Bridging the Gap Between Closed-Loop and Open-Loop Payments Systems

Payments ecosystems are often categorized as either closed-loop or open-loop systems, each with distinct advantages and limitations. Closed-loop systems, such as single-provider mobile wallets like M-Pesa, Venmo or PayPal, operate within a restricted network, limiting transactions to specific merchants or users who have the same provider. These systems often have a great user experience for specific use cases and speed to market new tools and efficient processing. Some closed-loop systems, like mobile money, have made big strides in financial inclusion. However, they often create financial silos that restrict consumer choice and hinder deeper financial inclusion. While use cases and access can move quickly, they are limited by the business model of one company.

In contrast, open-loop payment systems are designed to break down these barriers by enabling interoperability between diverse financial institutions. Open-loop systems allow banks, mobile money operators, fintech companies, and regulators to connect seamlessly, ensuring that individuals can send and receive payments across different networks without friction.  Because they rely on cooperation between providers, they can be inherently slower to move and respond to market requirements. However, open-loop systems are particularly crucial in emerging markets, where multiple mobile money providers operate independently, often preventing users from transacting outside their respective platforms or with smaller financial institutions. 

For instance, in a closed-loop environment, a customer using M-Pesa may be unable to send money to someone using Airtel Money, as both systems operate within their own networks.  With only two providers, this could be solved through bilateral agreements or duopolies, but that can block out new entrants or smaller financial institutions that often serve as the best reach for underserved groups like women and rural communities. Open-loop systems eliminate this limitation by providing a shared infrastructure, allowing transactions between different providers while maintaining security, compliance, and affordability.

By embracing an open-loop approach, central banks, governments, and private-sector stakeholders can develop inclusive digital financial ecosystems. This not only promotes economic growth but also ensures that unbanked and underbanked populations gain access to essential financial services, driving progress toward a truly interoperable global payments landscape.

Open-loop design fosters competition and innovation by allowing multiple financial service providers to participate in a shared payment infrastructure. Unlike closed-loop systems, where a single entity controls transactions and fees, open-loop systems create a level playing field where banks, mobile money operators, and fintech companies can offer interoperable services without proprietary restrictions. This encourages the development of cost-effective and customer-centric solutions, reducing transaction costs and expanding financial access to underserved communities. By promoting collaboration among financial institutions, open-loop systems not only enhance digital payment efficiency but also help build more resilient and inclusive economies worldwide.