Digital Finance Interoperability & Financial Inclusion
Interoperability—the ability for different systems to connect with one another—is attracting a lot of attention among digital finance experts. Interoperable payment systems have the potential to make it easier for people to send payments to anyone and receive payments from anyone quickly and cheaply. Financial service providers welcome the new business opportunities that would emerge from this higher volume of transactions, and policy makers see interoperability as a means to bring more poor people into the financial system, thus fostering financial inclusion.
To better understand the global landscape in regard to interoperability, CGAP commissioned Glenbrook Partners to conduct a 20-country scan that assesses the state of interoperability in select markets. The study focused on payments from and to small-value transactional accounts that are accessible to mass-market consumers. For comparability, the scan defined interoperability as the ability for a digital financial service account to make specific kinds of transactions across two or more providers.
For the scan, researchers gathered high-level data and identified three broad types of interoperability:
- Multilateral agreements among three or more providers.
- Bilateral agreements negotiated between two providers.
- Third-party solutions that connect providers.
The scan found that some form of interoperability is present in each market, but progress remains slow in increasing the number of use cases and volume of transactions per use case. Conditions on the ground are complex and messy, with all 20 countries in the scan showing multiple approaches in play at the same time.
The scan did reveal two broad patterns in half the countries studied. Six countries are pursuing a “market-wide” approach, whereby some type of central plan covers a majority of providers for a majority of use cases. Four countries are pursuing a “focused” approach, whereby a subset of nonbank providers have joined together to make their own arrangement, which is largely separate from mainstream banking. The remaining 10 markets do not yet exhibit a dominant pattern; for these 10, a mix of these approaches may be happening simultaneously.
Given the early stages of interoperability and the absence of substantial transactional volume data, it is not possible to draw definitive conclusions. Yet the scan did highlight some important factors:
- Interoperability is not binary; it progresses over time, and it takes years to build the volume of transactions of interoperable use cases that can contribute to research.
- Three functional elements must come together for interoperability to be effective: (1) arrangement governance, (2) business model, and (3) technical integration. Much of the focus in the countries in the scan is on technical interconnections. There has not been enough focus to date on the other elements that are critical to creating volume and economic value.
- In some countries interoperability is being discussed as digital financial services grow and mature. In other markets, discussions about interoperability start before digital financial services have made a sizeable impact. There is not enough evidence to determine the best time to consider and implement interoperability.