Wednesday, April 17, 2013

Open-loop mobile payment systems will lead to scale

It was last year that I read a review on customer satisfaction of US credit card companies. The report by JD Powers and Associates rated American Express highest on customer satisfaction for the sixth year running. (Read here). As a new employee of Visa, I found this quite interesting and decided to investigate the reasons and the implications.
In performing the research JD Powers asked card holders to rate their experience for different card companies related to six factors: Customer Interaction, Billing and Payment Process, Credit Card Terms, Rewards Programs, Benefits and Services, and Problem Resolution. Any American Express customer (in rating the above) would effectively rate only one company (American Express) for all of the above six factors. In the case of Visa, many different companies (thousands of banks) are effectively evaluated, as these factors do differ significantly from one Visa bank to another. I then realized that there are significant implications on evaluating open-loop card systems (with four-party models) and comparing them with closed loop offerings (where the card company issue and acquire all cards and transactions).
In thinking about it, it actually then makes more sense to rather deploy a closed loop solution (like American Express). It seems that this will ensure more control and effectively a better customer experience. So why then have open-loop payment systems at all? What would the need be of something like this (clearly more complex) and more likely to not deliver the same level of customer satisfaction? The reason of course is scale. The more banks and service providers one can connect to each other, the more transactions are you likely to see. This is the attractiveness of the four-party model and open payment systems.
What does this mean for the future of mobile payments? When it is easier to do closed loop systems and you are more likely to keep customers happy, why even consider open-loop systems? I would like to say that closed loop systems (you can only pay me with X, if I also have X) are the only way that mobile payments are deployed today. Is open loop systems (interoperability) really needed to create true scale? Will we unlock much more potential and volume of transactions when we connect all the closed loop systems to each other? That is the question.