The BackEnd explores the product development process in African tech. We take you into the minds of those who conceived, designed and built the product; highlighting product uniqueness, user behaviour assumptions and challenges during the product cycle.
Interoperability is not the easiest word in the dictionary to pronounce. It is a complex and abstract mouthful. But it is also an accessible concept driving modern digital innovations.
It is the process of creating successful handshakes between different entities.
Whether in fintech or telecoms, education technology or ecommerce, energy or transport, the concept implies creating a framework that makes it possible and convenient for the consumer of a product from institution A to exchange value with a consumer from institution B.
The key factor here is reducing or removing barriers to the cost of access and exchange for consumers.
In a state of nature, consumers who desperately need to exchange legitimate value will find whatever means it takes to do so. They will pay twice the nominal cost if necessary.
But this can often be expensive, reserved only for people with the means to go the extra mile. This breeds an exclusive ecosystem of services that really should be accessible to the general population. Also, an exclusive ecosystem is by definition opaque and prone to being taken advantage of by bad actors.
It is in this context that interoperability is one of many often-used words in financial inclusion circles. In the mobile money space, interoperability between accounts operated by different institutions enables fast, convenient, affordable and secure payments.
In an interoperable financial services environment, individuals can easily carry our peer-to-peer transactions and stay away from the use of cash as an alternative method of payment.
Governments benefit because as more consumers enter the financial system with their interoperable accounts, these people can access financial products like loans and insurance, be taxable and build out enterprises that have the potential to grow the economy and aid development.
When there is interoperability between mobile money accounts, and between mobile money accounts and banks, the financial system benefits.
“Interoperability has the potential to drive positive long-term network effects, similar to automated teller machines (ATMs), automated clearing houses (ACH) and debit and credit payment cards,” says the GSM Association in its June 2020 report on interoperability in the mobile money industry.
While all of the above is true, interoperability is not a direct or sole accelerator of financial inclusion. It’s a signal that access can be expanded in a given environment, not a seal or guarantee.
A naive gospel of interoperability assumes that in markets that are highly interoperable, most people will be banked or have formal financial accounts. But GSMA’s evidence from three highly populous countries with significant levels of interoperability in their financial systems – Pakistan, Indonesia and Nigeria – doesn’t support this wishful thinking.
In Nigeria, innovations like the bank verification number, a standard 10-digit account number and microfinancing have improved the landscape but a 60million+ inclusion gap subsists.
The ecosystem still leans heavily on cash transfers between consumers who seek to avoid bank charges. Operators are at different levels of technological sophistication, meaning downtime affects success rate. The underlying telecommunications infrastructure required to absorb more people into modern banking is not spreading fast enough, as 2G remains king especially in the hinterlands.
Nigeria’s 40% bank exclusion rate – one of the worst seven in the world – could get worse as people drop into lower economic classes due to a projected recession. A lot of people will reduce their data consumption and revert to more analog solutions for most needs.
“A host of favourable socioeconomic and regulatory factors beyond interoperability contribute to achieving financial inclusion,” the GSMA’s report says.
In other words, it will not be enough for banks to share APIs and have common standards with mobile money providers for the financial inclusion dawn to break. The business environment has to provide the “commercial incentive” for interoperability to yield results.
This incentive and clear path to scale mean different things for banks and mobile money providers inclined to adopt interoperability. Both entities make money in different ways.
Banks rely on interests on loans issued; this can be low volume yet produce high value. On the other hand, mobile money operators rely on collecting transaction fees from mostly low-value high-volume transactions.
In a follow up to this, we will discuss the considerations facing mobile money providers in Africa to be interoperable while running profitable businesses in the face of competition.