For most practitioners, interoperability brings to mind images of switches, network connections, aggregators and interfaces — in short, the technical tools that allow modern payment systems to work together. However, CGAP’s new global scan on digital financial services interoperability makes it clear that exchanging payments is about much more than technical connections.
No matter how well-designed the technology connecting payment systems, interoperability will not reach its full potential unless providers are incentivized to pass payments to each other. For this reason, interoperability must sometimes balance the conflicting interests of providers, striking a middle ground between competition and coordination. Achieving this balance is a part of what makes interoperability a complex issue. It is also a part of what makes interoperability more than just switches and aggregators.
CGAP’s assessment of mass-market, low-value accounts in 20 countries found that effective interoperability in digital financial services depends on doing three things well:
- Governance and operating rules. Rules should be in place to establish how participants in the interoperability arrangement will make decisions, jointly manage operations, and consider risk.
- Business agreements and incentives. Agreements should balance the economic interests of participants, from pricing to brand marketing, to incentivize the exchange of payments.
- Technical integration. The technical infrastructure connecting participants, anything from a payment switch or bilateral connection to a third-party service, should be sound.
CGAP’s survey, conducted with Glenbrook Partners, found interoperability in some form in each of the 20 countries; however, it did not find any country where all three elements were working at an optimal level. More broadly, it noted that there is often not enough focus on governance and business agreements, and that focusing too heavily on technical aspects may actually hinder the scalability of interoperable transactions.
Beyond these elements, two broad patterns in the approaches to interoperability emerged from our analysis of the scan. Some countries have followed a market-wide approach aimed at building a centralized infrastructure across all use cases and providers. Others have followed a more focused approach, first tackling a small number of use cases according to the needs of the providers involved.
The timing of these efforts similarly varies. In some markets, interoperability is being discussed as DFS grows and matures. In other markets, interoperability discussions have started before DFS has made a sizeable impact. There is not yet enough evidence to determine whether a particular timing or approach works best, but CGAP will continue to monitor the markets where these approaches are being deployed and whether they are achieving success.
Interoperability is a complex, multi-dimensional puzzle. Models can be difficult to get right. However, interoperable systems are important to achieving broader financial inclusion. Network effects from larger and more efficient systems promise expanded use of digital financial services by low-income populations. Expanded consumer use cases mean this access has the potential to enrich lives beyond the payment uses most common today. A detailed analysis of this global scan is available in a working paper and an accompanying PowerPoint with one-page descriptions of each country.
Are certain interoperability approaches most relevant for specific use cases? What is the relevance of digital financial services market development in starting to connect providers? The scan raises a number of unanswered questions. CGAP will continue to engage in this issue to help ensure interoperability works for the poor.
Interoperability can work provided each of the players in the market are prepared to play by the same rules. In established payment sectors, interchange fees allow providers to reinvest in the products and technology while higher transaction volumes drive profits together with increased customer satisfaction. In reality, the main problems facing interoperability continue to be a lack of trust between providers and poor/restrictive regulatory environments .