RBI defines closed loop payment instruments as “instruments issued by a person for facilitating the purchase of goods and services from him/it. These instruments do not permit cash withdrawal or redemption”. As these instruments do not facilitate payments and settlement for third party services, issue and operation of such instruments are not classified as payment systems by RBI. Operations of closed loop payment systems do not require any approval from RBI.

Most retailers nowadays sell gift vouchers which are example of closed loop payment systems. Key challenge in operations of closed loop payment systems is security of these instruments. As these instruments are essentially a currency they are prone to fraud and counterfeit leading to loss to merchants. Pine Labs benefiting from its heritage in the payment processing systems has incorporated security features associated with credit/debit card payments into its closed loop payment solutions.