Building a new closed-loop payment system? Prepare for disappointment…

Do you ever come across news that just makes you think ‘what exactly is going through their heads’? I recently saw this article, where it said the development of closed-loop payment systems was the top pick for payment professionals. In fact, 52% of respondents said they were planning on launching such a product in 2022, with the author citing open banking and the scrutiny of traditional payments as driving forces propelling these alternative payments.

Colour me confused. I honestly don’t understand the drive for MORE closed-loop systems! It’s not as if we’re lacking on that front already. The fact that so many think this is a cash cow product of the future and are pouring money into these is depressing. The market is saturating with more fragmented liquidity pools, making it harder than ever for consumers with little pots of cash squirrelled away in different closed ecosystems.

This bubble will burst quickly. Network effects mean that only a small handful of winners might eventually emerge. And the rest will end in tears, with the FCA going after the losers for any remnants of trapped cash to return to consumers. These new solutions require big numbers to work, but more closed-loop systems just divide the pie into smaller and smaller pieces.

In the same survey, account-to-account (A2A) payments came in a close second, with 45% looking to release this kind of solution for POS payments this year. Now, this has legs. But what I find amusing here is that it’s essentially just the new name for Request-to-Pay. The only difference is that it’s a pull payment request initiated from a point-of-sale or an online checkout process.

I remember having this exact discussion with Mark Hartley of BankiFi , and then again in our second After Hours with Adam Moulson (during which he told us about “the simplest way to pay” with Trilo).

The most comical part, though, is how QR codes are being introduced as this seemingly fresh, new way to simplify the A2A process. Um, has no one else noticed that this so-called big innovation that everyone is adding to their product development list has been the dominant form of payment initiation in Asia for the last five years?

Now, allow me to climb onto my soapbox, if I wasn’t already. If this is how product managers in the European market think they are going to change the market, make it better and earn future revenue, they are deluded! The answer is open-loop payments systems. And the key is providing a service that sits over the top of all these closed-loop services, making them interoperable. This provides consumers with a one-stop-shop to pay with what they have – and gives them what they want, which is simplicity and payment ubiquity.

I think banks, payment service providers and fintechs that make this a reality will be the real winners here. They will not only have consumers flocking to use their services, but they will also have the visibility of ALL the data flowing to these tiny closed-loop islands. Oh, and solutions such as Mojaloop exist to provide exactly this kind of interoperability with an open-source platform that serves the greater good.

Unfortunately, the greater good is probably not the motivation behind those developing these closed-loop and A2A solutions. These companies are just looking to maximise their returns at the expense of consumers. And they will eventually fall on their own sword – as this model is inefficient and unsustainable over the long term.

Ok, stepping off the soapbox…next speaker, please.