Around the world we see two very different kinds of payment systems that permit the storage of value in accounts other than traditional bank accounts. One is a so-called closed-loop system, in which customers are able to spend value they’ve deposited into their account only for goods and services offered by the provider of that payment system; usually, it is impossible to redeem this value for cash or transfer it to someone else’s account. Gift cards, transit (e.g. Oyster) cards, Starbucks cards, and so on fall into this category. Schemes like this tend to be very lightly, if at all, regulated, since it is hard to exploit them for money laundering or terrorist financing; they pose few systemic risks; and, since customers are unlikely to store large sums in them, scant attention is given to the question of whether customers will be able to get their money out of the system in the event that the provider becomes insolvent.
Open-loop payment systems, on the other hand, allow customers to spend value deposited into them at multiple merchants, transfer it to someone else, and/or withdraw it as cash later. Mobile money, pre-paid debit, and other e-money-based systems fall into this category. They are more heavily regulated, because these systems can be used to launder money; they can (if they grow large) pose systemic risks; and policymakers often feel that, if customers are told that they will be able to withdraw their money, then safeguards should be put into place to ensure that they will always be able to do so.
But although these two kinds of systems are regulated as discrete models, they are in fact situated on a continuum, and there are many interesting hybrids in between. Many supposedly closed-loop systems are not so closed in practice, and indeed there are strong commercial pressures on the providers of closed-loop services to open up by incrementally expanding the range of functionality they offer customers. A classic example of this evolution is the Octopus card, which was introduced as a way to pay for mass transit but can now be used to make purchases at retailers all over Hong Kong.
This is in part because it is easier for a lightly-regulated closed-loop system to incrementally add functionality that edges them along the spectrum toward openness rather than it is to seek regulatory approval to transform into fully-fledged open-loop service provider or to start a new such system from scratch. By adding the ability for customers to send airtime to each other on their networks, for example, mobile operators in a number of countries inadvertently created an unofficial domestic remittance system that has never become formally regulated as such.
This poses challenges for policy makers, who can either block these new hybrid models and the enhanced functionality they offer customers or find ways of coping with their emergence. RBI has drafted a framework for regulating “semi-closed” and “semi-open” payment systems, but rather than using these categories as a way to accommodate emerging service models, it has instead offered them as rigid prescriptions for what functionality may be offered to customers by systems that are regulated in each category. As such, it does little to foster the emergence of useful new open characteristics of closed-loop systems, which, after all, can benefit consumers, including the financially excluded, in interesting ways.