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Mobile money is a widespread business today available in two-thirds of low-and-middle-income countries. By the end of December 2016, 277 mobile money services were operating in 92 countries.

However, a majority of these mobile money operators provide closed loop services, which restricts the scope of digital transactions between users registered on diverse networks.

Srinivas Nidugondi, Senior Vice President & Head of Mobile Financial Solutions at Mahindra Comviva discusses the importance of interoperability between mobile money services in underpinning market growth in this first instalment of a two-part article which also appears in MEF’s most recent free Mobile Money eBulletin.

There is ample evidence that the broader goals of financial inclusion as well as less cash are inexorably tied to mobile money uptake, especially in growth markets.

However, it is also important to note that the potential and future growth of the entire mobile money ecosystem depends on the size of the network of people sending or receiving money through the network. This network gets even bigger if more mobile money service providers are connected with each other and to banks – or, in other words, moving from a closed loop to an open loop system based.

Both the GSMA and the World Bank are working towards interoperability. In 2014, the World Bank, discussing the expanding digital payments ecosystem said: “No one provider or sector can justify an investment in all of these elements or handle the contractual requirements of dealing with so many players. Rather, multiple players must be able to interconnect where necessary to provide individuals with a wide range of services, and must be able to do so on fair and equitable cost and access terms.”

The need for interoperability

Markets without interoperability (closed loop) rely heavily on off-net transfers. In an off-net transfer when a sender registered on one mobile money network sends money to a recipient registered on another mobile network, the recipient receives a withdrawal code via SMS. In order to cash-out money, the recipient has to visit an agent of the sender’s mobile money service and provide him with the withdrawal code.

This is an example of a poor user experience because:

1) The recipient has to spend his time and money in travelling to the agent and cash-out money

2) The recipient might have to pay the cash-out service charges

3) Carrying cash in person poses security risks.

“There is ample evidence that the broader goals of financial inclusion as well as less cash are inexorably tied to mobile money uptake, especially in growth markets.”

Also, in an off-net transfer like this, the sending operator will have to pay agent commission, which lowers the margin for them. The recipient does not have access to money in digital format, as the money is en-cashed instantly. On a broader scale, off-net transfers increase the reliance over cash in mobile money payments, which defeats the purpose of digitizing payments.

Reasons for lack of interoperability

Markets lack interoperability due to a number of reasons, such as lack of an enabling regulatory mobile money environment, lack of operator willingness, and underdeveloped markets.

Lack of enabling regulatory mobile money environment

Interoperability requires proactive support from the regulator. The regulator has to create enabling regulations that facilitate interoperability and the growth of mobile money services. Limitations on the role of non-banks, disproportionate KYC requirements, high taxes on mobile money transactions and excessive restrictions on the agent network are some of the factors that are fatal to the growth of mobile money services.

In 2016, the GSMA, in partnership with Harvard Business School found that heavy regulations were generally fatal to mobile money services.

Lack of operator willingness to interoperate

In some markets, operators who have put a lot of money and effort into building the consumer base, distribution network and ecosystem for mobile money, are not committed to interoperability, as they don’t want to give away their competitive advantage to newer entrants.

Interoperability is not a best-case scenario for such operators because they want maximum control over data flowing in their pipes and there is a reluctance to split revenues with other operators, especially when a big chunk of the revenue is spent on operational expenses to run mobile money business.

Infrastructural limitations

In some countries like Tanzania and Madagascar, interoperability is based on bilateral agreement between operators. This may lead to a very cumbersome settlement procedure if one of the operators is not party to the bilateral agreement. However, with many of the countries investing in national level switches, the days of bilateral agreements are numbered.

Part two of this article will be published next week and will explore the drivers of interoperability.

Download the free MEF Mobile Money eBulletin now

Download our sixth quarterly Mobile Money eBulletin which takes a look at some of the issues that are forming the ecosystem.  It includes contributions from Srivinas Ndugondi, Head of Mobile Financial Solutions at Mahindra Comviva discussing the importance of interoperability between mobile money platforms and Wirecard’s EVP of Global Product Strategy provides thoughts and analysis of MEF’s recently pubished Mobile Money Report.

The eBulletin also includes news, stats and Mobile Money market forecasts and analysis from Amrish Kacker, Lead Analyst from Analysys Mason’s Operator Strategy Consultancy Practice.

Download now