The concept of Closed Loop Wallets:
Major technology advancements are taking place in the inclusion of the payment, both for open and closed systems in full flurry. In the hoopla of digitization, closed wallets facilitate the purchase of goods and services with single vendor issuing such a wallet. They do not have the facility for cash withdrawal or recovery.
Money transfers accumulated for the largest share of the mobile wallet market at close to about 38% during the last year. The statistics display that the distribution of the mobile wallet market across PAN India in the year 2017, based on the service type.
Generally, closed loop wallets are those that help to add money into a user account which is linked to payment device of a company.
The limitation of closed loop wallets is to do with its usability in terms of specific companies and excludes withdrawal and retrieval. Web sellers like Myntra, Easemytrip, etc. are good examples of closed wallets. In case of returns/cancellation/refunds, the same account can be used for the same. But any alien merchants cannot be accessed using the same account. This is a completely unilateral process.
The wallets are generated on the POS (Point of Sale) to be more precise like the online and offline outlets. All sites offer different reward points on the conducted transactions for buying or selling of articles or exchange of any kind.
No PPI license issued by RBI is required to run a closed loop digital wallet system.
But then there are some downsides of closed loop wallets:
- Restrictive use
The closed loop wallets can only be used at the instance of the said merchant. The credit of the account can only be used by the merchant issuing the wallet.
- No withdrawal
The said amount to the credit of the account cannot be transferred, withdrawn, or used in any other way possible. It confines to the definite merchant and outsiders are not accepted.
These wallet systems do not allow you to add money. No one can use it to trade commodities on this wallet with added up money/credit.
The money deposited in the wallet is to be used to shop with the same dealer. The reason is that the dealer gets the refund into his account with no loss. So, this is done easily for both the customers and merchants for to and fro trading of things.
Advantages of Closed Wallets for the Merchant
- Locked in huge customer data for more and more customer buying patterns and behavior to build steady strategies
- Reduced dealer cut-offs
- Enhanced customer trust & continuation for repeated sales
Atleast, the closed wallets take responsibility for the process and open platforms are quite flexible. Essentially, proprietary closed loop systems offer merchants the ability to maintain ownership over the entire merchant/customer process, which at this point, open systems can’t provide.
For the customer, this is good for building trust and alluring more and more customers into repeat businesses like loyalty points, easy delivery, fast processing etc. thereby improving customer experience.