Interoperability has long been a goal for payment systems, which are often siloed and operate in parallel. In addition to increasing efficiency and boosting digital payment adoption, data from the International Monetary Fund (IMF) shows that an interoperable ecosystem stimulates commerce, reduces transaction costs, and expands access to credit.
The Growing Retail Digital Payments: The Value of Interoperability study highlights data from India’s Unified Payments Interface (UPI)—an interoperable platform that has become the world’s largest retail fast payment system. Unlike closed-loop systems, UPI enables seamless transactions between users of different payment providers.
Supporting Digital Payments Adoption
Unsurprisingly, interoperability plays a key role in driving digital payment adoption. Enabling different payment apps to work seamlessly with one another expands the reach of digital payments by giving users the freedom to choose their preferred app. The IMF encourages other countries seeking to reduce reliance on cash transactions to prioritize interoperable payment systems.
“Regions where interoperability increased by more indeed saw a significant increase in adoption of digital payments, both in absolute terms and relative to cash,” the study concluded.
But the benefits don’t stop there. Allowing users to access payment methods through multiple apps lowers barriers to entry and paves the way for more innovative offerings in the payments ecosystem. Interoperability also incentivizes existing providers to enhance the quality of their services as a means of retaining users.
Contrast with Traditional Fintechs
Interoperability has long been a challenge for payment systems in many countries, including the U.S., because different rails operate on separate systems. If a U.S. company wants to send a real-time payment, the sending institution might be set up for FedNow, while the receiving one might default to ACH.
The IMF study compared UPI transactions with data covering all transactions from an unnamed major fintech firm. This provider processed payments over a closed network, where both parties had to use the same wallet app. Researchers then analyzed users’ app choices after their first experience with digital payments.
The report noted: “After sampling both, users increasingly chose the interoperable UPI system over the closed-loop alternative. Crucially, transactions that would not be possible without interoperability—those where the sender and recipient use different apps—were a substantial part of this growth.”
The kicker? The fintech soon decided to join UPI.
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