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Using Interoperability to Become Cashless

Using Interoperability to Become Cashless

Debates in the aftermath of the government’s decision to withdraw high-value banknotes have reached fever pitch. In the public discourse on Facebook and Twitter, arguments have usually taken colour from the political affiliation of the commenter; in more hallowed debates among policy wonks and economists, the views appear to be sharply divided on whether the withdrawal will bring net benefits or not. Some influential voices (Kenneth Rogoff, Larry Summers, among others) have argued that this monetary experiment may hurt. Others (like Bibek Debroy, J.R. Varma and Vivek Dehejia) have argued in favour of the withdrawal-that this will operate as a one-time tax on the current float of unaccounted-for wealth stored in cash while whiplashing the consumer economy into digital (or plasticized) transactions. Regardless of the merits of the measure, however, what seems certain is that unless the government and regulators act swiftly to put in place infrastructure facilitating digital transactions, the potential positives will remain just that-potential positives.

One such critical infrastructural necessity is the interoperability of prepaid payment instruments (PPI), popularly known as wallets. While interoperability has several dimensions, in its simplest form it is the ability of, say, a Paytm user to transact with a merchant/user that uses another wallet (say, Freecharge). The ATM provides the most visible example of interoperability in retail finance. You walk into the ATM of any bank and swipe a card issued by your bank and withdraw cash. The card/point-of-sale terminal ecosystem is another example of interoperability. Interoperability is said to have pro-competitive effects and also promote financial inclusion.

So, what are the prerequisites for implementing interoperability between PPIs? Borrowing from the experience of the card network/bank ecosystem, a set of common standards for settlement-including a dispute settlement mechanism; a “switch operator”; a price mechanism (on the lines of interchange fees in the card system); and a facilitative regulatory atmosphere (provided by the Competition Commission of India, Reserve Bank of India and Telecom Regulatory Authority of India)-appear necessary conditions. RBI’s “Vision Statement On Payments & Settlement” for 2018 recognizes the need to promote interoperability as the basis for a seamless payment experience for users.

Additionally, Kenya and Tanzania, bellwether countries in the mobile money market, teach us two important, if contrasting, lessons. Kenya blazed an early trail in mobile money transactions through M-Pesa/Safaricom. One would expect that the market would be interoperable there by now. Ironically, the very factors that led to the rapid expansion of the M-Pesa network have inhibited adoption of interoperability in Kenya. This is because operators face a classic collective action dilemma (see The Logic Of Collective Action (1965) by Mancur Olson) in the context of interoperability-collectively because it leads to financial inclusion, they all benefit. This benefit, however, comes at a near-term cost to each of them individually (as they have to share agents/merchant networks, among other things). The more entrenched a player is, therefore, the less the incentive to inter-operate. Think about it like the digital equivalent of Garrett Hardin’s “tragedy of the commons”.

Because M-Pesa dominated the market in Kenya, the incentive to “hold out” dominated and became an economic barrier to interoperability in Kenya (see the report: “Interoperability In Electronic Payments: Lessons And Opportunities”.)

However, learning from Tanzania suggests that operators have the most incentive to opt into an interoperable framework when their market shares are comparable. This stands to reason—too early, and their incentives to invest resources in network development will be dampened. Too late and the dominant operator will hold out. Happily for India, the relative market shares of respective operators appear to be comparable. A recent AC Nielsen survey found Paytm to be the most popular mobile payment app at 39%; Freecharge was the second-most popular at 26%; and MobiKwik was the third at 17% (see bit.ly/1ni9VAr). Taken together, the trailing two command more popularity than the leader. We seem to be located at a sweet spot on the space-time continuum to exploit interoperability between PPIs.

Finally, given the collective-action problem articulated above, it seems tempting to rely on regulatory fiat to mandate interoperability. Again, Tanzania provides valuable lessons. The Tanzanian interoperability was brought about organically, with operators evolving bilateral standards for settlement with regulatory blessings but no explicit intervention; instead, the International Finance Corp. and Bill & Melinda Gates Foundation acted as independent “overseers” of the project. Data and surveys by GSMA of the operators evaluating interoperability in Tanzania appear positive.

In sum, the road from the rhetoric of cashless society to the reality of a cash-lite society is a long one. Regardless of the merits of the recent monetary experiment, it has provided an opportunity for renewed focus on the development of India’s non-cash payment infrastructure. Interoperability between PPIs is a critical catalyst in that journey.

Authors: Sakshi Chadha and Mandar Kagade are, respectively, manager, Microsave-Digital Financial Services and policy analyst, Bharti Institute of Public Policy, Indian School of Business.

Source: This article is reproduced from Live Mint dated January 24,  2017.

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