Can open- and closed-loop payments coexist?

Photo by Katie Chizhevskaya/Adobe

With consumer pressure to offer faster payments, community banks are considering how they can offer both open- and closed-loop payments platforms to deepen customer relationships.

By Colleen Morrison


According to Deloitte’s July 2022 Payments Trends Report, payments are thriving as a piece of a holistic customer experience, not a stand-alone transactional exchange. In today’s environment, that distinction can make or break a community bank payments program.

The movement of money may now matter less than the experience behind it, increasing friction between open- and closed-loop networks.

Open vs. closed loop

“Open-loop networks are payment networks open and accessible to all financial institutions and their customers via defined standards and specs. Think ACH, Visa and Mastercard,” explains Nick Denning, senior vice president of payments industry relations at ICBA Bancard. “Closed-loop networks, on the other hand, are not open and accessible to all; consumers and businesses must have direct relationships with the payment network itself. Think Amex, Venmo and others.”

“Both open- and closed-loop networks are trying to achieve the same objective, which is to provide the best payments experience,” notes Zachary Aron, principal, Deloitte Consulting LLP, and the global and U.S. banking and capital markets payments leader. “Advancements in real-time payments infrastructure, identity and digital currencies make it easier for both types of networks to develop this type of experience.”

But with equal opportunity comes equal competition, and community banks, who have limited influence over most closed-loop systems, have been more focused on ways to leverage open payments infrastructure.

Tim Ruhe, vice president of real-time payments at Fiserv, points out that this makes strategic sense. “Open-loop networks put banks in the middle of the relationship with their customers, because they enable customers to transact through their bank’s existing mobile app or website,” he says. “The end result is that banks benefit from deeper digital engagement, higher customer retention, increased product cross-sell and increased customer profitability.”

Yet, while open-loop networks largely have been the preference of community banks over the years, a number of closed-loop solutions have emerged as contenders for particular customer segments or use cases. For example, $127 million-asset Bridge Community Bank in Mechanicsville, Iowa, explored a closed-loop beta merchant value card program, where customers could send money to a specific retail card to be used at that store. The community bank had a couple dozen retailers engaged and passed the proof-of-concept and pilot phases, but ultimately, the customized network didn’t fit the overarching need.

“The bottom line is that when it comes to payment networks, the technology sometimes is the easy part,” says Bob Steen, the community bank’s CEO.

“Community banks should seek to ensure that when customers open their app, there are valuable and action-oriented capabilities and launch points, inclusive of money movement.”
—Nick Denning, ICBA Bancard

The P2P use case

As a common use case for closed-loop solutions, person-to-person (P2P) networks have placed pressure on banks’ payments programs. Providers like Venmo, PayPal, Cash App and others have taken transactions outside of the banking infrastructure to the tune of billions of dollars in non-federally insured wallets.

“Community banks can both acknowledge that the 80 million Venmo users aren’t going to magically stop using Venmo overnight and focus on enhancing their own digital payment and mobile banking offerings, coupled with robust safeguards,” says Denning. “Community banks should seek to ensure that when customers open their app, there are valuable and action-oriented capabilities and launch points, inclusive of money movement.”

Solutions like Zelle and newer entrant CHUCK provide banks with a way to do just that and remain central to customers’ payments. By integrating with community banks’ digital banking solutions, these options create a way for customers to send money from their banking app or website.

“It’s not uncommon for [a consumer] to probably have relationships with 30 to 40 different payment providers,” says Tede Forman, president of payment solutions at Jack Henry, which in September acquired Payrailz, the company responsible for the payments infrastructure that fuels CHUCK (see sidebar, below). He adds that Jack Henry is trying to create opportunities for its community banks to have solutions that can keep consumers within their digital payment experience.

Mercantile Bank in Grand Rapids, Mich., recognized the customer-choice potential in CHUCK and jumped on board as a founding bank. “We imagined customers and recipients having more choice in how they transact,” said John Schulte, senior vice president and chief digital banking officer for the $5.1 billion-asset community bank. “Different networks have particular strengths for certain transaction needs: recurring versus one-off, international, varying transaction speeds or fees, fraud controls, B2C/C2B use cases, gift cards and more.

“CHUCK’s structure allows for a richer, more dynamic ecosystem for consumer payments with the option for each party to decide the best way to perform a particular transaction.”

The impact of instant

And as new choices emerge, new opportunities arise. For example, instant payments will gain traction via FedNow’s launch and the increased use of The Clearing House’s Real-Time Payments network (RTP), and these faster payments rails will allow for creative community bank solutions.

“These systems certainly have the potential to bring speed, additional data and lower cost to P2P and other transactions,” says Schulte. “We’re excited to be exploring new use cases with the Clearing House and the Fed to enable them.”

Keep the customer at the heart

So, with so much changing and fresh solutions emerging every day, how can community banks best respond? Experts agree that it’s about putting the customer first, this time with a greater focus on payments needs.

“Payments are a primary function of a bank account and our ability to continue delivering outsized value to customers relies on building both great generic payment experiences—pay anyone quickly and efficiently—and tailored payment experiences, such as splitting transactions, paying merchants in-person and paying contractors,” says Schulte.

In addition, reminding customers about the added security that exists with their community bank, which nonbank providers might not offer, will help them remember why they chose their bank in the first place.

“We think choice, ubiquity across all institutions, speed and cost are all important components to consumer satisfaction with payment options, and collaboration with other like-minded institutions has been critical to bringing this vision to life.”
—John Schulte, Mercantile Bank

“One of the big advantages banks have is that customers typically have a high level of trust in the safety and security of their bank, so that can be a differentiating factor,” shares Ruhe. “With a bank-based P2P service, customers can also call someone if there is a problem, which is something consumers don’t typically get with a non-bank digital provider.”

Beyond that, a little community bank collaboration will go a long way. “We think choice, ubiquity across all institutions, speed and cost are all important components to consumer satisfaction with payment options,” says Schulte, “and collaboration with other like-minded institutions has been critical to bringing this vision to life.”

Whether banks offer open or closed networks, they should still take steps to inform their customers of the prevalence of scams perpetrated by sophisticated fraudsters,” says Denning “It is important for customers to be aware of the risks that come with instant payment transfers. They should ensure they are comfortable with the subject transaction and know the recipient before authorizing payments because once the money is sent, it is unlikely to be returned.”


A new owner for Payrailz

On August 9, Jack Henry announced its planned acquisition of Payrailz, a company offering next-generation capabilities for consumer and commercial bill pay, real-time P2P, account-to-account (A2A), business-to-customer (B2C) payments and more.

Perhaps most well known as the engine behind the bank-centric P2P solution CHUCK, Payrailz’ technology allows for a true open-loop experience. For Jack Henry, that advantage brings with it new opportunities for supporting an open approach to payments.

“We feel the value of the Payrailz solution is that it allows you to fund from and fund to multiple sources,” says Tede Forman, president of payment solutions at Jack Henry. “With the Payrailz P2P solution, you can fund to an ACH card, a Venmo account, a debit card. And with the things Jack Henry brings to the table, we’re going to plug in real-time payments. So, if you think of that truly being an open network, it gives the consumer at the community financial institution a choice on how they want to receive their funds.”

The company plans to bring the first of its Payrailz solutions to market quickly. “We can offer a P2P product almost day one [following the close of the acquisition],” shares Forman. “Our plan is to be able to offer that into our base pretty much immediately.”


Colleen Morrison is a writer in Maryland.