Compatibility and Interoperability in Mobile Phone-Based Banking Networks

In many developing countries of Africa and Asia, cell phones are used (i) to transfer money across individuals; (ii) to securely self-transport money, and (iii) to save/store money. These banking networks ride on top of wireless telecommunications networks. Traditionally, each banking network was confined to the network of a telecom carrier, and transfers were available only within the carrier’s network, making it incompatible with banking networks of other carriers. In Tanzania, mobile banking under incompatibility was well established for a decade until September 2015 when the second, third, and fourth largest carriers established full compatibility of their banking networks. Analyzing a comprehensive dataset of banking transactions provided by a large telecom carrier in Tanzania, this paper discusses pricing under compatibility, contrasts with pricing under incompatibility. We analyze the transaction termination fees (cash-out fees) in this unregulated environment, and assess the individual and collective incentives for compatibility, noting that the largest carrier has remained incompatible. Despite very high prices for transfers across networks set up commercially under compatibility, the introduction of compatibility resulted in substantial consumer surplus gains. We calculate further potential welfare gains under a number of counterfactual regulatory scenarios.