Who governs the payments scheme or organization within a country? With a closed-loop structure, the question is obvious: the scheme is owned and governed by the provider of the system. With an open-loop system, or with interoperating closed-loop systems, there is a question of who governs either the system or the “connecting pieces.”
In traditional open-loop payments systems, there is often a distinction made between the “scheme” and the “operator.” A scheme governs and writes the operating rules of the system, controls the brand, and may or may not control the selection and activities of the “operator” that manages daily payment processing activities between scheme participants. Frequently, the “scheme” in an open-loop payments system is governed by the participants in the scheme. In recent years, we have seen more examples of schemes which are privately or commercially owned.
Option “A”: Participants (service providers serving end-users) should govern the scheme
This traditional structure creates a sense of fairness and control among the participants, and increases their interest in making the payment system sustainable and robust. Participants feel in control of the economics of the scheme, both in terms of ongoing operations and investment in new capabilities.
However, Participants are not running the scheme full-time and may not have the expertise necessary to optimize decisions: this structure may be characterized by slow decision-making on the part of participants. Additionally, participants’ self-interest may work against the common good of the scheme, particularly when it comes to issues of economics and investment. Finally, participants from one category (for example, banks, or telcos) may have a vested interest in not allowing other categories of participants to join the system.
Option “B”: A commercial or private service should govern the scheme
A dedicated, independent commercial service will be more expert and more efficient in running the scheme, thereby arguably holding costs down for participants. A commercial service may be more welcoming to new categories of participants, and may be more effective at creating a level playing field.
Conversely, a commercial service’s profit motivation may drive scheme costs up over the long run; the commercial service may be incented to continually “improve” the scheme, and to collect revenues for doing so. This may support products and services for more affluent end-users but work against the interest of keeping costs low for poor end-users. A commercial service is likely to have an interest in a strong, even dominant brand, rather than a utility brand that supports individual provider brands. (See Issue: Brand). On the other hand, a commercial service provider may not have an incentive to invest in infrastructure improvements that do not lead directly to financial returns.
The Financial Inclusion Perspective: Option “A” is preferred
The advantages of participant control outweigh the concerns about participant gate-keeping (excluding other categories of participants), as that issue could potentially be managed by regulation at the country level. The risk of rising costs with commercial governance of scheme rules is considerable, and can therefore lead to higher end-user prices in the long term.
Note that participant scheme governance does not mean that the scheme operator, needs to be participant governed as well. Although this is the case with some open-loop payment systems, other systems use commercial providers to operate the payment scheme. (See Issue: Switch)
In some countries, governance of the scheme is held by the Central Bank, or by another government entity. Most typically, in this situation, providers participate in user groups which give guidance on scheme rules. We see this as a special variation of “Option A” and support its efficacy in delivering digital financial services for the poor.