Selma Ribica

NexThought Monday – Mobile Money Interoperability is Not a Silver Bullet for Financial Inclusion

Interoperability between mobile money operators (MMOs) is a hot topic right now – including at this week’s Mobile Money and Digital Payments Global conference. Various stakeholders have placed it at the top of their agenda, lined up funds behind related projects, or are simply debating whether it will prove to be the key to increasing mobile money adoption.

Mobile Money Interoperability (MMI) can undoubtedly lend support to extending the reach of mobile money and growing its prevalence over cash. However, MMI can also pose significant risks for the attractiveness of the industry and halt the customer acquisition efforts. In order to reap the benefits of MMI, the following three dimensions need to be considered:

The question of scope

The first aspect of interoperability that must be addressed is the question of scope: To start, which entities should be enabled to transfer e-money on each other’s networks? In mature but fragmented mobile money markets, enabling e-money flows between different MMOs – usually called account-to-account interoperability (A2A) – could bring immediate increases in the velocity of digital transfers. It can also help mobile money acquire that extra mile of the cash-dominated person-to-person transactions.

Interoperability between MMOs and other players, such as banks, payment card players or microfinance institutions, could also bring benefits, enabling ecosystem interoperability and providing new avenues of growth, such as merchant/transport payments and cashless distribution.

But while connecting the fragmented players in different areas of the payments ecosystem can accelerate the digitalization of cash, we should be wary of the negative effects of scale economies in mobile money agent networks. Agent interoperability, whereby any mobile money customer could cash-in or cash-out from the agent of any mobile money service provider, could reduce operators’ incentives to invest in agent networks, suppressing competition and potentially encouraging free-rider behaviour. Distribution synergies can be achieved instead through agent non-exclusivity, and direct competition between those operators that are prepared to invest in their distribution network.

Structure and incentives

A second question that needs to be considered is how to choose the technology architecture that will enable interconnection between players. In many markets, this could mean reverting to solutions from the developed world, such as banking switches or traditional Visa/MasterCard solutions. But mobile money is built on principles of affordability and simplicity: inserting a commercial central switch into the value chain is likely to increase prices for customers, making it harder to get funds for growth and innovation. In addition, a reliance on a single architecture may eventually reduce the efficiency of the solution due to lack of competition. Potential solutions to these risks could be the co-existence of bilateral interconnections between MMOs, and a hub model that ensures a balanced governance system between all participants of the hub.

The more complex part of this question is the challenge of setting the right incentives for participating and investing in the new interoperable world. Incentives should be set on both the retail and wholesale levels to encourage customers and services providers to embrace the new reality.

To create a healthy ecosystem, interconnecting businesses, merchants and MMOs must recognise and appreciate each other’s business models and, ultimately, how much the end customer is willing to pay. Unfortunately, most of the projects funded in the field ignore these economic challenges and focus on the simpler task of building technology infrastructure.

The question of timing

Finally, perhaps the most critical question for interoperability is: When should it be implemented? In order for mobile money services to reach scale, distribution networks needs to be built in rural areas where the need for financial inclusion is highest. But if we enable interconnection in a given market – before the major players have reached a critical mass of customers – this could reduce the incentives for infrastructure investment. Recent launches of interoperability in young markets such as Indonesia and Sri Lanka have not demonstrated its power to accelerate mobile money adoption.

As the telecoms industry commoditizes, mobile network operators (MNOs) that run mobile money services are increasingly suffering from reduced access to free cash. If interoperability between MMOs removes the churn benefits of mobile money for the core telecoms business, MNOs will face two choices. They can allocate resources to projects with bigger returns than mobile money, renowned for its thin margins. Or, to improve the business case, they can increase prices for mobile money customers. Both outcomes are likely to suppress customer adoption and reduce financial inclusion, with low-yield rural areas the first to suffer.

M-Pesa and Vodafone (where I work) are behind plans to launch A2A interoperability in Tanzania, one of the most mature mobile money markets. Tremendous growth in financial inclusion has happened there without interoperability, but rather on the back of years of intense competition between MNOs. According to Finscope’s study from 2013, financial exclusion has been halved in Tanzania since 2009, and currently over 43 percent of the population are “banked” by “non-bank formal products.” Is the introduction of interoperability going to grow these numbers, or merely grow the volumes that flow via mobile money channels?

A2A interconnection is unlikely to become the silver bullet for mobile money adoption. It can only drive financial inclusion in the long-term if it includes the wider ecosystem, is accompanied by successful commercial strategies to roll out new services and, critically, is done at the right time and with the right scope. If and when it happens, interoperability must focus on protecting the investment incentives and customer trust upon which the future of mobile money depends.

Selma Ribica leads M-Pesa commercial strategy for international remittances, interoperability and global strategic partnerships in Vodafone Group in London.

digital payments, mobile finance