These are the wallets that are restricted to be used at their own outlets online or offline. You can understand it better if you take this real-life example where day to day you get your reward points or gift card. The gift card can be used at the same place to where it belongs. So the gift card with Myntra can be used to purchase something from Myntra only and cannot be used on some other e-commerce website.
RBI has classified and differentiated the wallets based on their properties and functionalities. Below is the basis on which we identify the wallets that have been classified by the prepaid payment instruments.
- Closed System Payment Instruments: These type of payment tools are issued by the business companies for use at their own company only. No cash redemption or withdrawal is permitted under this payment instrument type. Example Ola money can be used to pay Ola cab fare.
- Semi-Closed System Payment Instrument: These type of payment tools can be used at the selected identified merchants, locations or companies those have shared the contract with the issuing company. Example Paytm.
- Semi-Open System Payment Instrument: These type of payment tools can be used to purchase goods and services at any card accepting merchant locations. So it is like, your company offers you card with some balance, the balance cannot be redeemed or put in the bank account but you can use that particular card to buy things at the shop or place that accepts that particular card which you have. Example Sodexo
- Open System Payment Instrument: These are payment tools that let you withdraw or deposit cash and also be used to purchase goods and services. Example your debit cards.
MERITS OF CLOSED LOOP WALLET
- Closed loop wallet is beneficial for both consumer and merchant. The consumer gets the product or its preferred purchase and the merchant gets the payment into its account or in the company’s name.
- Learn about the customer type, the data he/shares, his/her choices and reply over marketing campaigns.
- Internal processing of payment resulting in a dip the merchant cost.
- Increase in customer faith as the loyalty integration happens within the merchant application.
- The merchant has the ownership of the entire process of transaction and customer/merchant process, therefore, the merchant has the upper hand and power to play and gain accordingly.
DEMERITS OF CLOSED LOOP WALLET
- They are restrictive and cannot be used at other merchants. You can use them at the merchant who has issued it.
- You cannot add this money into your bank account, also you cannot withdraw it. The money cannot be added into the same wallet or your gift card using credit or debit card. You are forced to use the reward points or the balance in any of the merchants account because it has an expiry. Closed loop wallet doesn’t require a PPI license by RBI to function.
- The easy refunds in the form of credit in the account is a deliberate effort to retain the customer and make the customer use the money maintaining loyalty.
CLOSED LOOP WALLET v/s SEMI-CLOSED WALLET?
- Closed loop wallets are a restricted mode of payment to the issuer whereas semi-closed wallet can be used make payments at identified merchants or can be exchanged within the users using the same platform. Eg. Makemytrip
- Closed loop wallets do not offer the option to transfer the money into the bank account however, semi-closed wallet allows to transfer the money from user to another or into the bank account. Eg. Paytm
- Closed loop wallets do not require any external company or set of people to look after the money in the e-wallet whereas the money in semi-closed wallet is managed by payment companies.
There can be no clear statement supporting the closed loop wallet as better payment system however, it is all user dependent. Some might accept it the way it functions, however, someone might want to the option of using it at multiple other platforms. Depending on the increasing demand would there be a discovery of a hybrid way that would serve the purpose and bring the closed loop wallet at a beneficial position.