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Global, June, 29 2015 - Interoperability has enormous potential to transform the financial services landscape in emerging markets and produce significant gains in financial inclusion.
In the past couple of years there has been increasing interest in the topic of “interoperability” in mobile money and its potential impact for the nascent sector. A handful of deployments, such as in Indonesia and more recently in Tanzania, have garnered attention in various blogs and reports, while a growing number of non-governmental bodies and foundations place interoperability between financial services players as one of the key conditions for achieving financial inclusion.
There is indeed promising potential in interoperability, and as practitioners of two companies who have been deeply involved in promoting it – Amitabh Saxena, who previously led mobile money at MasterCard in Latin America, and Selma Ribica, who leads interoperability strategy in Vodafone’s global M-Pesa team – we wanted to share our experiences and provide some nuance on some of the industry perspectives currently being advocated.
A simplified definition of interoperability
While there have been several attempts to thoroughly define “mobile money interoperability” with all its permutations, we think it’s best to first define interoperability at a conceptual level: a two-way interaction between any two or more systems. A few cases in point: users of one provider of e-mail, automatic teller machines (ATMs) and text messages can interact with users of a competing service. But this is not the case with, say, social media (think Facebook and Google+) and digital music (such as Apple iTunes and Google Play Music).
As applied to mobile money – which effectively covers both the retail banking and payments sectors – the ideal state of interoperability refers to interaction between any service provider (financial institution, mobile network operator, third-party vendor) through any form factor (card, mobile, tablet, PC) and for a range of products (sometimes referred to as “use-cases”), primarily money transfer, depositing and withdrawing cash, and merchant payments – domestically and/or across geographies. In practical terms, this would enable an entrepreneur on Safaricom’s M-Pesa in Kenya who travels to India to use her phone to purchase goods from a merchant who accepts MasterCard. In this regard, the utopia is that, from the user perspective, banking and payments become as seamless as e-mail: irrespective of geography, e-mail provider, transmission technology or Internet service provider, the transaction just works – safely, rapidly and cheaply.
If achieved, the benefits of full interoperability would be substantial. For end-users – the consumer and merchants – it means greater relevance; in other words, the ability to do more transactions and have access to more services, since there is no limitation if the other party (be it another consumer, agent, merchant, ATM, etc.) belongs to another provider. Greater relevance means more users and transactions, leading to more revenue for providers, greater economies of scale, and eventually, a decrease in the use of cash. It should be noted while this is a net benefit for the industry, since it increases the overall market size and profit pool, there will be market winners and losers.
With such a compelling vision, it makes sense to ask: What should be done – and not done – to promote interoperability? While there have been recommendations on the technical and tactical elements to implement it, we offer three macro insights to ensure that the winning conditions are present in the first place.
Insight #1: Non-interoperability isn’t necessarily a bad thing
Just because full-blown interoperability is ideal to strive toward in a mature ecosystem does not mean its absence is detrimental. So-called “closed” systems can still provide significant benefits to both service providers and users. Until recently, Safaricom’s M-Pesa in Kenya and Tigo’s Cash in Paraguay were restricted to its consumers and exclusive agents; both have continued to grow thanks to the satisfaction of its respective end-users. Outside of mobile money, Facebook and Apple’s iTunes are proof positive that non-interoperable systems can still be huge successes. And the more users that the leading player attracts under its system, the less incentive it has to collaborate with rivals.
Insight #2: Timing is a crucial factor
Particularly in markets with several providers, it is important that each provider achieve a critical mass of users and transactions before interoperating. When Amitabh worked for MasterCard in Latin America a couple of years ago, very few banks and mobile operators had launched their own mobile money programs, and their most pressing need was simply to get up and running. They wanted to see if users responded to the concept of mobile money in the first place – rather than immediately join an interoperable system that MasterCard was building among banks and mobile operators. Thus, while interoperability can provide valuable benefits, when to participate in it is a key consideration. Moreover, this decision should be left to the provider; advocating interoperability on fledgling players, either by governments or by the private sector, while well-intentioned, often ends up being counterproductive. Recently, the Bank of Ghana acknowledged that its 2008 regulation mandating interoperability did not help increase financial inclusion and issued revised, less prescriptive regulation in 2015. Moreover, imposing interoperability too early may take away some of the incentives for players to invest in the mobile money sector, as it diminishes the business case benefits on churn-reduction and differentiation. As a result, interoperability in these circumstances is likely to work against the goal of financial inclusion.
Insight #3: Market structure and competitive dynamics determine winners and incentives to interoperate
As an industry, we need to carefully assess the market structure to determine pathways to interoperability. Generally speaking, smaller providers have incentives to interoperate, as they gain access to a larger end-user base; the larger ones, for precisely the same reason, are more reluctant. That being said, it is not impossible. In Tanzania, Vodacom, the market incumbent, recently agreed to interoperate with Tigo and Airtel, two smaller mobile operators, and enable peer-to-peer payments across networks, motivated by the benefit of increased intra-regional transactions currently dominated by cash. In the early years of fierce competition, Vodacom had invested millions of dollars in building its mobile money customer base and distribution network, and sought to recoup its investment by providing services exclusively to its end-users. But once it saw the growth of its domestic money transfer (i.e., P2P) transactions peak, the right incentives to create a more unified market were seen by all the mobile operators.
In other cases, smaller players can come together on a "level" playing field and interoperate, and eventually create sufficient mass in aggregate to entice the market leader to join. (This is what occurred with ATM interoperability in the U.S. in the 1970s and '80s, when Citibank, whose proprietary ATM network was the largest of any individual bank, joined a consortium of banks that had joined forces to create a much larger network.) In the case of agent interoperability, or merging distribution networks between different mobile money operators, the dynamics are similar. Typically, as the distribution network represents a key competitive advantage for a mobile money operator, the incumbents are reluctant to participate in cash-in and cash-out interoperability, while smaller players are keen to merge resources and the risk of "free-riding" on the bigger players’ investments are higher.
Lastly, special attention should be paid to collaboration between industry challengers and incumbents. The previous examples describe participants in the same industry as competitors (i.e., mobile operators in Tanzania; banks in the U.S.). But full-fledged interoperability means interaction between financial institutions and payment networks, who until recently exclusively owned the banking and payments space, and newer entrants such as mobile operators (and even more recently, technology companies such as Google and Facebook). The former understandably feel that the latter have invaded their turf. This does not mean that they are not willing to strike mutually beneficial agreements, but only so long as those agreements do not threaten the core business directly. Kenya again provides a useful case in point: Safaricom and Equity Bank, two rivals and each leaders in their own industry, struck an agreement to provide a mobile money linked savings account in 2010 (a development which Amitabh described at the time). Yet it unraveled shortly thereafter, presumably because they were in too much direct competition with each other for retail customers. Two years later, Safaricom tried again, but this time worked with a local, non-retail bank, the Commercial Bank of Africa (CBA), to offer a savings and loan product called M-Shwari. The complementary skill-sets and lack of head-on competition enabled both partners to jointly create a product and market it to the benefit of customers. And, with 4.5 million active customers and over $44 million USD in savings accounts as of December 2014, it has proved a major success.
Interoperability has enormous potential to transform the financial services landscape in emerging markets and produce significant gains in financial inclusion. With ambitious plans under way to enable it in several other markets, we feel optimistic that if the above considerations are taken into account, there will be a greater likelihood of success for providers and consumers alike.