Mobile money agent interoperability and liquidity management

We study agents that provide Cash-In/Cash-Out (CICO) services to mobile money consumers. A moral hazard friction constrains these agents’ ability to hold liquid reserves, which creates an endogenous cost for operators of ensuring reliable CICO services. Interoperability that allows agents to contract with multiple operators tends to decrease the amount of liquidity held by agents when the moral hazard problem is mild through a higher utilization rate but can increase it when the moral hazard problem is severe. In the latter case, the fees paid by operators to agents become strategic complements sustaining multiple equilibria with different levels of liquidity. Fees from operators to agents tend to be inefficiently low from a welfare perspective, both because operators internalize agents’ agency rents as a cost and because they do not internalize that higher fees, by expanding agents’ capacity to hold liquidity, benefit consumers from other operators. In that context, authorizing interoperability can decrease (when moral hazard is mild) or increase (when moral hazard is severe) welfare.