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When it comes to faster (or “instant”) payments, there are two basic systems for enabling transactions: Closed Loop and Open Loop.
Open Loop Payment Systems enable transactions between accounts at different banks without requiring participants to hold an account with any specific app or financial institution. Open Loop Payments are made via a shared network—like the RTP Network, Zelle, and FedNow (coming in 2023)—that routes and settles payments for any financial institutions enrolled in that network.
Open Loop Payment System vs. Closed Loop Payment System
While Open Loop Systems are available broadly across financial institutions, Closed Loop Systems process transactions through a single provider. In a Closed Loop Payment System, both the sender and the receiver need to have an account with a given provider in order to complete payments. Examples of Closed Loop Systems include apps like Venmo, Cash App, and Paypal.
Where sending funds from one person to another is quick and simple within a Closed Loop Payment System, transferring funds out of the app itself can take 24 hours or more as the funds have to then move from the app to the payee’s account at a bank, which is outside of the “closed loop.” Funds transferred via Open Loop Payment Systems, however, are usually sent and posted instantly.
RTP (Real-Time Payments) is a payment processing network used to send money electronically between banks in the United States.