What Are Closed-Loop Wallets & How Can Merchants Benefit From Them?

While the eCommerce landscape is continuously shifting, the search for payment solutions that are both convenient and secure remains a constant. Closed-loop wallets have proven themselves to be a game-changer in this regard and have quickly become an indispensable tool for merchants and aggregator platforms.

This guide is here to shed light on the advantages of such digital wallets and explain why their use in the eCommerce industry is only expected to grow.

Open-Loop Vs. Closed-Loop Wallets: What’s the Difference?

For instance, some renowned examples of open-loop wallets include:

• PayPal
• Apple Pay
• Google Pay

In contrast, some closed-loop wallets you have probably heard of or used are:

• Amazon Pay
• Alipay
• Walmart Pay

More and more eCommerce companies nowadays are beginning to implement such wallets for the sake of enabling users to store and use funds exclusively within their platforms. In fact, closed-loop transactions are expected to account for over 50% of digital payments already by 2030. But what are the reasons behind such a rapid upward trend?

The Advantages of Closed-Loop Payment Systems for eCommerce

Closed-loop wallets are taking the world by storm, and many agree that they will soon become a must-have not only for large-scale businesses in the eCommerce sphere but also for SMBs. Here are some of the key factors driving this increasing demand:

• Advanced security. The fact that closed-loop wallets process transactions in a restricted environment enables them to create an extra security layer and minimize vulnerability to external threats. Besides, they also often feature state-of-the-art authentication measures and encryption protocols.
• Improved consumer convenience. Closed-loop wallets spare consumers the need to re-enter their payment details for every transaction by securely storing them in the system. Such a convenient checkout process helps merchants decrease cart abandonment rates and, consequently, boost their sales revenue.
• Lower transaction costs. eCommerce merchants using closed-loop wallets often manage to cut transaction costs since processing payments within the platform eliminates third-party fees.
• Customizability. Merchants utilizing closed-loop wallets can customize their functionality and design, which gives them increased control over their payment ecosystem.
• Compliance with regulations. The use of closed-loop payment wallets allows merchants to keep a finger on the pulse of all payment processing, ensuring their compliance with current industry regulations.
• Data insights. A closed-loop system has the power to provide a business with a wealth of data insights, which can be used to personalize marketing campaigns, target product recommendations, and enhance the overall customer experience.

Finally, closed-loop wallets also offer merchants plenty of opportunities to introduce loyalty programs and rewards, such as cashback, discounts, or bonus points, which, in turn, incentivize users to return to their stores.

This is extremely important, as 65% of an average company’s revenue typically comes from returning clients, and 84% of consumers are likely to stick around a brand that offers a loyalty program.

Are There Any Cons for Merchants to Keep in Mind?

While closed-loop wallets offer numerous advantages for eCommerce merchants, it’s essential to understand the potential drawbacks related to their implementation. Here are some aspects to keep in mind:

• Limited reach. Closed-loop systems are often designed for specific regions or markets. Thus, merchants aiming for a global customer base might find that closed-loop wallets are not universally recognized, unlike the more widely accepted open-loop alternatives.
• User adoption challenges. Encouraging users to adopt a closed-loop wallet can be a challenge, especially if they are already accustomed to using established open-loop payment systems. Convincing them to switch to an in-house option requires a smart marketing strategy as well as a seamless onboarding process.
• Upfront expenses. Developing a closed-loop wallet system may require significant upfront investment in technology integration. Merchants need to ensure that their existing infrastructure can support the new payment system, and this process can be both time-consuming and costly.

However, despite these concerns, it is safe to say that the advantages of closed-loop wallets outweigh the downsides linked to them.

Summing Up: Are Closed-Loop Wallets Indispensable for Merchants?

All in all, closed-loop wallets offer significant advantages, which makes them an increasingly important solution for staying ahead of the game in an increasingly competitive eCommerce landscape.

While many small and medium businesses selling their products and services online can still get by without implementing such systems, most large-scale companies already see them as indispensable. However, as the digital payments landscape continues to evolve, the demand for closed-loop wallets is forecast to grow, making them an integral part of virtually any eCommerce merchant’s toolkit.