Wallet Interoperability

Wallet interoperability is the ability of a customer using one digital or mobile wallet to send money to, or receive money from, a customer of a different wallet provider or a bank, in the same way that a bank customer can pay someone at another bank. It also covers whether merchants can accept payments from any wallet through a single QR code or terminal, and whether agents can serve customers of more than one provider. Without interoperability, each wallet is a closed network and its users can only pay each other.

The issue is most prominent in mobile money markets, where telecom-led wallets grew rapidly as separate systems, and in countries building national instant payment systems that include non-bank wallets. It is part of the broader topic of interoperability in payments and links closely to financial inclusion, since closed systems limit the usefulness of digital money for poorer users.

Wallets differ in how far they can be used outside their own network. A closed-loop wallet can be spent only with the issuer, such as a coffee chain's app. A semi-closed wallet can be used at a defined group of merchants that have agreements with the issuer. An open-loop wallet can send money to other wallets and banks and may allow cash withdrawal. Interoperability is about moving wallets towards the open end, either through agreements between providers or through shared infrastructure.

Wallet interoperability is usually achieved in one of three ways:

• Bilateral agreements. Two providers connect their systems directly and agree on fees and settlement. This is simple to start but becomes complex as the number of providers grows.
• A shared switch or hub. Providers connect once to a central switch, often run by the central bank, a national payments company or an industry body, which routes transactions and calculates net positions for settlement. Many African markets use this model, and the open-source Mojaloop software was created to help countries build such hubs.
• Inclusion in a national instant payment system. Wallet providers become direct or indirect participants in a fast payment system alongside banks, so every wallet and bank account is reachable through one set of rules. India's Unified Payments Interface (UPI) and Brazil's Pix both allow non-bank institutions to take part in this way.

Tanzania is often cited as one of the first African markets where competing mobile money operators made their wallets interoperable, through bilateral and multilateral agreements in the mid-2010s. Kenya launched interoperability between its main mobile money operators in 2018, allowing customers of different networks to send money to each other directly. Ghana connected mobile money wallets and bank accounts through its national switch at around the same time. In India, wallets issued by non-bank prepaid payment instrument issuers can be linked to UPI, so their users can pay any UPI merchant QR code. Interoperable QR code standards, such as those promoted by EMVCo and adopted by several Asian central banks, let a single code accept payments from many wallets.

Interoperable wallet payments need clear rules on who pays whom. Many schemes use an interchange or switch fee paid by the sender's provider to the receiver's provider or to the switch operator, and the level of these fees can make or break adoption. Providers settle their net positions with each other, usually through accounts at a settlement bank or the central bank, and must hold enough funds to cover outgoing flows. Governance arrangements set standards for messaging, dispute handling, fraud reporting and customer protection. Regulators often push for interoperability because dominant providers may have little commercial reason to open their networks to rivals.

Interoperability does not remove all barriers. Customers may face higher fees for off-network transfers than for on-network ones, which reduces usage. Different KYC levels and limits across providers can block transfers that exceed the receiving wallet's allowance. Technical failures at a central switch can affect every connected provider at once. Fraud can also move more easily between networks, which requires shared fraud intelligence and quick ways to trace and freeze funds.

In crypto, wallet interoperability has a different meaning: the ability of wallet software to work with many blockchains, decentralised applications and standards. That depends on shared address formats, signing standards and connection protocols rather than on payment schemes, and is linked to blockchain interoperability.