Closed Loop Financing
Modern companies offer multiple payment options, including open loop and closed loop finance solutions for their clients. While open loop payment systems involve traditional credit/debit cards that are used everywhere, closed loop payments focus on a single company's usage.
Such payments carry many advantages for businesses as it creates an internal loop that they can fully control. This lets them accrue all the income, data, and long-term value of the payment ecosystem. KredX offers closed loop financing solutions in the form of Buy Now Pay Later to the dealers, retailers, and distributors of businesses.
The following sections will cover everything one may need to know about this payment solution.
What Is Closed Loop Financing?
In closed loop payment networks, the payment source (bank card/wallet), POS (Point of Sale), and the payment network connecting them are the same. This creates a closed internal loop where one platform gets the economic and long-term strategic value of the entire ecosystem.
Many merchants offer closed loop electronic payment cards with the help of a backing agent like Discover, Visa, or a financial institution. Common examples of closed loop cards include gift cards and store-specific cards. Store credit cards limit purchases to one retailer but offer discounts and loyalty program points. Customers can later redeem these points on future purchases.
Closed loop finance is equally beneficial for retailers as it incentivises customers to return to the store and make purchases. Customers also tend to spend additional amounts to claim the benefits of such gift cards.
The benefit for customers is that these payment systems are simpler and more secure than open loop finance. As the closed loop cards are usable only in selected stores, payments are quick and fully internal. Moreover, clients can use their smartphones to make payments via this method.
How Does Close Loop Financing Work?
POS lending is offered by traditional banks, credit unions, e-commerce platforms or non-banking financial companies. Retailers partner with these institutions to offer POS financing options on their websites for certain products and services. The APR is usually 0% though some lenders may charge interest for less qualified borrowers.
Customers need to fulfil certain conditions like having sufficient income or credit scores to avail Point of purchase financing. Some merchants allow customers to apply for a one-time instalment loan upon checkout. Others require them to sign up and choose a payment plan to use this service.
Once the buyer accepts the terms and conditions, the lender approves the loan. Afterwards, he/she can interact with the lender, who will pay the retail outlet or website for any purchase. Then, he/she can repay the amount in instalments as per the loan’s terms.
Approved customers can choose a repayment tenure of 3, 6 or 12 months, depending on the lender and budget. They can repay the amount on the lender’s website or mobile app. If he/she fails to make timely payments, some POS providers can charge a penalty.
Benefits of Using Closed Loop Financing
The following are some of the reasons for companies to use closed loop systems:
- Gain Competitive Advantage
With closed loop finance, companies can retain customers and all the data and revenue as they create a complete internal loop. Customers are attracted to this model due to its automatic top up, mobile friendliness, rewards program, etc. Moreover, its exclusive model makes it easy to monopolise related services/products.
- Enhances Customer Outreach
Today, a majority of people own smartphones, and many are looking for quick and easy digital payments. Closed loop systems allow firms to benefit from this lucrative opportunity. Moreover, businesses can set up geo-targeted reminders and notifications for customers.
- Simple And secure
Closed loop financing systems are less complicated and more secure. As closed loop cards do not work in any other stores/brands, all payments are an internal process, which is easier to secure. It adds an extra layer of security between the bank account and the merchant.
- Captures Big Data
In traditional payment systems, banks get to keep all of the 'big data' involving millions of transactions. With closed loop systems, retailers can capture this data, giving them an in-depth insight into their customers' buying habits.
Open Loop Financing vs Closed Loop Financing
The following points illustrate the differences between open loop and closed loop payment systems:
Reasons To Use Closed Loop Systems
- Merchants can maintain ownership of the entire payment and retail systems.
- They offer a number of benefits for customers, including loyalty incentives, faster check out, pre-ordering facilities, etc. A better customer experience can increase customer loyalty.
- Retailers can benefit from the lower transaction costs due to the internal payments.
- Internal processing lowers transaction costs.
- From a merchant perspective, open loop financing does not offer many benefits.
Reasons to Use Open Loop Systems
- Open loop systems allow companies to benefit from economies of scale. Their openness allows them to rapidly attract customers.
- The fragmented nature of closed loop financing can deter customers from making mobile payments.
- These systems tend to be more acceptable among customers as it allows them to pay anywhere from a centralised digital wallet.
Closed loop financing offers many benefits for businesses as they do not have to share the economics with external parties. They can offer a single platform for customers that connect the payment source, network and merchant acquiring solutions. Several renowned companies have been using this system for years due to its great potential.