Mobile payments and interoperability: Insights from the academic literature

Summary

Focus

A functional payment network requires significant infrastructure investment, which often has a public good element. At the same time, market forces may lead to the emergence of a dominant player. We focus on (i) the balance between competition and cooperation between service providers; (ii) the governance of key infrastructures in mobile payments; and (iii) the welfare implications of making mobile payment systems interoperable.

Contribution

We connect various streams of academic literature to analyse how alternative competition and regulatory policies may affect the development of mobile payments. We highlight the extent to which existing models, often coming from related industries (such as telecom, payments and banking) can be applied to study the effects of mobile money interoperability.

Findings

We identify four key dimensions of mobile payments interoperability. We find that the lack of interoperability may discourage entry and weaken competition. Without regulation, interoperability at the platform level may fail to emerge, even if it is welfare-improving, when a dominant player enjoys strong network externalities or when consumers can join several platforms. The intended pro-competitive effects of interoperability may be considerably weakened or even backfire if consumers face search costs or if fees are complex. Finally, interoperability of data creates a link between payments and other financial services, which may increase overall efficiency.

Abstract

We connect various streams of academic literature to analyze how alternative competition and regulatory policies may affect the development of digital financial services, and particularly of mobile payments. Our main objective is to highlight the extent to which existing models, often coming from related industries (such as telecom, payments, and banking) can be applied to study the effects of mobile money interoperability. We focus on four dimensions of interoperability. First, we consider mobile network interoperability (whether clients of one telecom can access another telecom's payment services) in connection with the IO literature on tying. Second, we discuss platform level interoperability (the ability to send money off-network) in light of the literature on compatibility. We also build on the behavioral IO literature to suggest how the effects of interoperability may be very heterogeneous across various types of firms and consumers, or even backfire. Third, we consider interoperability in the cash-in-cash-out agent network, in light of the literature on co-investment in network industries, and of more specific studies on ATMs' interoperability. Fourth, we discuss how the literature in banking and on data ownership can be used to understand interoperability of data. We conclude with some broader remarks on policy implications and on possible directions for future research.

JEL classification: L51, L96, G23, G28, O16

Keywords: mobile payments, interoperability, financial inclusion, competition policy