DevExplains: Open vs. closed loop systems for humanitarian payments

Payment systems are a hot topic for the development sector but the jargon can be overwhelming. Devex has your quick guide to making sense of the two main options. Open loop systems When thinking of open loop payment systems, think of credit cards. Open loop systems enable payments to be made at many different locations from a centralized digital wallet that is connected to personal account information. Money can be spent in advance; it does not have to exist in the account for payment to be approved. These systems enable payments to be made or goods to be purchased from a wide variety of merchants. Open loop systems are generally best if the goal is to maximize recipient choice. They work most effectively if these systems have broad acceptance from local merchants and financial institutions already. In the humanitarian context, they have been utilized in post-disaster or conflict recovery programs to rebuild local economies. For NGOs, open loop systems enable wider choice on how and where money can be spent. Systems already exist, so nothing new needs to be built. But if organizations require detailed reporting on how payments are made, open loop systems may be inadequate. They will produce a record of where the recipient purchased goods, not what they bought. Closed loop systems If we think of open loop systems as similar to credit cards, closed loop payments are best thought of as gift cards or prepaid cards. A prepaid phone card, transit card or the store gift card are some examples. Closed loop systems enable payments to be made only to a specific vendor or location. Consumers can load money into a spending account that is linked to a payment device such as a card or mobile phone. This makes it easy to track and limit spending. Closed loop is a compelling option when open loop acceptance is not available, local financial institutions are limited or detailed transaction data is required. It has worked best in urgent relief programs requiring immediate aid. Financial service providers including sQuid and Red Rose provide closed loop payment options that are currently being utilized in delivering humanitarian aid. Even MasterCard, traditionally associated with the open loop side of payments, has jumped on board by implementing closed loop systems to better deliver aid in Yemen and the Philippines. The disadvantage is that closed loop systems may need to be built from scratch: cards must be issued and merchants must be secured to accept the payment mechanism. What to consider Is an open or closed loop payment system the right option for delivering humanitarian aid? The answer will depend on the program, needs of the community, availability of services and capabilities of implementing NGOs. A combined solution may instead be the best option. This hybrid system would utilize back office processes and systems of a closed loop structure but enable the withdrawal of cash that can take place via an open loop system. All solutions generally, work best with connectivity. While there are off-line versions, these cost more to set-up, run and settle financially. Knowing what financial terminology is the first step in making the right choice.