Championing interoperability for financial inclusion: carrot or stick?

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Mobile payments at Hawala Market in Daykundi, Afghanistan. Photo: Institute for Money, Technology and Financial Inclusion

Interoperability – a term used in a variety of industries, including telecommunications and financial services – is generally understood to refer to the ability of different systems and sometimes even different products to seamlessly interact. For payment systems, “interoperability” depends not only on the technical ability of two platforms to interact but also the contractual relationships between the entities wanting to interact. Traditionally, interoperability has been established by the same type of institutions, by banks’ participation in a central retail payment infrastructure (e.g. a central switch or an automated clearing house) and adhering to a payment scheme (e.g. a card scheme or a credit transfer scheme).

These days interoperability in retail payments is no longer limited by national borders and the overall ecosystem has become more complex. Non-bank payment service providers have emerged (many of them mobile network operators-MNOs) and there are new types of payment instruments (e.g. mobile money). Innovative payment instruments often start as proprietary solutions, processed in-house rather than via a central platform. In that regard, interoperability can help tear down barriers by enabling transactions between customer accounts of different mobile money solutions. In some countries, interoperability even facilitates transactions across different type of accounts (e.g. deposit transaction accounts held with banks and mobile money accounts held with non-bank service providers).

Interoperability can promote competition, increase the financial viability of service offerings by reducing fixed costs and unlocking economies of scale, and improve the utility of payment instruments and convenience for the end user. All these elements are generally considered to facilitate financial inclusion. A lack of interoperability can result in inefficiencies due to overlapping or limited coverage and sunken investment costs, which can negatively impact adoption and usage. The CPMI-WBG Payments Aspects of Financial Inclusion Task Force acknowledges the importance of interoperability when it comes to increased access to and universal usage of transaction accounts.

Despite the advantages that interoperability brings, not all market participants will necessarily embrace interoperability initiatives. For example, in highly concentrated markets with only one or a few dominant player(s), the short-term objectives to lock in customers and retain the existing market share might distract dominant market participants from the medium to long-term benefits of a growing the overall market. The situation might be even trickier when it comes to interoperability between new market entrants (often non-banks) and incumbents. In this regard, leaving interoperability to market forces alone might not necessarily lead to a positive outcome. However, mandating interoperability by regulation (e.g. by specifying a timeframe in which payment services must become interoperable) is not necessarily promising and will not magically result in interoperability. Interoperability, whether mandated or voluntary, can only be realized if there are private and/or public sector champions who embrace the vision of interoperability and are able to get all the relevant stakeholders on board.

But what role, if any, should regulation play in facilitating interoperability? And on what timetable? As stated in the GPFI white paper “Global Standard-Setting Bodies and Financial Inclusion: The Evolving Landscape,” some argue that mandating interoperability at an early stage can reduce the incentives for firms to enter new markets and compete. Where the regulators and market are unable to establish interoperability from the beginning the focus should, at a minimum, be on ensuring that interoperability is technologically feasible. At the same time, regulators should ensure they have both the necessary information and regulatory power to intervene when there is evidence that a dominant position is being exploited. Specifically, there should be effective oversight arrangements that address the three levels of interoperability: system-wide, cross-system, and infrastructure. Requiring infrastructure-level and system-wide interoperability and disallowing exclusivity arrangements can set the stage for cross-system interoperability in the future.

Ensuring that interoperability is technologically feasible may involve using international technical standards for financial services and telecommunication services, rather than domestic or proprietary ones. Therefore, technical standard-setters from both finance and telecoms should be involved in that process. One such example is the International Telecommunications Union’s Focus Group on Digital Financial Services.  In the area of interoperability, the Focus Group is currently addressing a number of highly topical issues. The Focus Group’s Interoperability Working Group aims to answer a number of questions: Which cooperation frameworks in the payments and/or financial inclusion space could be leveraged for interoperability initiatives? What can we learn from existing interoperability agreements and what are the key elements of an interoperable scheme? How can international interoperability be promoted? What are the risks that come with interoperability and how can they be addressed by authorities? What is the role of non-banks’ (including MNOs’) access to payment infrastructures for interoperability? How can agent (non) exclusivity affect interoperability?

By the end of this year, the ITU Focus Group plans to publish a number of guidance notes to those interested in making interoperability happen, not at least for the benefit of financial inclusion.


Thomas Lammer

Senior Financial Sector Specialist

Kate Lauer

Lawyer and Senior Policy aAdvisor, CGAP

Olga Tomilova

Regional Representative for Europe and Central Asia (ECA)

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