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a2a interoperaBility anD moBile money
2.2
Why is A2A
interoperability
important
Good and Bad Network Effects
I nteroperability adds the ability for customers to transact with users in other schemes, increasing the size of the overall payments
network. there are a number of studies that assess actual transaction data to show that a positive network effect – referred to as
the positive effect of network externalities – applies to payment systems, just as it does for telecoms networks. When applied
4
to mobile money, this would lead to an increase in the number of transactions made in participating schemes, which in turn leads to
increased transaction revenues.
as well as the positive network effect, joining an interoperable network can have negative effects due to the competitive threat of
substitution – referred to as the negative effect of network externalities – as the differentiation of products on the same network
becomes harder for network operators, as well as increasing costs for implementing and operating compatible systems. For telecoms
and payments products alike, this can lead to incumbent networks trying to protect their existing business by remaining isolated
from other networks, even though there is evidence that, if network externalities are strong, the positive effect is more valuable than
the negative impact.
5
the Gsma has published a paper illustrating the benefit of interconnectivity with an analysis of the positive network effect associated
with interoperable sms across mobile networks, and how this may relate to mobile money schemes . additionally, there is a large body
6
of literature analysing the positive network effect for payments in banking networks.
Evidence of a Positive Network Effect
empirical studies over the last thirty years or so have helped confirm the existence of the positive effect of network externalities for
7
several types of banking sector payment networks, including atm networks, automated clearing House (acH) and credit and debit
payment cards.
research into atm deployments identified positive network effects based on number and concentration of atms in specific locali-
8
ties. atm networks originally started as private networks before coming together into ‘networks of networks’. the banks with larger
proprietary networks, and who made the biggest investments were found to be slower to join with other network providers than
2
banks with smaller networks.
4. electronic purses, interoperability and the internet, leo Van Hove, http://firstmonday.org/ojs/index.php/fm/rt/printerFriendly/1514/1429#v3
5. the economics of networks, nicholas economides, october 1996, international Journal of industrial organization, http://www.stern.nyu.edu/networks/top.html
6. the case for interoperability, neil Davidson, paul leishman,, http://www.gsma.com/mobilefordevelopment/wp-content/uploads/2012/06/mmu_interoperability.pdf
7. payment systems and network effects, Johan Gottfried leibbrandt, http://www.merit.unu.edu/training/theses/Jleibbrandt.pdf
8. adoption of technologies with network effects: an empirical examination of the adoption of automated teller machines, the ranD Journal of economics Vol. 26, no. 3 (autumn, 1995), pp. 479-501
5
2.2
Why is A2A
interoperability
important
Good and Bad Network Effects
I nteroperability adds the ability for customers to transact with users in other schemes, increasing the size of the overall payments
network. there are a number of studies that assess actual transaction data to show that a positive network effect – referred to as
the positive effect of network externalities – applies to payment systems, just as it does for telecoms networks. When applied
4
to mobile money, this would lead to an increase in the number of transactions made in participating schemes, which in turn leads to
increased transaction revenues.
as well as the positive network effect, joining an interoperable network can have negative effects due to the competitive threat of
substitution – referred to as the negative effect of network externalities – as the differentiation of products on the same network
becomes harder for network operators, as well as increasing costs for implementing and operating compatible systems. For telecoms
and payments products alike, this can lead to incumbent networks trying to protect their existing business by remaining isolated
from other networks, even though there is evidence that, if network externalities are strong, the positive effect is more valuable than
the negative impact.
5
the Gsma has published a paper illustrating the benefit of interconnectivity with an analysis of the positive network effect associated
with interoperable sms across mobile networks, and how this may relate to mobile money schemes . additionally, there is a large body
6
of literature analysing the positive network effect for payments in banking networks.
Evidence of a Positive Network Effect
empirical studies over the last thirty years or so have helped confirm the existence of the positive effect of network externalities for
7
several types of banking sector payment networks, including atm networks, automated clearing House (acH) and credit and debit
payment cards.
research into atm deployments identified positive network effects based on number and concentration of atms in specific locali-
8
ties. atm networks originally started as private networks before coming together into ‘networks of networks’. the banks with larger
proprietary networks, and who made the biggest investments were found to be slower to join with other network providers than
2
banks with smaller networks.
4. electronic purses, interoperability and the internet, leo Van Hove, http://firstmonday.org/ojs/index.php/fm/rt/printerFriendly/1514/1429#v3
5. the economics of networks, nicholas economides, october 1996, international Journal of industrial organization, http://www.stern.nyu.edu/networks/top.html
6. the case for interoperability, neil Davidson, paul leishman,, http://www.gsma.com/mobilefordevelopment/wp-content/uploads/2012/06/mmu_interoperability.pdf
7. payment systems and network effects, Johan Gottfried leibbrandt, http://www.merit.unu.edu/training/theses/Jleibbrandt.pdf
8. adoption of technologies with network effects: an empirical examination of the adoption of automated teller machines, the ranD Journal of economics Vol. 26, no. 3 (autumn, 1995), pp. 479-501
5
