Cash usage has declined when it comes to basic payments, as people now keep their debit and credit cards handy. Instant payments have also revolutionized the way users make payments.
Amid all these changes, if there’s one thing that has improved the experience, it’s open-loop payment systems.
Open-loop payment systems are found worldwide, enabling swift, contactless payments. One of the most insistent uses of the open-loop payments system is in public transportation. Several governments are working on finding ways to implement it effectively.
In this blog, we will explore open-loop payment systems and try to understand how they work. We will also try to unravel some of the global trends around open-loop payments and their benefits.
Without further ado, let’s get started!
What is an Open Loop Payment System?
An open-loop payment system is an arrangement that allows a user to make payments with any resource irrespective of it being from the same financial institution.
This means irrespective of what bank the payment is made from, it will be settled in your account easily. With open-loop payment systems, you can make transactions between accounts from different banks, cards, or wallets.
The system is widely accepted across the globe and is used for a variety of payment methods such as credit cards, debit cards, prepaid cards, gift cards, etc. The best thing about this system is that it allows a merchant to process payments irrespective of which financial institution the payer uses.
Similarly for the payer, it is easy to use any debit/credit card to make the payment, irrespective of which bank the payee uses.
With open-loop payment systems, daily transactions such as public transportation, grocery shopping, etc. become super convenient. Even the best mobile banking apps support open-loop payments as they open a new horizon for their users.
Global Trends in Open-Loop Payments
- Despite multiple challenges, the usage of open-loop payment solutions has increased over the years. Not only that, according to a report, the entire contactless payment market is expected to grow at a CAGR of 19.1% from 2022-2030.
- One of the most popular use cases of these systems is public transportation across the globe. So much so that around 150 cities across the world are planning to adopt an open-loop payment system by replacing the traditional legacy ticketing system.
- The number of open-loop payment cards used for ticketing is forecast to reach a whopping 136.9 million by the end of this year (2025). It says a lot about the global adoption of open-loop payment technology.
- As far as contactless payments are concerned, according to a survey, 2 out of every 3 people are likely to use a contactless payment mode either with their credit/debit cards or with a prepaid card that is not directly linked to their bank account.
Global trends in open-loop payments say that all the countries are ready to adopt the idea of implementing open-loop payments and there is no doubt that if you own a business, you should implement the same too.
How Open-Loop Payment Systems Work?
The open-loop payment system relies on a real-time payment network, popularly known as the RTP network. This is because the payments settle in real-time and funds are available to use instantly.
An open-loop payment system allows users to make payments using credit cards, debit cards, etc. using a shared network.
Let us take a quick look at the steps involved in an open-loop payment system –
1. Initiating a Payment
To initiate a payment, the cardholder must tap the card at the terminal. This card can be any debit, credit, or prepaid card as per the convenience of the user.
Keep in mind that the card being tapped should be using one of the authorized card payment networks.
2. Transaction Authorization
Once the card is tapped, transaction details are sent to a payment gateway where the information is encrypted for further authentication.
Usually, transactions made with a tap require no authorization from the customer as they have a set limit up to which they can make a transaction contactlessly.
3. Verification and Approval
The encrypted information is shared with the card network to verify with the bank. The bank simply checks the account information and matches it to the customer’s details.
It then verifies if the amount requested is available in the account. After all the checks are done, the transaction is approved.
4. Clearing and Settlement
The funds are cleared by the customer’s bank and settled into the merchant’s account after the entire verification and approval process.
It simply means that the payer has enough funds to transfer and the difference between the merchant’s existing funds and the added funds is settled.
5. Real-Time Notifications
All of it happens in real-time, keeping both the merchant and customer in the loop. The entire process is so quick that it only takes a few seconds to get the confirmation of payment.
These real-time transaction notifications make the entire process relatively reliable as the amount is available to use instantly!
This is how open-loop payments work. Each step signifies a status and hence is crucial for the entire process.
Examples of Open-Loop Payment Systems
Now, you may be wondering what are some examples of open-loop payment systems. Well, we have all used open-loop payments in one way or another.
Let’s take a look at some of the everyday examples where open-loop payment systems are commonly used.
► Card Payment Networks
The first and foremost example that comes to mind is card payment networks. You see, it is impossible to use a closed-loop payment system when it comes to debit/credit cards.
That is because not every customer may have a card associated with the same bank that you use. Hence, the implementation of open-loop payment solutions is crucial. To support this, card networks such as Visa, Discover, Mastercard, and American Express facilitate the transactions.
Today you can find translation machines that support both Visa and Mastercard payments, irrespective of which banks have issued those cards.
► Mobile Wallets with Open-Loop Functionality
With digital payments making their way into everyday life, several mobile wallets currently support open-loop functionality. These wallets simply allow a user to send money and make a transaction from their wallet to the receiver’s wallet irrespective of which payment application they use.
The best examples of mobile wallets with open-loop functionality are Apple Pay and Google Pay Wallet. Any user can simply add their cards to these wallets and then use any outlet to make payments. This helps make contactless payments super easy for the users as all they have to do is tap!
► Public Transport Smart Cards
Public transport smart cards are another great example of using open-loop payment systems. The convenience of using a single card for all your transportation needs comes from implementing open-loop payment systems.
The best way to enable a hassle-free experience for a traveler is to keep them free from unnecessary queues and give them a quick ticketing solution.
The open-loop payment system meets all these requirements, making public transport smart cards the best way to travel around.
► Online Payment Gateways and Platforms
With online payment gateways and platforms being powered by open-loop payment systems, the possibilities for businesses have become endless.
Users can easily use the payment of their choice and merchants can accept payments from anywhere in the world, irrespective of what financial institution the user is associated with. By integrating an online payment gateway, even the smallest of businesses can enable payments conveniently.
► Retail Payment Solutions
Retail payment solutions that allow merchants to accept payments from more and more banks are the perfect example of open-loop payment solutions. Being a retailer, one cannot imagine the number of transactions they have daily.
Now, among those transactions, if a retailer is only allowed to accept payments from a certain financial institution (like in closed-loop payments), then he/she will have to bear a lot of loss, considering not every consumer will be using the same bank.
However, thanks to open-loop payment infrastructure, a retailer can use a single payment machine to process them all!
► International Money Transfers
International money transfers have always been a point of contention for several businesses as they often cannot find a simple way to go through with them. Thankfully, with open-loop payment solutions, merchants can simplify international transactions.
This is possible as the card payment networks used on open-loop platforms are not limited to a single country or region. They are accessible throughout the world, helping the system enable international money transfers.
Benefits of Open-Loop Payment Systems
An open-loop payment system, when implemented properly, can do wonders for any merchant. From basic retail payments to public transportation, everyone around the globe is using open-loop payment systems. There is no doubt that there are several benefits of open-loop payment systems.
Some of the most common benefits that you may find include –
1] Brings Inclusivity
Open-loop payment systems allow every individual who uses a card or a digital mode of payment to transact, making it a completely inclusive system. You do not have to be a dedicated member of any bank or organization to be able to access the system, it is inclusive and open for all!
2] Adds Convenience
With open-loop payments, you have the flexibility of making payments anywhere without having to worry about unnecessary details. Being able to pay for anything with your account, regardless of what bank the receiver uses is a big convenience that open-loop payment systems offer.
3] Broadly Accepted
Open-loop payment systems are accepted by merchants globally, making it easier for consumers to buy goods and services anywhere in the world. For example, if you are in a different country and only have a card to make all your payments, you can do the same at any merchant, thanks to open-loop payments.
4] Cost Effective
Handling cash is not as easy as it appears. There are several types of costs that a merchant has to bear. Not only does this reduce the cost involved in cash handling, but it can also reduce the land cost of any ticketing infrastructure.
Simply enabling an open-loop payment system can help in reducing the handling charges along with different infrastructure costs to nil.
If you get proper support from professionals, it may take you less time and cost to develop an e-wallet app that offers an open-loop facility than your legacy payment system.
5] Efficient & Secure
The method is efficient as it works on a shared network like the RTP network. This means that payments are settled in real-time, with instant confirmation from the associated banks and financial institutions.
The entire process uses the best encryption and security features such as tokenization, fraud detection, etc. making it secure and safe in real-time.
6] Simplifies International Transactions
One of the key benefits of using open-loop payment systems is that it enables international transactions smoothly. A merchant can easily accept payments from a card belonging to a person from another country as long as they are on the same card payment network.
This has opened doors for even the smallest of businesses to reach a wider audience with the help of cross-border open-loop payments.
Technology Behind Open-Loop Payment Systems
Reading about the benefits of open-loop payment systems might have gotten you curious about the technology behind open-loop payments. Well, there are a bunch of different technologies and APIs that enable this system to work seamlessly.
These include -:
♦ Shared Networks
Shared networks such as RTP are necessary for these transactions to go through. These networks provide a common ground for all the steps involved in the mobile payment process and are available 24/7 to ensure that every payment goes through irrespective of banking hours.
♦ Card Payment Networks
Card payment networks such as Visa, Mastercard, Discover, American Express, etc. serve as the middleman between the cardholder’s bank and the merchant’s bank. These networks connect with the financial institution associated with the card for authorization of payments.
♦ Digital Wallets
Open-loop payment technology is convenient to use as it can be used anywhere. Digital wallets offer an interface to this virtual platform that can be used to save all the payment information and cards to practically make a payment without carrying your physical card or wallet.
The e-wallet app features do not end here as it can also allow a user to make transactions without even exposing their current bank details, keeping them completely safe from fraud.
♦ Payment Gateways
Similar to offline point-of-sale terminals, payment gateways are online services that allow a merchant to accept payments directly into their bank account.
These gateways serve as a bridge between the merchants and their banks, allowing the customers to directly make payments to them, irrespective of what financial institution they are associated with.
♦ Encryption
Encryption is one of the most important components of an open-loop payment system. This is because it ensures that delicate information such as your credit card details, banking information, etc. stays intact in the network. It converts all the information into code so that it stays intact from unauthorized access.
All these when combined can help you implement an open-loop payment system that is robust and highly efficient. You always have the option to integrate newer technologies into the system to make it more effective.
API integration for open-loop payment technology is significantly easy for any development professional, hence it is simple to implement as well.
Challenges in Implementing Open-Loop Payment Systems
While the open-loop approach for payment seems the ultimate solution to all the hassle, it is not easy to implement. Several challenges often cause an issue in the implementation of open-loop payment systems.
Let’s take a look at some of them:
Challenge #1 – Coordination Among Involved Parties
When trying to enable open-loop payment solutions anywhere, it is necessary to establish a coordination mechanism between the involved parties. Since not all institutions are using open-loop solutions to carry out transactions, creating that sense of coordination is still a challenge.
One of the key benefits of closed-loop solutions is that they provide a complete cycle of transactions, making it more convenient. But, an open-loop payment solution requires coordination among different entities to carry out the transaction properly.
Challenge #2 – Generating User Interest for Adoption
One of the key uses of an open-loop payment system is where a large number of transactions take place regularly.
The best example is the installation of an open-loop payment solution in public transportation. Now, while the idea of a simple tap-and-pay system seems convenient, of people find it difficult to adopt.
This is a huge challenge as people have become accustomed to the current ticketing system and a simple change may be difficult for them to adopt.
Challenge #3 – Compatibility with Existing Technologies
To set up an open-loop payment system, you need every user to be on the same page. You cannot ask someone to use an NFC payment app to pay if they do not have an NFC-enabled smartphone. And that is just a basic example, several things need to be taken care of while changing an existing system.
The average target group for a public transportation system or a retail store is not exactly compatible with emerging technologies and hence their incompatibility can prove to be a massive challenge.
Challenge #4 – User Preferences & Feasibility
Changing the preferences of your users is another challenge that the establishment of open-loop payment systems faces. You see, not every user needs to be comfortable using a smartphone while they are in a crowded area, in a retail store queue, or on the bus.
Also, it may not be feasible for people to use open-loop payment technology everywhere. Taking a ticket while using a train/bus seems easier for a user in comparison to remembering that they have to tap their smartphone to pay before leaving the bus.
Challenge #5 – Infrastructure, Investment, & Training
The challenge is not in establishing newer infrastructure but in replacing it. Significant changes would have to be made to bring proper open-loop payment solutions in place, which can take significant investment and training.
You need to get proper equipment that can accept payments from other payment modes, along with an understanding of all the digital payment regulations that must be followed.
While the solution may reduce the involvement of humans in the process, it is still necessary to train a person to oversee the transactions.
While the challenges may vary in different regions and sectors, the benefits do stay the same, hence implementing open-loop payment systems is a must for every merchant with an online/offline store.
How Nimble AppGenie Can Help Develop Open-Loop Payment Solutions?
The future of open-loop payment technology is all set to take the world by storm. You too can become a part of this growing sector by introducing your e-wallet app that enables all the users to easily adopt the idea of open-payment systems across the globe.
At Nimble AppGenie, we offer some of the finest e-wallet app development services that can help you explore all the options related to open-loop payment solutions and how you can implement them.
If you are looking for assistance and want to develop an open-loop payment solution, this is your best chance, reach out today to share your digital wallet app ideas and we assure you that we will turn them into reality!
Conclusion
The idea behind open-loop payment systems is to add to the convenience of users and reduce the hassle of daily transactions.
One of the biggest opportunities that arises with the rise of open-loop digital wallet payments is to be a part of the revolution by introducing your e-wallet app.
The concept is futuristic, the use cases are sustainable, and the opportunities to grow are endless.
Sure, there are a few challenges in the adoption of the idea and implementation, but, they are manageable in front of the comfort and convenience that the system brings on board. All in all, we can say that open-loop payment systems are here to stay!
FAQs
Niketan Sharma is the CTO of Nimble AppGenie, a prominent website and mobile app development company in the USA that is delivering excellence with a commitment to boosting business growth & maximizing customer satisfaction. He is a highly motivated individual who helps SMEs and startups grow in this dynamic market with the latest technology and innovation.
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