Does “Effective Interoperability” Equal Financial Inclusion?

In the work CGAP and Bankable Frontier Associates (BFA) did on Pakistan last year, we identified a way to measure progress on interoperability in retail payments in a country. Both CGAP and BFA have road tested this measurement tool over the last few months in other countries with positive feedback from various regulators. It is not surprising that regulators and policymakers are keen to develop a way to measure progress on interoperability. Many of them are at a loss about how to manage the process of interoperability in retail payments.

The question is not about when to intervene with respect to interoperability – regulator involvement is inevitable in some form and even likely necessary in some cases – but how to manage progress against broader policy goals in mind. As we discussed in the context of Pakistan, interoperability in retail payments is a means to an end and financial inclusion could be one of those reasons why progress on interoperability might be necessary. Unless there is a clear way to measure progress on interoperability, it is hard to know whether you are making progress towards those goals.

In this post, we describe what we proposed in that original Pakistan paper in terms of a measurement tool so we can get some more feedback from this blog’s readers. The tool had two steps:

First, identify the payment use case where it is important to achieve interoperability: By payment use case, we mean a transaction that involves an account type, a payment instrument and a channel. It is important to be specific on which account type, which payment instrument and which channel, as the technical process of conducting that transaction and the underlying business rules could be different depending on differences in how account, payment instrument and channel come together in a payment use case. This precision is necessary.

Audience listen to workshop proceedings Audience listen to workshop proceedings

Photo Credit: Kabir Kumar. CGAP discusses measurement tool at interoperability workshop in Pakistan

For example, consider cashing out into physical cash at an agent location. It is important to specify whether a mobile phone or card or another payment instrument is involved, whether it is a basic account or a prepaid account or another type of account, or there is no customer account at all, as it would be in the case of over-the-counter transactions. And, if we changed cashing out at agent to from ATM, then it would change the payment use case. 

Second, measure progress on interoperability on five levels which are: (1) theoretical interoperability, as in the capability of systems to connect to each other; (2) technical or actual technical points of interconnection or interfaces that make it possible to interoperate; (3) functional, as in not only are there actual technical points or ways to interconnect but that they can interoperate to meet agreed technical standards; (4) business-level or commercial, as in there are business rules, beyond the technical standards, that make the interoperability commercially possible; And, finally, (5) effective interoperability, where the process has resulted in success in meeting broader goals.

Measurement involves creating an indicator to measure progress at each level. For example, one indicator could simply be the share of accounts for the specific payment use case in question. For the payment use case of ATM withdrawals in Pakistan, the universe of relevant accounts was roughly 14 million. For the payment use case of electronic inter-bank funds transfer (IBFT), the relevant universe of accounts was 30 million accounts.

The measurement of “effective interoperability,” however, depends on the ultimate policy goal, which could be financial inclusion. In the case of Pakistan, we said “effective interconnection” could equip 100 million Pakistanis with electronic financial access within eight years.  As a result, payment use cases (e.g., cash withdrawal at agents) would not only have to be interoperable, but also affordable for the poor.

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