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What is a closed loop payment system?

Sunday, January 19, 2014

How your business can benefit from accepting these payments

At your small business, taking payments is critical to your success. While you’re familiar with credit and debit cards, you may not be as familiar with another type of payment method – closed loop payments. So in this article, we’ll help you become familiar with closed loop payment systems, including what they are, how they work, and some advantages and disadvantages of having a closed loop payment system in your business. To start, let’s define a closed loop payment system.

What’s a closed loop payment?

When it comes to payments, there are generally two types of payment cards or mobile payments: open loop and closed loop. Open loop payments are generally easier to understand, as they are cards that can be used at various retailers. Open loop cards are things like Visa, Mastercard or American Express credit or debit cards that tie to a card issuer or a customer’s bank account. An open loop payment can be used at any retailers that accept those credit or debit cards. Hence the name “open loop”; many retailers accept open loop cards. This is the difference between open loop and closed loop payments.

Closed loop payments are different from open loop payments because they can only be used at a specific retailer. Often, these are either specific accounts or gift cards. For example, a person buys a gift card from your business, Carl’s Coffee. They’ll pay you for the gift card, which has a stored value. Let’s say they put $25 on the gift card. Then, the person who bought the gift card from you gives it to their spouse. The spouse can then come to Carl’s Coffee and “spend” the $25 that was given to them.

In this example, the gift card only works at your business and no other company. Therefore, it’s a closed loop card. While some closed loop cards are directly from the business, some financial institutions will also partner with merchants to produce closed loop cards. For example, a financial institution might sponsor a company’s branded credit card. However, it’s important to note that closed loop payments operate without intermediaries (such as banks or financial institutions).

The advent of mobile payment technology has broadened the use of the closed loop payment model. That’s because closed loop payments no longer have to be physical cards. Instead, they can be digital cards on mobile payment apps or stored in a consumer’s mobile wallet. With the development of digital wallets, consumers can store both loyalty cards and gift cards in one place, and they can access them with a few taps. These closed loop payment systems offer customers a way to view their account balance, add more money to their cards, redeem rewards from loyalty programs and more. These mobile closed loop payments are often in a mobile app but can also be transferred to a digital wallet.

Generally speaking, closed loop payment processing costs less than traditional card payments. That’s great for your company. But, on the flip side, end users may find closed loop payment systems limiting, as they can’t buy from various retailers with their closed loop cards. Now that you know more about closed loop payments, let’s dig into some of the biggest advantages of closed loop payment systems.

What are the advantages of closed loop payment systems?

When it comes to doing business, you’ve undoubtedly faced pros and cons with some of the decisions you have to make. There are both advantages and challenges to accepting closed loop mobile payment systems at your company. It comes down to what fits best for your business. Let’s look at some of the biggest advantages closed loop payments offer, whether physical gift cards or electronic payments.

Helps you identify customer behavior

With closed loop mobile payments, you’ll be able to capture big data on your customers’ buying habits. By analyzing all of these transactions, you can better understand your customers. This can help you narrow your marketing campaign efforts to your target market and zero in on their purchasing habits. With all of this information, you’ll be able to create more compelling, customized offers and promotions to drive business to your store.

Allows for greater customer reach

In addition to helping you grow your business through word of mouth (sharing gift cards with one another), closed loop payments also can help you build relationships with your customer base, especially if you utilize mobile offers and push notifications. Some businesses may also be able to geo-target customers, sending them push notifications triggered by potential customers being a specific distance away from the store.

More loyal customers

Because digital closed loop payments can be customized, you can develop a better relationship with your most loyal customers. By sending promotional offers and incentives for customer loyalty via smartphone, you’ll retain more customers and build a growing community of loyal and engaged customers.

Stand out from the competition

Accepting closed loop payments, especially mobile payments, can give your company a leg up on your competitors. This is especially true if others are not utilizing these closed loop payments. There’s a lot of functionality that can give your company a competitive advantage, including pre-ordering via mobile app, real-time and contactless payments, automatic top-up, consolidating multiple gift cards and more.

Make more money

As customers utilize closed loop payments with gift cards, e-gift cards or mobile wallet apps, they’ve already spent money within the store (even before using the card in store). Therefore, even if they don’t redeem their gift cards in store, you’ve already gained an extra profit.

As you can see, a closed loop payment system can have many benefits that can increase your business and help you serve your customers better. Now, let’s look at the challenges of closed loop payments.

The challenges of closed loop payment systems

When it comes to the challenges of closed loop payments, there aren’t too many downsides for a merchant. Again, the benefit to your business outweighs the hassle. However, it can be a bit more challenging for consumers. The most challenging hurdle for consumers is adopting closed loop systems as a way to pay.

Consumers are used to paying a certain way. Often, that’s with an open loop payment solution that they can use wherever businesses can process their credit card or debit card. Asking them to utilize a gift card or closed loop mobile app might be difficult at first. However, once they try it and realize the benefits, they are more likely to utilize that system in the future.

As you can see, closed loop payments can be beneficial to your business. In this article, we’ve discussed them in greater detail – what they are, how they work, and their advantages for your business. After reading this article, you’ll be able to determine if implementing a closed loop payment system is right for your business.

Ready to work with a payment processor who can help you accept closed loop payments?

Heartland is the point of sale, payments and payroll solution of choice for entrepreneurs that need human-centered technology to sell more, keep customers coming back and spend less time in the back office. Nearly 1,000,000 businesses trust us to guide them through market changes and technology challenges, so they can stay competitive and focus on building remarkable businesses instead of managing the daily grind. Learn more at heartland.us.