Closed-loop payment systems are top of the agenda for US and UK payment teams, with over half set to establish their own by the end of the year.
According to VIXIO’s 2022 Payments Compliance Outlook report, this preference for closed-loop payment systems was closely followed by account to account (A2A) payments. It found that 52 per cent plan to launch a closed-loop payment product in 2022 and 61 per cent will develop one by the end of 2023.
A closed-loop payment system allows consumers to load money into a spending account that’s linked to a payment device. In real-world terms, this would include things like gift cards or prepaid spending cards. For a better perspective, the opposite of this, an open-loop payment system will allow consumers to pay at many different locations through a decentralised personal wallet; with credit cards being a good example.
Closed-loop payment systems do hold their benefits. Their use allows company to capture big data about their consumers and their consumer’s spending habits, it cuts down internal transaction costs for the merchant, and it’s also capable of boosting loyalty to a certain brand.
The report is based on research conducted late last year with 113 (56 UK, 57 US) compliance professionals who work at fintech and payments firms with $10million-plus in revenues.
It found that, aside from closed-hoop payment systems, 45 per cent plan to launch an A2A product for POS payments in 2022 and 53 per cent will launch one by 2023.
In addition, a sizeable number are planning to launch e-wallets and digital currencies, with 41 per cent of financial services and payment functions planning to focus on these products in the next two years.
Demand for alternative payment solutions – whether in the form of instant A2A payments or platform specific closed-loop solutions – is coming at a time when traditional card payments are under increasing scrutiny from regulators.
The rise of open banking arrangements provides payment firms new opportunities to innovate and compete for customer attention. This is supported by payment modernisation initiatives such as the proposed New Payments Architecture in the UK or the new FedNow instant payment service due to launch in 2023.
Andrew Neeson
“Brands must innovate and chase growth opportunities in the face of a rapidly evolving regulatory landscape, and alternative payment solutions can play an important part of this,” comments VIXIO’s Research Director Andrew Neeson. “Firms are aware of the benefits of offering faster, efficient and frictionless user experiences that many alternative payment methods offer, and so are understandably keen to include them in their arsenal.”
New product launches have been at the heart of compliance team’s priorities with the data also showing that 87 per cent of compliance departments increased headcount over the last two years. The biggest reason for doing so is a need to focus on strategic licensing decisions (18 per cent).
Furthermore, supporting the licensing process for new products is the highest priority for payments compliance teams in 2022 (16 per cent).
Neeson continues: “In order for innovation and new alternative payment product launches to be a success, compliance needs to be on your side. Compliance departments are an enabler of growth.”
In addition to the 2022 Payments Compliance Outlook report, VIXIO is upgrading its Horizon Scanning platform to cover 60 countries by April 2022. The tool helps businesses track upcoming regulations and monitors regulatory bodies across multiple jurisdictions and languages.
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