By Carol Coye Benson and Scott Loftesness; published by Consultative Group to Assist the Poor (CGAP); 2012; 46 pages; available at: http://www.cgap.org/sites/default/files/Interoperability_in_Electronic_Payments.pdf
This report explores the issue of cross-compatibility among electronic payment systems that serve poor and under-banked people in developing countries. The authors argue that end users, including merchants, governments and consumers, find it easier to make and accept payments when payment systems are interoperable. Service providers to these end users, including networks, processors and banks, gain additional revenue in the form of transactions made via interoperable payment systems that may not have been made electronically if the only option were to use closed-loop (non-interoperable) systems. Interoperability between payment systems also can enable enhanced risk management and produce cost efficiencies compared with closed-loop systems.
The report identifies three ways in which interoperability in payment systems can be achieved: (1) simple scheme interoperability; (2) network interoperability; and (3) system interoperability. Simple scheme interoperability is defined by the authors as “a feature of open-loop payments systems, or ‘schemes,’ which consumers and businesses access through their relationships with their banks.” Under this method, banks form a group that agrees to be bound by a set of rules whereby each bank allows other member bank’s customers to send and receive funds to and from their customers. Checks, electronic funds transfer (EFT) systems and open-loop credit and debit card systems are examples of interoperability in payment systems achieved through simple scheme interoperability.
The second system, network interoperability, involves multiple systems, such as those described above, agreeing to work together. According to the authors, network interoperability systems are “most typically used for cross-border or cross-regional payments acceptance – allowing the holder of a domestic credit card, for example, to use that card in another country.” Therefore these systems are rarely used by banks competing for business in a single market.
The final method of interoperability, parallel system interoperability, is defined by the authors as one that “allows the merchant or agent accepting payment from a consumer to participate in multiple schemes.” Under this system, a commercial service provider acts as an intermediary between the various schemes and the merchant. Although the merchant is technically accepting payments from the various schemes separately, the use of the intermediary is intended to simplify this process, thus achieving some of the effects of interoperability.
The authors conclude that promoting interoperable payment systems will benefit both consumers and businesses, making it easier to make and accept payments and increasing revenue for businesses. Interoperability, however, “rarely happens on its own,” the authors argue that efforts must be made by businesses and governments to facilitate interoperable payment systems.
By Makai McClintock, Research Associate
About CGAP (Consultative Group to Assist the Poor)
CGAP (Consultative Group to Assist the Poor) is a US-based nonprofit policy and research center dedicated to increasing financial access to poor people worldwide. CGAP is supported by approximately 40 development agencies and private foundations. Its mission is to provide market intelligence, to promote standards and to offer advisory services to governments, microfinance providers, donors and investors. CGAP reported a budget of USD 22.5 million for the fiscal year ending June 2012. CGAP is co-located with the offices of the World Bank Group in Washington DC.
Sources and Additional Resources
“Interoperability in Electronic Payments: Lessons and Opportunities;” by Carol Coye Benson and Scott Loftesness; published by Consultative Group to Assist the Poor (CGAP); 2012; 46 pages; available at: http://www.cgap.org/sites/default/files/Interoperability_in_Electronic_Payments.pdf
MicroCapital. April 15, 2013, “MICROCAPITAL BRIEF: CGAP, Grameen Foundation, Mobile Telecommunications Network (MTN) Uganda to Finance $1m Mobile Finance Product Research and Development Initiative,” https://www.microcapital.org/microcapital-brief-cgap-grameen-foundation-mobile-telecommunications-network-mtn-uganda-to-finance-1m-mobile-finance-product-research-and-development-initiative/
MicroCaptial. March 18, 2013, “MICROCAPITAL BRIEF: Boston University, CGAP Partner on Financial Inclusion Regulation Website, Request Submissions of Material from Microfinance Stakeholders,” https://www.microcapital.org/microcapital-brief-boston-university-cgap-partner-on-financial-inclusion-regulation-website-request-submissions-of-material-from-microfinance-stakeholders/
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