Sionic Mobile Blurs the Lines Between Open and Closed Loop Payments

Over the years, there has been much confusion about open loop and closed loop payments. Even those in the payments industry may find themselves with an unclear understanding.

So, what is causing all the confusion?

For some, it may be the way a mobile or digital transaction happens. For others, it may depend on how the funds move through a certain payment ecosystem.

There are companies with systems that offer consumers pleasant experiences on either one. But, which is better and how much does it matter? Let’s find out.

Connecting the Dots

First, we will begin by defining what open and closed loop payments are. This will help clear up some of the confusion.

Open loop payments link a customer’s debit or credit card to a payment device. This payment device may be a smartphone or even a smart watch. The consumer may use this device to make payments in the same way they would use a linked card to a checking account. These payments can occur at any business that accepts contactless payments.

Closed loop payments enable the customer to preload funds into a spending account. They may preload this spending account from a linked card. Nonetheless, the funds for any transaction come from the account, not the card, when they spend.

In a closed loop system, an account reload may happen in various ways, or during the transaction. Unspent funds remain in the spending account. Those funds may not be accessible unless used at a specific location or time.

Sionic Mobile: Weighing the Pros and Cons

Sionic Mobile knows digital and mobile payments. Both open and closed loop payments have seen a large number of users and each has its benefits. They also have drawbacks, so let’s take a deeper look.

What makes open loop payments so attractive for some? One could argue that it is the openness of the system itself. Open loop systems allow more flexibility and convenience. Consumers have the option to engage in this ecosystem in a broader range of places with more options.

That brings us to another advantage of open loop payments — scale. According to an article by Annie Dossey for Clear Bridge Mobile, scale and value to the end user are key. With scale comes increased functionality that resonates with consumers. It makes for a simpler experience to manage a centralized mobile wallet or linked card from a device. One consumers can use to pay for whatever they want, wherever they go.

Open loop payments are not without caveats. We see the central drawback for open loop to be the lack of a consistent merchant network. Sionic Mobile understands merchant adoption for mobile payments can be slow. Why? Some merchants shy away from investing in new technology to accommodate consumers. Also, some do not see the benefits in programs that may impose on their own consumer loyalty play. We have first-hand knowledge from launching our ION Rewards® mobile app back in 2012.

Another disadvantage for open loop systems is payment processing fees. In this model, merchants pay a fee on every checkout, unlike closed loop. You will find out why later. Finally, open loop systems have a higher likelihood of fraud.

Closed loop payment systems have their share of loyal supporters. The compelling aspect of this payment type is the shared benefits. Both the consumer and the merchant get something out of the deal.

For the consumer, they are able to take advantage of targeted incentives. These could be anything from mobile order-ahead to loyalty discounts for their patronage. The end result is a more efficient checkout experience and increased consumer loyalty.

Closed loop is a preloaded spending account model, remember? So, merchants enjoy a cheaper means of processing payments. They only pay a fee on each spending account reload, not each checkout (like open loop).

This is a huge advantage for them. It allows them to enrich the loyalty incentives they offer their consumers. Also, merchants with a branded app have a unique opportunity. They are able to integrate loyalty programs inside their app, increasing engagement.

All that glitters isn’t gold, though. Closed loop systems may be convenient for a single brand, but that is where it ends. Consumers must download and manage an app for each individual brand that uses them. This is not doable for most consumers. By comparison, this makes an open loop system much more viable for digital consumers.

Who’s Doing What in Mobile Payments

There is some pretty fierce competition in digital payments systems currently. Cashless payment systems will likely continue an upward trend into the future. So, who are the heavy hitters?

When it comes to closed loop-based mobile apps, the Starbucks app is the standard bearer. Opinions may vary, but the proof is in the pudding. This app is the great example of a closed loop payment system done right.

The Starbucks app ticks all the boxes for a closed loop system. It utilizes a preloaded spending account and rewards consumers each time they checkout. Those rewards are good only at Starbucks locations.

Aside from paying with the app, it also offers an order-and-pay system. This was a feature introduced in 2018. An article from Business Insider provides insight on the importance of this feature:

Starbucks just quietly made a change that reveals the future of the company — here’s how it works

With an estimated 25.2M users in 2019, it is no wonder Starbucks has locked down the closed loop payments app.

The driving force for open loop payments is Apple Pay. Sure, there are similar systems out there, like Samsung Pay and Google Pay. But, Apple Pay has capitalized on the broad network of POS systems used by its network. With that, its open loop concept allows consumers to pay with the system at a variety of places, not only one.

The rise of proximity mobile payments have fueled the adoption of Apple Pay over the years. Brand recognition may have also played a role. According to 2019 eMarketer article, Apple Pay’s app user base surpassed Starbucks’s. In 2019, Apple Pay logged approximately 30.3 million users in the US, up from 27.7 million users a year prior.

The Missing Link: Sionic Mobile Has It

There is a single paradigm that is missing in both the Starbucks and Apple Pay models. Neither offers both an expansive retail network and a “universal” pay/rewards component. The common denominator: limitation. For people who are content with those models, it may not be a big deal. Yet, for some, it is a glaring oversight.

Why not offer both? Sionic Mobile’s prior mentioned ION Rewards app does. Our app offers a hybrid of sorts to solve this dilemma. Users can pay with the app at a vast merchant network, big and small, and earn rewards on each checkout. App users may redeem those rewards as cash at any merchant in the Mobile Rewards Marketplace (“MRM”).

ION Rewards does not use proximity payments like Starbucks and Apple Pay. Instead, the app renders an eGift Card for the exact payment amount in real-time. The cashier may either scan the eGift Card or key in the card number and PIN on their POS system. ION Rewards also offers a 3-digit CODE checkout. For this, the cashier uses the MRM merchant app to key in the code on their POS, tablet or smartphone.

To make mobile payments, the app offers flexible account linking capabilities. It can handle a user’s linked card or their preferred digital wallet to complete the sale.

Technology That Blurs the Lines

Sionic Mobile knows that payment technology is evolving and becoming more innovative. As it does so, our proprietary ION Commerce Engine® (“ICE”) could play a critical role in bridging gaps.

ICE is a multi-tenant, dual-cloud platform. It enables transacting mobile payments and merchant-funded rewards at the point of sale. ICE is dynamic and can accommodate various digital platforms, services and providers.

Let’s consider how ICE may address voids in today’s open and closed loop ecosystems.

First, merchant network. The Mobile Rewards Marketplace has a vast footprint. It consists of tens of thousands of retail locations nationwide. The Marketplace can accommodate both large chains and SMBs. Merchants can set their own rewards percentages to consumers.

Second, payments and rewards. ICE enables mobile payments and merchant-funded, universal rewards across the entire Marketplace network. There are no limitations to a single store or brand.

Third, flexibility. ICE provides private label capabilities. Our ION Rewards consumer app and MRM merchant app are available for consumption. For existing mobile apps, our mobile SDK (software development kit) is accessible. Integrate the SDK to enable mobile payments and instant rewards for app users.

Fourth, channel implementation. ICE is capable of providing digital capabilities to prepaid and challenger banks. Marketplace lenders and digital asset exchanges may also take advantage of ICE.

What It All Means

Is there a perfect solution to solving the open v. closed loop payment conundrum? No. But, there are solutions that offer consumers a more valuable and well-rounded experience.

Both open and closed loop systems can offer customers unique experiences, though limited. Even with those limitations, consumers need secure payments and consistency.

At some point, there must be an infrastructure that can support mass mobile payments. But, payments alone are not enough. Consumers want convenience and rewards, too. Sometimes, blurring the lines can be disruptive, but in our case, it’s exactly what’s needed.