Page 105 - ITU-T Focus Group Digital Financial Services – Interoperability

ITU-T Focus Group Digital Financial Services
Interoperability

1 Introduction

Interoperability is deemed to be one of the crucial characteristics of financial and information and communications
technology (ICT) infrastructures, and for the widespread availability of DFS, effectively supporting financial
inclusion . Whereas the widespread availability of digital solutions for savings, credit, and payments provides
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people with access to financial services, payments interoperability enables these targeted people to transfer
their money to any other individual, without needing to have multiple transaction accounts.
While everyone should have the option to have more than one account, if she/he decides to do so, nobody
should be required to open accounts due to a lack of interoperability, since this might involve costs coming
from the existence of idle balances or from a higher incidence of fees to cope with their management. Since
costs are often quoted as one of the most important reasons not to have an account, products that effectively
meet a broad range of transaction needs of the targeted population (e.g. via interoperability) at little or no
cost have a higher potential to increase access to and usage of transaction accounts .
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Recent literature points out interoperability issues as a major obstacle to the implementation of DFS . However,
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interoperability is not always considered as a desirable objective by service providers, especially not if they
are dominant market players. This setting makes room for the rise of the willingness of governments seeking
inclusion to induce interoperability.
Despite the fact that some consensus has been achieved and the regulator can now have an important role in
inducing interoperability , the right timing for and scope of the regulator’s actions is still an open discussion. On
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one hand, early intervention may adversely affect market development by raising entry barriers and removing
first mover incentives. For example, innovative solutions may be unsuccessful with early interoperability
induction because of the reduction of the potential revenue they would obtain in the case where they were
provided as stand-alone solutions . On the other hand, intervening too late might make it difficult – if not
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impossible – to establish a competitive, interoperable market. As a result, undesired outcomes, such as
oligopolistic or even monopolistic structures, and market power concentration can arise. Changing these
market structures once they are established is challenging and will likely draw opposition from incumbents,
who fear the competition from potential new entrants and want to defend their current market position.

Thus, the question becomes: What is the right time for the regulator to intervene and induce interoperability
in a country’s DFS market? There is already extensive theoretical economic literature (which balances the
benefits and costs of the government’s intervention in the market ) that may provide insights for answering
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this question. When it comes to interoperability, although there is some anecdotal evidence, typically we
find a lack of ex ante/ex post data. Thus, analyses is limited, and any conclusion about whether regulatory
intervention has improved interoperability must be carefully considered.

The present work contributes to the topic providing insights shared by five regulators who participated in the
DFS Focus Group WG on Interoperability.

2 According to the ITU Digital Financial Services Focus Group’s glossary, interoperability is “the ability to exchange payments
transactions between and among providers. This can be done by providers participating in a SCHEME or by a variety of bilateral
or multilateral arrangements”. “When payment systems are interoperable, they allow two or more proprietary platforms or even
different products to interact seamlessly”.
3 See the Payment Aspects for Financial Inclusion report (CPMI and World Bank, 2016).
4 See Albuquerque et al. (2014).
5 For recent accordingly claims, see, e.g., David-West (2016); Bankable Frontier Associates (2012).
6 There is a lack of quantitative assessment of these assumptions. According to Dahlberg et al. (2015), limited progress seems to
have been made even if a large number of articles and notes have been published about digital payments.
7 Indeed, the literature on market power and regulation and on contract theory and incentives is especially applicable to this topic.
See, for example, Laffont and Tirole (1993), Laffont and Tirole (1999) and Aghion et al. (2016).

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