Financial Inclusion, Interoperability and Market Development in the East African Community

The digital finance revolution in East Africa contributed to a rapid evolution in financial services, and especially in mobile money-based services. Today, the ability of a customer to make end-to-end transactions from one provider to any other is assumed to be critical for continued rapid financial sector development. Interoperability is believed to promote financial inclusion by promoting greater and cheaper access to a wide range of financial services. This paper contributes to questions on the benefits of interoperability from an industry perspective, the anticipated value proposition for customers, and pricing structures. It establishes how interoperability has worked in practice across East Africa. From this perspective, it determines the factors that have influenced the success or lack thereof in interoperability and considers the impact of interoperability on financial inclusion. The paper looks to the future in assessing how financial technology can enhance interoperability. It presents lessons for Sub-Saharan Africa from East African financial inclusion, market development and interoperability. The paper closes with a discussion of what the research findings mean for future interoperability. In the absence of comprehensive data, the paper has relied upon extensive secondary research followed by discussions with 30 primary respondents. Regional and international respondents were drawn from regulators, policy makers, payment specialists, donors, and financial sector specialists. The study notes the impressive results in the value and volume of payments that can be derived from an interoperable platform, citing the evolution of Safaricom's M-Pesa and Equity Bank's digital banking platforms in Kenya. However, the findings question the assumed benefits of scheme interoperability, noting the limited interoperability achieved to date across East Africa, partly resulting from the commercial and competitive positions taken by industry participants. The position of regulators and policy makers is evolving as pressure to implement nationally interoperable platforms increases and the definition of interoperability evolves to include data and payment interoperability. Financial technology, in particular shared platforms, banking as a service, and cloud based solutions can enhance interoperability, but policy needs to evolve to support these advances.