Platform-level Interconnection in Branchless Banking
In our first post in this series on interoperability, we introduced a three-level interoperability framework focusing on (i) platform interconnection, (ii) agent exclusivity, and (iii) customer-level interoperability. You can see the full framework in this presentation. In today’s post, we delve deeper into the first level–interconnection of mobile money platforms.
Platform-level interconnection is what most people have in mind when they think of interoperability in branchless banking. When we speak of interoperable platforms, we are referring to platforms that permit the transfer of funds from one mobile account to the mobile account of another service provider. This is similar to being able to send money from your bank account to your sister’s account at another bank. Or it is similar to being able to send a text message from your phone with your mobile network operator to your friend’s phone on the network of a different mobile network operator.
These “cross network” transactions should not be confused with “off-network” transactions which many mobile network operators claim to be platform interoperability. Off-network transactions make it possible for account holders to send money to anyone, whether they hold an account or not. For example, you send money from your mobile account to your friend, who doesn’t have an account, and your friend cashes out at your service provider’s agent. While off-network transactions can be beneficial for low-income users, we believe they are not as financially inclusive as cross network transactions. Off-network transactions require recipients to cash out, whereas cross network transactions make it possible for recipients to store received funds, on-send them or use them to make payments.
We identify different ways platforms can interconnect. In basic terms, platforms can interconnect: (1) directly (as the two ATM networks, 1Link and MNet, did in Pakistan) or (2) indirectly where a third-party entity which is either owned by providers, owned independently, or owned by the government interconnects platforms (as POS networks are currently doing in Brazil). The way in which platforms interconnect impacts pricing and efficiency of the payment system and potentially the ultimate value to customers.
Regulators ultimately want interoperable payments platforms, but are often torn about how best to achieve them. Permitting exclusive platforms can ultimately allow first movers or large actors to dominate the market, with the possible result being limited competition and artificially high prices. However, mandating interoperability too early in the growth of the market may discourage actors from entering the market due to concerns that competitors could “piggyback” off of large start-up investment. Several middle paths are available, such as temporary periods of exclusivity or requiring interoperability ex-ante in the regulation but not enforcing it until the market had matured. But how long should regulators wait and how can they enforce it if the market drags its feet?
Of course regulators would not have to struggle with these questions if service providers voluntarily interconnected. But as far as we can tell, businesses rarely initiate interoperability in financial services, even if it is technologically feasible, unless regulators intervene. A key question is whether there is mutually beneficial pricing that would encourage them to do so. In mobile money, service providers with a large share of the voice or mobile financial services market (or the anticipated market share in new markets) have no real incentive to interoperate, hoping instead to capitalize on their more developed infrastructure down the road. This is particularly true when market actors are using financial services to differentiate their product from the competitors and reduce churn.
Smaller market actors however may want to interconnect their services to compete with larger players. This is similar to how smaller banks made their ATMs interoperable in order to compete with the larger banks’ ATM networks. But in new mobile financial services markets, there may not be enough small actors to take on those that have a market lead. In heavily fragmented markets, perhaps service providers would find greater benefit from interconnecting. But this would then defeat one of the primary purposes to enter the market in the first place – reducing churn of voice subscribers. Still, it could permit them to overcome stagnant growth or could prove to be a cost-effective way of entering new markets.
It may be that the mobile financial services markets are still too young for interoperability – forced or voluntary. What do you think – can interoperability ever be achieved without government intervention? If not, why? And if so, what should regulators do and when?
1/. Being able to control the fund holders, possibly limiting MNOs to message passers rather than money holders
2/. Extracting taxes during the course of relevant transactions, such as when VAT is due on a purchase
3/. Delivering benefits in a secure and confidential manner
4/. Linking with specific incentives for deeds such as innoculation and education
Overall, the enormous value of MNOs capability of linking citizens can be enhanced while respecting the need for givernment to exercise due control. RTpays’ particular role in working with tax authorities to improve government’s income is important (although we understand that it is not always popular to talk about collecting tax!). However, if it is done fairly, and explained well in advance, it can be seen to have value for all.
I believe that many governments want to improve their image with citizens, partly by cleaning up unfair tax policies, i.e. the failure to collect proportionately from the better off, and partly by creating benefits of all types that will improve the lives of the poor.
Finance is one key (they need more income to make greater payouts), but so is establishing a higher support for all facets of life. To that end, specific incentives for medical checks and taking the initial learning skill essentials (such as the ability to read) can be created once there is a central database. The database can link phone numbers with many identity files to ensure that the correct recipient is being supported.
As to whether MNOs will support this concept, I believe that can be answered in two ways. Firstly, most governments now appreciate that interoperability is a requirement – and therefore the central bank should have a strong role in licensing MNOs and ensuring there is fiscal control. So, any MNO which does not want to interact with government policy may find getting a license is difficult.
Secondly, the increase in traffic over the phone lines will be significant; if the primary income for the MNOs is linked with that traffic flow, then there is sufficient self-interest to bring about compliance acceptance.
Thanks Chris for the insight. You raise an interesting perspective and I’m intrigued by your item number 4. My gut reaction is that the private sector will balk at the idea of the government piggybacking on their systems to deliver public goods like education and innoculations but the idea should be explored. How do you envision such a system working in such a way that it would be in an MNO’s interest to participate?