Mobile payments are the next step in the evolution of seamless commerce. Our mobile devices serve as the hub for virtually all of our daily activities, and they can become the nexus of our commercial interactions as well. When a mobile device is used as the payment form factor rather than a card (or a check, or cash), all contextual information – such as rewards numbers, discounts, and payment history – can be instantly loaded onto the transaction, allowing for a personalized, data-driven user experience. And it all happens in the background: one authenticated tap and everything is securely done.
A mobile payment system is a broad term that may refer to many different things, such as open-loop mobile wallets like Google Wallet and closed-loop mobile wallets like Starbucks’ software, as well as merchants’ use of mobile payment acceptance solutions. But what is the difference between the two?
What is an Open Loop Mobile Payment?
Open-loop payments can be thought of as any electronic payment which can be used to make purchases at a multitude of organizations. Covering the realm of traditional credit cards, debit cards, gift cards, EBT cards, and just about every other electronic payment method, they are much more common than closed loop payments. They are issued by major financial organizations such as Visa, American Express, MasterCard, and Discover. Open-loop payment systems can range from point-of-sale purchases to mobile payments to e-commerce transactions.
Open-loop payments are complex, but they are also more adaptable and able to be used for a much wider range of purposes. When it comes to small companies and open-loop mobile payments, partnering with a reputable merchant service provider is critical to ensuring that the company has all of the necessary hardware and software.
What is a Closed-Loop Mobile Payment?
Closed-loop mobile payments are any form of electronic payments that can only be used by a single organization. They are typically issued by a company (the merchant) in conjunction with a backing agent such as Discover or Visa.
There are two ways in which closed-loop payment methods can be used:
- As a debit card.
These cards generally contain pre-loaded funds, similar to a gift card. In addition, they may also be linked to a separate account.
- As a credit card.
Businesses or organizations can apply for closed-loop credit cards, which function as credit cards. Credit limits, spending power, and perks will be maintained by that single entity.
In general, closed-loop payment methods are simpler and more secure than open-loop payments. This is largely due to the fact that closed-loop cannot be used in any other locations, so payments are more of an internal process than a means of accepting an outside electronic payment. Closed-loop payments are usually made through proprietary apps or other mobile payment solutions.
Despite their technical differences, both forms of payment are processed in very similar ways by business owners. To authenticate, accept, and settle payments, merchants must have the required hardware, such as a POS system, mobile payment solution, or wireless credit card machine, which is backed by a payment processor or merchant service provider.
Merchants may continue to favor closed-loop schemes, or open-loop mobile wallets may arise as the preferred option. However, the evolution of mobile payments would most likely not result in a definite winner. The coexistence of these choices is more likely.