks offer zero transaction fees, widening profit margins for retailers. Closed-loop payment networks therefore present a clear cost benefit for retailers in already tough and price sensitive markets.

A closed-loop payment network transaction.

Closed-loop payments are more common than you’d think. An example of a more widely-used closed-loop payment system is the use of a gift card. Once purchased, a gift card allows a consumer to redeem the monetary value with the predefined retailer. The closed-loop network that makes spending possible allows a consumer to transact directly with the retailer, without the need for a bank to approve the transaction as the gift card is preloaded with money issued by the retailer.

Closed-loop payment networks present retailers with opportunities previously only imaginable. As closed-loop networks are designed to manage consumer–retail transactions, the network is able to gather large amounts of data on consumer buying habits and buying behaviours not shared in open-loop networks.

For example, a pizza restaurateur who is part of a closed-loop network is able to gather deeper consumer insights than ever before to make more informed decisions about stock requirements, staffing needs and special offers.

As the restaurateur begins to plan for what he knows to be a busy season, he is not only aware that he will need to buy a certain amount of flour and a variety of toppings, but he also has data that shows exactly which toppings are customer favourites, which customers enjoy having the toppings, and what those unique topping combinations are.

The ways in which the restaurateur can use this data don’t stop there. Understanding buying patterns and behaviours of a certain customer segment, he can introduce a new pizza that comes with a combination of toppings that his customers love, and offer a special discount to drive sales volume and have a highly successful busy season.

This level of data analysis gives merchants the ability to make smarter decisions and capitalise on opportunities as they happen.

Mobile Phones and Closed-Loop Payments

Introducing mobile phones into the closed-loop network structure creates another set of possibilities for retailers. Mobile phone growth rates are rocketing! Craige Fleischer, director of integrated mobility at Samsung SA, says that smartphone penetration alone is between 37% to 47%, and according to Statista, South Africa is set to see smartphone growth rates reach 22 million by 2020 – up from an estimated 16.1 million established earlier this year.

Number of smartphone users in South Africa from 2014 to 2021 (in millions)*

Image source: Statista

Closed-loop mobile payments allow savvy retailers to gather more unique datasets from consumers using mobile applications. Because mobile phones are an inescapable part of everyday life, consumers are comfortable sharing anything from personally identifiable information to reviews and recommendations with application developers.

In Amazon Go, a brick-and-mortar store where shoppers activate a shopping app to purchase goods, the e-commerce giant is able to track all sorts of user analytics.

Using cutting-edge artificial intelligence, machine learning and machine vision, Amazon is able to find out what products customers pick up, where they spend time deciding what to pick up, and what customers leave the store with. Digging into this data, the retailer’s marketing team is able to create smarter mobile marketing campaigns to entice consumer spending through discounts and product pairing, as well as other important decisions about product pricing, store layout and merchandising.

Closed-loop payment networks are a part of a very interesting and potentially lucrative future for retail merchants. Beyond the possible transaction fee savings, merchants interested in creating the perfect buying experience for consumers are able to use large datasets to pinpoint unique buying and behavioural patterns previously out of reach. Thanks to mobile phones and applications, creating smarter mobile marketing campaigns and unique loyalty program offers will also help merchants realise greater success as they battle for their share of consumers’ spending.