The ability to pay anyone and be paid by anyone is a necessary condition for a useful payments system. In a Level One aligned system, the ability to reach counterparties is not the basis of competition among service providers. A Level One aligned platform provides a level playing field for all counterparties; service providers should and will compete on other dimensions of their service.
What does “open loop” mean in the context of Level One?
- An open-loop payments system is one in which any licensed DFSP provider may participate. Membership conditions are specified in the operating rules of the payment scheme.
- An open-loop system will not discriminate against categories of DFSPs, or protect the interest of one category (e.g., large providers) against others.
Does “open loop” mean the same thing as “interoperability?”
- An open-loop system implies interoperability. The system exists to exchange transactions among participating DFSPs. Every open-loop system is interoperable.
- Not all interoperable schemes are open loop. An interoperable scheme might exist among a set of providers, but the rules of that scheme might exclude some classes of DFSPs.
What are the challenges in managing an open-loop system?
- Countries may achieve the effect of a single open-loop system by interconnecting two or more systems. Connected schemes need to have the same basic rules for transaction timing and treatment.
- Balancing the needs of differing constituents (e.g., banks vs. non-banks, large providers vs. small) is difficult. That is one reason why Level One advocates for a “skinny” payments platform—with minimal functionality embedded at the platform level. This is a “lowest common denominator” approach to the value transfer function of the platform. Level One further specifies an open API protocol to access the platform. DFSP providers and their partners (e.g., non-DFSP service providers) can compete based on “apps” and “accounts” that use this platform.
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