By: Briana Marbury President & CEO Interledger Foundation
The recent roller coaster of on-again, off-again tariffs has provided several helpful reminders for the global economy. First, global supply and manufacturing value chains are interlinked into complex webs, where disruption at any point creates a domino effect that will cascade across the globe. Second, everything we are learning (or relearning) about efforts to restrict the free flow of goods has long been true about the flow of money.
Every country restricts the flow of money in different ways and for different reasons: to combat corruption, discourage money from moving out of the country, or some other aim. But there is another form of roadblock that results from legacy systems, rather than conscious policy decisions.
In most regions of the world, moving money relies on privately managed, closed-loop payments networks that each have their own technologies, creating fragmented payments ecosystems and imposing serious costs and constraints on movement. The result of the unintended restrictions on money are similar to how tariffs restrict the flow of physical goods: less economic activity and less growth.
Fintech services have stepped in over the past twenty years to create private offerings that fill in the gaps and develop workarounds to enhance the abilities of legacy infrastructure. But even in the most developed countries, there are still critical limitations. Among the consequences are payment delays, hefty fees, and the fact that more than a billion people can’t access financial services that would enable them to participate in their local economies.
If technology alone could solve these problems, they would have been solved already. But the reality is that creating a financial system where money flows freely from person to person, business to business and country to country–just as information does on the internet– relies on public policy as well.
Here is a look at three initiatives from around the world that can serve as a roadmap for other markets.
INDIA: Introducing digital public infrastructure (DPI) grows gross domestic product (GDP).
In established economies, payment silos restrict the flow of money. In the United States, even with fintech services like Zelle, for example, consumers can only send money to other Zelle users—not to another service like Venmo or directly to a bank account. This inherently creates roadblocks when it comes to transferring money and, in many cases, has excluded individuals from payments altogether if they are deemed too risky by one financial entity or choose not to use a specific network. But this example is a mere inconvenience compared to roadblocks that affect everyday money needs elsewhere.
India set out to solve a magnified version of this problem by connecting more than 200 banks and fintechs across the country with the introduction of its digital public infrastructure (DPI), India Stack.
Through the resulting united payments interface (UPI), which was built using open, interoperable technology that seamlessly integrates with India’s existing banking infrastructure and users’ mobile devices, consumers can now make real-time payments to virtually anyone in the country.
This has had a significant impact on India’s economy. Research shows that even a 1% increase in UPI transaction volume results in a 0.03 percent increase in GDP growth.
Instead of creating barriers, India is making it easier for tech companies to innovate because providers only need to connect to a single system (rather than several different siloed payments networks), and then they can exchange funds with any other bank or financial institution in the country. As new providers come into play who service the banking and credit needs of those who couldn’t previously access digital payments, more people can participate in the economy. As a result, whether someone is a customer of a small fintech provider or a large bank, they will still be able to interact financially with any individual or business in the country.
BRAZIL: Regulatory policies are the key to unlocking the full potential of DPIs.
Like India, Brazil introduced a DPI project called Pix to support domestic payments. Pix operates similarly to UPI, allowing financial institutions and fintechs to connect to each other so payments can flow seamlessly.
But before Pix launched, the central bank came to a realization. If they launched this interoperable, instant payments system, but nobody was connected to it, it would fail at its goal of streamlining payments and boosting economic activity.
So the central bank mandated that every financial institution with more than 500,000 user accounts join Pix. Now, regardless of which large bank a person chooses to use, the institution is connected to most other significant financial institutions, allowing people to exchange payments frictionlessly. Thanks to this approach, Brazil has more than 153 million people–or 76% of its population–using the system.
With a significant majority of people and businesses now using Pix, money can flow freely across the country and boost commerce, fostering sustained economic development.
MEXICO: Cross-border digital transactions unlock global digital finance.
In both the cases of India and Brazil, interoperable payments systems allow transactions between parties within the same country. However, the current configuration means someone in India cannot send a payment to someone in Brazil (or any other country) through the system, or vice versa.
In many rural Mexican communities, local residents depend on money sent home by relatives who immigrated abroad. These cross-border transactions often serve as residents’ primary source of income but they create significant challenges. If the recipient household has a bank account at all, it will likely be at a small community-based institution rather than a large bank. So receiving cross-border funds will involve high fees and prolonged wait times because local community banks in Mexico lack the clearing and transfer system necessary to receive international payments. As a result, many recipient households will use private networks like Western Union and take the funds as cash.
Cash-based payments means the money flowing into Mexico often bypasses community banks altogether, resulting in banks not having the funds on their ledger to support lending for infrastructure upgrades, small businesses, or other local development. This results in a vicious cycle where even more residents must leave the community to earn a living, putting more small towns in Mexico at risk of losing even more of their population.
To solve this issue, People’s Clearinghouse, a social sector tech platform that services community banks and savings co-ops, is providing a network of 140 rural banks in Mexico with the technology and infrastructure to transact payments across borders. The resulting funds flowing into and out of these banks will facilitate easier, faster, and cheaper payments for local residents, creating opportunities to enhance the country’s overall financial health.
The settlement process for these transactions uses FedGlobal, a public solution developed by the Federal Reserve and the Central Bank of Mexico. Unlike the India Stack and Pix examples that demonstrate the effects of direct government mandates, the People’s Clearinghouse work in Mexico demonstrates that governments can take a less hands-on approach to free flowing money movement while still creating meaningful impact.
The digital payments use cases across Brazil, India and Mexico serve as a blueprint for other markets who similarly want to stimulate economic growth while also expanding financial inclusivity.
Making financial transactions easier and less costly has proven to increase the flow of funds and commerce in emerging markets. The opening of payments infrastructure creates space in the market for technology investments that can deliver new digital financial services, including to customer segments previously unserved or underserved.
