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a2a interoperaBility makinG moBile money scHemes interoperate
For a2a interoperability, the most directly comparable banking sector payment network is probably the automated clearing house
(acH). an acH is a banking sector network that facilitates relatively low value money transfers between customer accounts at different
banks. acHs and their operation and settlement are introduced in appendix a of this paper.
research from Federal reserve Bank of Boston in 2002 found acH usage passively correlated to adoption by other banks in the local
9
market. research at us national Bureau of economic research in 2006, recognised that the us acH was underutilised, looked at the
10
reasons why and assessed the positive network effect by modelling changes to both customer and bank costs. From the models created,
they found that reducing customer fixed costs would lead to an increase in utility and give a positive increase to bank profits.
Regulation Drives Requirements
many of the studies into the network effect for payments have been undertaken in conjunction with central banks and as such include
potential policy directives that central bank regulators should consider adopting, to encourage and foster growth in electronic payment
networks. this is because the wider economy benefits significantly from efficient electronic payments. For example, in the developed
market of canada, iHs Global insight research (sponsored by Visa) indicated that electronic payments contributed 23% of the $782 billion
11
in cumulative growth of the canadian economy over a 25 year period to 2010. From this, it is reasonable to assume that central bank regu-
lators will, at some point, want to see a2a interoperability for mmo schemes in their market to set an environment for as strong and stable
growth as possible. a key consideration will be for central banks to allow this to be implemented in the most efficient way possible.
central banks have the responsibility to oversee the efficiency of payments systems and to mitigate systemic risks, which requires visibil-
ity of transaction volume and velocity. consequently, central banks are likely to add additional reporting requirements for interoperable
schemes to help with on-going supervision and oversight. this to ensure that any introduced settlement risk between schemes due to
interoperability is effectively and actively managed such that it is quantifiable and minimised.
Will Mobile Money Benefit
it is important to note that the benefits of a2a interoperability do not remove the need for the investments required to make individual
mobile money schemes successful (i.e. investments in distribution, product development, customer activation and marketing, etc.) . any
12
benefits are more likely to be for schemes with proven success in a market.
the experience in banking sector electronic payment networks indicates there is a positive network effect from a2a interoperability. as
the effect is likely to be directly applicable to mobile money, this has the potential to facilitate substantial growth in the mobile money
industry over time. the benefit from a positive network effect is not a ‘one-off’ occurrence; it remains in force for the life of the service .
13
Helping to improve financial inclusion is likely to be dependent on how interoperability is implemented. Here, the target segment of cus-
tomers are particularly cost sensitive and any fees introduced are dependent on the costs of the particular a2a interoperability solution
that is implemented. the aim should be to avoid additional barriers. therefore it is essential that the implementation options are fully
understood so that informed choices can be made and solution selection undertaken that is appropriate to the target market. one of the
key objectives of this paper is to help with this selection process, so that the core characteristics of mobile money – that mobile money is
real-time, affordable, low-risk and accessible for all types of users – are all maintained in an interoperable solution.
9. network externalities and technology adoption: lessons from electronic payments, Federal reserve Bank of Boston, 2002, http://www.frbsf.org/economic-research/files/wp02-16bk.pdf
10. Quantifying equilibrium network externalities in the acH Banking industry, national Bureau of economic research, 2006, http://www.nber.org/papers/w12488
11. the Benefits of electronic payments: http://currencyofprogress.ca/files/2012/08/3.2.4-Download-electronic-payments-White-paper-english.pdf
12. expanding the ecosystem of mobile money: considerations for interoperability http://www.gsma.com/mobilefordevelopment/wp-content/uploads/2012/10/2012_mmu_expanding-the-ecosystem-of-mobile-money.pdf
13. For example, this characteristic was identified as a key feature when the business model for faster inter-bank clearing and settlement of retail transactions in the uk was analysed. the analysis stated: “it is also worth empha-
sising that improvements to payment arrangements, such as faster clearing times, incur a one-off cost of investment in bank systems, but lead to a continuing flow of benefits to payment users. per annum benefits therefore
need to be only relatively small to provide a cost-benefit justification for making the proposed improvement in payment arrangements.”
6
For a2a interoperability, the most directly comparable banking sector payment network is probably the automated clearing house
(acH). an acH is a banking sector network that facilitates relatively low value money transfers between customer accounts at different
banks. acHs and their operation and settlement are introduced in appendix a of this paper.
research from Federal reserve Bank of Boston in 2002 found acH usage passively correlated to adoption by other banks in the local
9
market. research at us national Bureau of economic research in 2006, recognised that the us acH was underutilised, looked at the
10
reasons why and assessed the positive network effect by modelling changes to both customer and bank costs. From the models created,
they found that reducing customer fixed costs would lead to an increase in utility and give a positive increase to bank profits.
Regulation Drives Requirements
many of the studies into the network effect for payments have been undertaken in conjunction with central banks and as such include
potential policy directives that central bank regulators should consider adopting, to encourage and foster growth in electronic payment
networks. this is because the wider economy benefits significantly from efficient electronic payments. For example, in the developed
market of canada, iHs Global insight research (sponsored by Visa) indicated that electronic payments contributed 23% of the $782 billion
11
in cumulative growth of the canadian economy over a 25 year period to 2010. From this, it is reasonable to assume that central bank regu-
lators will, at some point, want to see a2a interoperability for mmo schemes in their market to set an environment for as strong and stable
growth as possible. a key consideration will be for central banks to allow this to be implemented in the most efficient way possible.
central banks have the responsibility to oversee the efficiency of payments systems and to mitigate systemic risks, which requires visibil-
ity of transaction volume and velocity. consequently, central banks are likely to add additional reporting requirements for interoperable
schemes to help with on-going supervision and oversight. this to ensure that any introduced settlement risk between schemes due to
interoperability is effectively and actively managed such that it is quantifiable and minimised.
Will Mobile Money Benefit
it is important to note that the benefits of a2a interoperability do not remove the need for the investments required to make individual
mobile money schemes successful (i.e. investments in distribution, product development, customer activation and marketing, etc.) . any
12
benefits are more likely to be for schemes with proven success in a market.
the experience in banking sector electronic payment networks indicates there is a positive network effect from a2a interoperability. as
the effect is likely to be directly applicable to mobile money, this has the potential to facilitate substantial growth in the mobile money
industry over time. the benefit from a positive network effect is not a ‘one-off’ occurrence; it remains in force for the life of the service .
13
Helping to improve financial inclusion is likely to be dependent on how interoperability is implemented. Here, the target segment of cus-
tomers are particularly cost sensitive and any fees introduced are dependent on the costs of the particular a2a interoperability solution
that is implemented. the aim should be to avoid additional barriers. therefore it is essential that the implementation options are fully
understood so that informed choices can be made and solution selection undertaken that is appropriate to the target market. one of the
key objectives of this paper is to help with this selection process, so that the core characteristics of mobile money – that mobile money is
real-time, affordable, low-risk and accessible for all types of users – are all maintained in an interoperable solution.
9. network externalities and technology adoption: lessons from electronic payments, Federal reserve Bank of Boston, 2002, http://www.frbsf.org/economic-research/files/wp02-16bk.pdf
10. Quantifying equilibrium network externalities in the acH Banking industry, national Bureau of economic research, 2006, http://www.nber.org/papers/w12488
11. the Benefits of electronic payments: http://currencyofprogress.ca/files/2012/08/3.2.4-Download-electronic-payments-White-paper-english.pdf
12. expanding the ecosystem of mobile money: considerations for interoperability http://www.gsma.com/mobilefordevelopment/wp-content/uploads/2012/10/2012_mmu_expanding-the-ecosystem-of-mobile-money.pdf
13. For example, this characteristic was identified as a key feature when the business model for faster inter-bank clearing and settlement of retail transactions in the uk was analysed. the analysis stated: “it is also worth empha-
sising that improvements to payment arrangements, such as faster clearing times, incur a one-off cost of investment in bank systems, but lead to a continuing flow of benefits to payment users. per annum benefits therefore
need to be only relatively small to provide a cost-benefit justification for making the proposed improvement in payment arrangements.”
6
