By Estelle Brack
The global payments landscape is at a turning point. Bank deposits, mobile money, card schemes, BigTech wallets, stablecoins and now CBDCs all coexist—yet most remain trapped inside walled gardens, fragmenting the market and limiting financial inclusion.
The recent BIS Working Paper “Competing digital monies” (2025) offers a timely analytical framework to understand what is really at stake: payments are two-sided markets, where consumers and merchants join a platform only if the other side is present. Without interoperability, these markets naturally evolve toward fragmentation, higher fees, and exclusion.
This article brings together insights from the BIS, OECD, ECB, CGAP, and earlier industrial-organisation research to argue that interoperability—through fast payment systems, open APIs, or CBDCs—is the missing link for efficient, inclusive digital finance.
Two-Sided Markets: Why Payments Tend Toward Fragmentation
Payments are a textbook example of a two-sided market. Merchants adopt a payment instrument only if consumers use it; consumers adopt it only if merchants accept it.
Early research on mobile termination and retail payments (Hausman & Wright, 2006; OECD 2025) shows that:
- Platforms maximize adoption by setting asymmetric prices (e.g., cards are free for consumers but costly for merchants).
- Network effects mean that the largest platform tends to dominate, creating lock-in.
- High merchant fees or closed-loop wallets reduce incentives for smaller players to interconnect.
The CGAP report “The Challenge of Two-Sided Markets in Merchant Payments” observes the same dynamics in emerging markets: mobile money schemes (M-Pesa, MTN MoMo, Orange Money) achieve scale quickly but often stay closed, limiting their usefulness for merchants and smaller PSPs.
The result is predictable:
A consumer with three wallets and a merchant with two POS systems is a sign of market failure, not innovation.
The High Social Cost of Fragmentation
The ECB (2012) study on the social and private costs of retail payments shows that:
- Retail payments cost nearly 1% of GDP,
- Costs are shared between banks, infrastructures and merchants,
- The largest costs come from duplicated infrastructures, reconciliation, and manual processes.
When each provider builds its own rails—QR codes, POS specifications, agent networks—society pays higher fixed costs, while merchants face multiple fees and devices.
Fragmented digital payments can paradoxically be as costly as cash, especially for small merchants.
This is why interoperability is not just a technical issue but a macro-efficiency priority.
Insights from BIS (2025): Why Public Infrastructure Matters
The BIS model (Frost, Rochet, Shin, Verdier, 2025) shows three results with powerful policy implications:
(1) Without interoperability, financial inclusion is inefficiently low
Walled gardens limit the number of consumers who participate in digital payments and restrict merchants to a single acceptance network.
(2) Fast Payment Systems (FPS) and CBDCs are functionally equivalent as public interoperability layers
Both make private digital monies interoperable by providing a neutral, public digital settlement asset.
(3) Interoperability may increase merchant fees but boosts overall welfare
A surprising result: once interoperability is introduced, merchants value the larger market more, making their demand for payment services less elastic—thus fees may rise.
But total welfare increases because volumes increase and exclusion declines.
The BIS concludes:
A public interoperability layer—whether FPS or CBDC—raises welfare, expands inclusion, and limits BigTech dominance without banning innovation.
Interoperability: The Missing Ingredient in Digital Financial Inclusion
CGAP’s two-sided market analysis emphasises that merchant payments fail to scale when:
- Wallets are not interoperable
- QR codes are proprietary
- Distribution is siloed
- Merchants face high MDRs
- Consumers face friction switching across wallets
Interoperability solves several structural issues at once:
✔ A single acceptance point for all wallets (QR / API / IPN)
Merchants accept payments from any PSP with one interface.
✔ Universal reachability
Any consumer can pay any merchant—like cash, but digital.
✔ Network effects finally work for inclusion
Small PSPs can compete; fintechs can innovate on top of common rails.
✔ Lower total cost of payments
Using ECB data, Brack (2020) estimates that even 1% substitution from cash to CBDC could reduce European retail payment costs by €1.5bn/year.
✔ Public digital rails reduce systemic risks
No single provider becomes too dominant.
What the OECD Mobile Payments Study Teaches About Competition
The OECD (2025) “Competition in Mobile Payment Services” highlights three risks when markets are closed:
- Switching costs lock consumers into single ecosystems
- Exclusive partnerships foreclose competition
- Vertical integration by BigTech limits data portability and merchant choice
Interoperability is the antidote: it ensures open access, reduces barriers to entry, and avoids “winner-takes-all” dynamics.
Why CBDC, Fast Payments and Open APIs Are Complementary
Interoperability can be offered through multiple instruments:
A. Fast Payment Systems (FPS)
Examples: Brazil Pix, India UPI, Ghana GhIPSS.
They make bank money interoperable in real time.
B. CBDC
Makes central bank money interoperable, digitally, for all PSPs.
A CBDC wallet is by definition portable and open.
C. API-based interoperability and QR code standards
Enables instant switching and open access for fintechs.
The BIS demonstrates that:
A well-designed FPS can deliver most benefits of a retail CBDC.
CBDCs add a public digital settlement asset, reinforcing resiliency and competition.
Policy Recommendations
1. Mandate interoperability as a regulatory objective
Just as EMV unlocked international card payments, a national QR or API standard can unlock competition.
2. Build open, neutral payment infrastructure
FPS, instant payments, CBDC and ISO 20022 rails should be treated as digital public goods.
3. Promote proportionate access for banks and non-banks
Fintechs, micro-PSPs and mobile money operators must access the core rails on equal terms.
4. Protect consumer data portability
Data should follow the user, not lock them in.
5. Address merchant incentives
Lower MDR ceilings for small merchants and value-added services (inventory financing, accounting tools) can accelerate uptake.
6. Design CBDCs for inclusion
Offline capability, tiered-KYC, and simple user interfaces matter as much as the underlying technology.
Conclusion: Interoperability Is the Foundation of Digital Financial Inclusion
Across Europe, Africa, Latin America and Asia, the lesson is the same:
digital payments scale only when public infrastructure ensures universal reachability—like cash once did.
The BIS (2025) adds rigorous evidence: both CBDCs and fast payment systems increase welfare, reduce fragmentation, and boost financial inclusion by creating an interoperable marketplace.
The ECB (2012) shows the societal cost of maintaining multiple parallel payment systems.
CGAP demonstrates the two-sided nature of merchant payments.
The OECD warns of competitive risks.
When these insights are combined, the conclusion is unavoidable:
Interoperability is not optional—it is the cornerstone of an efficient and inclusive digital economy.
Bibliography
BIS (2025). Competing Digital Monies. BIS Working Paper No. 1301.
Frost, J., Rochet, J.-C., Shin, H. S., & Verdier, M.
Brack, E. (2020). Opportunities for a Retail CBDC. KiraliT. (Manuscript)
CGAP (2019). The Challenge of Two-Sided Markets in Merchant Payments. Consultative Group to Assist the Poor.
ECB (2012). The Social and Private Costs of Retail Payment Instruments: A European Perspective.
Schmiedel, H., Kostova, G., & Ruttenberg, W.
ECB Occasional Paper No. 137.
Hausman, J., & Wright, J. (2006). Two-Sided Markets with Substitution: Mobile Termination Revisited.
OECD (2025). Competition in Mobile Payment Services. (Uploaded document)
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