During a recent conversation, my colleague Irina Eichenauer at KfW reflected on how funders can promote interoperable payments: “We’ve been supporting payment systems in some markets and are looking into ways to push these approaches to the interoperability frontier. Our experience has led us to realize how much technical assistance, coordination and advocacy work, coupled with long-term commitment, are needed to push interoperability forward. Promoting interoperability will require strong coordination, not only among stakeholders, but also among the funder community.”
Irina’s comment resonates with CGAP’s experience. CGAP has long advocated for interoperability, which can help advance and sustain financial inclusion under the right conditions. Historically, many of the digital services used by low-income customers have operated in silos, with users only able to transact with other users on the same network. This is slowly changing. Countries like the Philippines and India have achieved interoperable systems for instant payments that encompass both banks and non-banks, and more interoperable services are going live all the time. COVID-19 has accelerated the adoption of new interoperable systems, including Transfiya in Colombia.
In many countries, however, these rails are still either not in place or have not achieved scale in terms of transaction volumes. Part of the reason more countries have not achieved success is that the process of promoting interoperability is complex and often contentious. Effective interoperability requires finding a delicate balance between cooperation and competition among financial services providers. Financial services providers participating in an interoperable system need to cooperate to grow and improve the overall market, while competing to expand their own market share.
This “coopetition” means that costs and revenues will change. If providers determine that the costs of participating in an interoperable system outweigh the revenues, they are unlikely to encourage interoperable transactions, even if interoperability is mandatory and technically enabled. For example, when interoperability was first introduced among mobile network operators in Kenya, a lack of incentives meant leading providers were not inclined to actively promote the service.
Driving effective interoperability requires aligning incentives and translating them into a set of procedures, rules and technical standards — a scheme that clarifies how interoperable transactions should occur and encourages financial services providers to actively participate in driving volumes through the system.
Market dynamics, such as scale, distribution, product diversification and competition, differ in each country, so these incentives will vary. A process that is successful in one market might not work in another – and vice versa.
But experience shows that a participatory process can help to ensure success. Where providers participate in defining rules, subject to regulatory oversight, they are more likely to work toward, rather than against, the goals of the system.
To promote interoperability, funders should support this participatory process and help ensure it considers low-income people’s needs. Funders who invest time in understanding market dynamics are well-suited to help participants effectively balance cooperation and competition. They can advocate for interoperability among market participants, cover the costs of necessary research, cover the costs of a participatory process, support individual providers in launching, marketing or improving products leveraging interoperability, or support the development of the connecting infrastructure.
CGAP just released a technical note, "Interoperability in Digital Financial Services: Emerging Guidance for Funders," to help funders understand what is at stake with interoperability projects and how they can help drive change. We encourage you to read the note and share your experiences.