Interoperability plays a key role in many people’s daily lives, especially in developed countries. When making a phone call, sending an email or withdrawing cash from an ATM, we no longer worry whether the person on the other side of the transaction is using the same provider we do. This is thanks to interoperability.
By routing transactions between different providers, interoperability makes financial services more convenient and encourages customers to transact more. This generates network effects that create economies of scale for providers and increase the financial viability of their services. Interoperability can also break down barriers to entering the mobile payment space and promote competition and innovation. Without interoperability, customers often choose the same provider as their friends, suppliers or clients, in order to directly transact with them – potentially creating dominant players. With interoperability, customers are more likely to choose based on value proposition, customer service quality and pricing rather than on a provider’s customer base. For these reasons, CGAP believes interoperability can unlock the potential of digital financial services (DFS) and advance financial inclusion.
Yet interoperability remains largely absent from the mobile payment services used by low-income customers. In many emerging markets, customers develop difficult and costly workarounds to transact with users of different services, like swapping SIM cards, using an agent to intermediate or reverting to cash.
To encourage mobile payment interoperability, funders might be tempted to support the creation of routing infrastructure (i.e., a switch for mobile payments). CGAP’s 2017 Funder Survey shows that funders are indeed increasing their support to DFS infrastructure. On the face of it, funders’ role in supporting interoperability seems straightforward: They provide the infrastructure mobile payment providers use to increase their value proposition and grow their markets, clients benefit from improved financial services and financial inclusion takes off.
Unfortunately, it’s not so simple. Recent experiences worldwide highlight that a switch alone is not enough to promote interoperability: It’s a piece in a much broader ecosystem. .
Is interoperability the best way to achieve my financial inclusion goals?
Despite all the benefits outlined above, interoperability projects may or may not align with a funder’s financial inclusion goals. Early evidence suggests that interoperability enhances two key dimensions often used to measure financial inclusion: the quality and use of mobile payments services. However, interoperability does not yet have a proven impact on people’s access to these services (i.e., providers’ ability to attract new customers). If a funder’s financial inclusion goal involves reaching populations that are currently excluded from the financial sector, interoperability probably won’t be the solution.
Similarly, depending on sector dynamics — in terms of scale, risk and product diversification — interoperability might discourage rather than promote innovation. Providers might refrain from investing and innovating if the successful innovations are immediately shared with competitors through an interoperable platform. Interoperability is not always a solution to promote innovation and growth.
Funders should therefore first clarify what they are trying to achieve and whether interoperability is the right way to get there.
Is a mobile payment switch the best infrastructure to connect providers?
When interoperability makes sense given a funder’s goals, a new mobile payment switch may or may not be needed. Nonbank participants, such as fintechs and mobile money providers serving the unbanked, often have a variety of ways to connect. Depending on economic, operational and risk considerations, they may prefer an alternative solution. Examples include direct API connections, as in Tanzania; third-party hubs or aggregators, as in cross-border mobile payments in Africa; links to banks that are connected to a national switch, as in India; and connection to existing switching technology, as MTN has done in Uganda.
A new switch has its benefits. It provides clear ownership and governance, easier scalability and improved efficiencies at scale. But it also requires a higher upfront investment and can end up duplicating existing infrastructure in an already crowded space. When separate switches are created for each use case, channel, provider type or country, it can lock the industry into subscale arrangements, with customers bearing the burden through higher costs and poor user experience.
As discussed in an earlier blog post, funders must decide whether the specifics of a given situation warrant an additional investment in new technology. Key considerations include economic factors, such as the expected transaction volumes, but also more intangible factors, such as the governance, rule-making and ownership structures of available alternatives.
Is the market ready for interoperability?
If providers do not see a business case for interoperable services, they are less likely to drive use of the service. Mandating interoperability through regulation does not always help. When interoperability becomes a rule rather than a business decision, providers often work around the requirements.
For example, mobile money interoperability has been functional and mandatory in Kenya since April 2018, but early evidence shows that there are few interoperable transactions. Providers are not promoting the service; some are even hiding it behind a complex user experience. For instance, users of one service initially had to know a USSD code to make an interoperable transfer because the transfers did not appear in the service’s menu.
There is no single path to building effective interoperable systems, but it always requires a comprehensive scheme rather than just a switch. Generally, the first step toward building this scheme should be to get providers’ buy-in by developing a profitable business case and translating it into business arrangements that state how stakeholders will share the costs and revenues from interoperable transactions. Next, or in parallel, governance rules should clearly outline the way decisions will be made (e.g., who can participate in the interoperability scheme). These rules should also define how providers will share risks and responsibilities.
Only once these arrangements are in place should the conversation move to connecting the solutions.
Funders should adopt a holistic view
There are many issues around interoperability, and they are not just about technology or infrastructure. Funders and regulators should adopt a holistic view, aiming for comprehensive schemes that align market actors’ incentives and provide clear governance rules.
Great article, thank you for the thought stimulating and multi-faceted perspectives shared.
I totally agree with the article on interoperability having implemented an all-inclusive national switch in Malawi.
I have a few points to share - from experience.
We currently have all banks and mobile money operators integrated to the national switch.
We are working on increasing the number of use cases on the national switch to drive transactions volumes.
A buy-on of industry players is very critical to the success of the switch initiative. The national switch in Malawi was funded by the World Bank. The firm managing the national switch is owned and governed by the participants themselves. In a way such a governance structure has led to a supportive landscape.
Issues around innovativeness come where the financial industry is still competing on infrastructure basis. We need to move into an era where a national switch is not only being used for interoperability, but rather a centre of excellence for the financial industry to collectively innovate, continue to share infrastructure in areas where competition does not create the network effects, cost efficiencies and economies of scale.
When we start looking at the advantages of the non- competitiveness of national switches and digging foe hidden potentials buried in national switches, financial insitutions have potential to collaborate, innovate for their own good and for the good of the economies where they operate.