How Can Interoperability Drive Investment and Competition in Digital Payments?

Instant interoperable payment systems (IIPSs) are increasingly celebrated as a means to advance economic growth and financial consumer welfare, in low- and middle-income countries (LMICs) in particular. Inspired by the sustained growth in usage of government-led IIPSs in India and Brazil, advocates suggest IIPSs will lead to more robust competition among financial service providers, reducing costs and increasing quality for consumers. However, history and research suggest that building the technology behind IIPSs is by no means sufficient. Successful adoption of IIPSs requires complex institutional design, pricing, and general policy decisions, which should reflect the unique structure of local markets. Contrary to the intentions of advocates, poorly designed and mistimed rules and regulations can have negative consequences for financial consumers and firms.

This research brief draws on empirical and theoretical academic research in economics to highlight key insights for practitioners as they seek to build IIPSs. Many of these insights are counterintuitive to the conventional wisdom among advocates, rendering them all the more important.