No matter how well designed the technology, interoperability in digital financial services will not reach its full potential unless the right business structure and incentives are in place.
This is one of the finding from a new CGAP report, “Digital Finance Interoperability and Financial Inclusion: A 20-Country Scan”.
When financial service providers and regulators talk about interoperability, it brings to mind images of switches, platforms and software – in short, the technical tools that allow modern payment systems to work together.
But CGAP’s new global survey of interoperability finds that seamlessly exchanging payments quickly and cheaply – an important means for connecting poor people to the formal economy – is about more than the technical connections.
A successful interoperable payment system depends upon three elements, it says:
* Governance and operating rules covering how participants make decisions, jointly manage operations and consider risk must be in place;
* Business agreements that balance the economic interests of participants, from pricing to brand marketing, are needed in order to incentivize them to exchange payments; and
* The technical infrastructure connecting participants, which can be anything from a payment switch or a bilateral connection to a third-party service, must be sound.
Greta Bull, CEO of CGAP, comments: “Interoperability is important for the development of digital financial services, as it provides a better experience for low-income consumers and introduces efficiencies and scale into the payment system. Many countries are exploring pathways to interoperability. What this research demonstrates is that there is no one formula for achieving interoperability.”
The survey also made the following findings:
* Timing: Although various systems and technical infrastructure may be in place, it takes time for changes in financial behavior to happen and for end users to understand how to use the system.
* Focus on technology is shortsighted: Although interoperable systems may involve technology, other crucial elements such as good governance and business incentives are essential. The end result will be more people using formal financial services and businesses benefiting from increased uptake.
* Chicken or egg? Digital financial services is not necessarily a precondition to set up an interoperable system, and there is no clear route or timing to set up the system. Some interoperable systems are market driven and some are government and policy driven; it depends on the country context.
CGAP’s survey is a first of its kind and shows the progress made toward interoperability in 20 countries across three continents.
