What are closed loop mobile payments?

Editorial Team

Woman making mobile payment

Have you ever bought a gift card or prepaid phone card? If so, then you’re already familiar with the concept of a “closed loop payment network.” With this payment option, you basically purchase a pre-loaded card that can only be used within specific environments — i.e., that particular retail store or mobile network.

The concept isn’t new, but thanks to the rise of smart devices, many merchants and retailers are taking the concept one step further by leveraging mobile technology.

What exactly makes closed loop mobile payments different from other closed (or even open) loop payment options?

The skinny on closed loop mobile payments

Using their phones, customers upload money into a dedicated account linked to a specific retailer. As is the case with a standard gift card, those funds can be used only at that store. Because the entire interface happens through the phone, customers are able to manage their accounts on the go. They can:

Add more money without going to a cashier or waiting in line. They can also check account balances without having to call a 1-800 number.
Pay with their phone without having to carry an extra coupon or gift card. This means faster checkouts and shorter lines.

Whereas open loop payment networks, such as Apple Pay®, are tied to a user’s credit card or bank account, closed loop systems work only at specified locations, such as the Starbucks® app.

How closed loop mobile payments help the merchant

Speed, security, and control are just a few of the benefits that customers receive from using closed loop mobile payment systems. A merchant that accepts this option benefits from:

Higher sales. When users add funds to their e-gift cards or mobile wallet apps, that money has technically already been spent within your store. And just as with gift cards, you get to keep the extra profit if customers don’t use their remaining balances.
Better reporting. Tracking physical gift cards may be cumbersome, but keeping tabs on mobile behavior might be easier. Remove the guesswork from your analytics and gain de e per insights into customer buying habits.
Greater outreach. Mobile technology also makes it easier to send reminders and promotions. You can even set up geo-targeted notifications that are triggered only when a customer is close to your store.