Digital payment systems like Venmo or Zelle in the U.S. offer many advantages over checks or cash such as speedier transfers, the ability to transact over multiple devices, and security features such as encryption. A recent paper by experts at Wharton and elsewhere shows how a new set of gains can be unlocked when payment systems are interoperable, allowing users to transact seamlessly across different platforms.
The paper, titled “Integrating Fragmented Markets: Interoperability in Money and Payments,” demonstrates that the usage of digital payments dramatically increases with interoperability across networks. The paper’s authors are Wharton finance professor Yao Zeng, and Alexander Copestake, Divya Kirti, and Maria Soledad Martinez Peria from the International Monetary Fund.
“With more digital payments, you leave more digital footprints,” said Zeng. “That information becomes more fluent. Fintech lenders can access those transaction records to understand their customers better and potentially offer bigger loans at lower interest rates.” While industry watchers were intuitively aware of those benefits of interoperability, there has been little insight into how much of a difference it could make, he added; that set the motivational backdrop for their study.
The authors made their case by studying the effects of interoperability in the performance of India’s Unified Payments Interface, or UPI, which is the world’s largest payment system by volume. “India’s UPI is also the world’s largest fast payment system now. Understanding how it got there is relevant for any other network trying to get to scale,” Zeng said.
Both banks and fintech firms provide UPI apps, and an entity regulated by India’s central bank, the Reserve Bank of India, provides payment rails. Since inception in 2016, India’s UPI ecosystem has several hundred participating apps and banks, with total monthly transactions exceeding 20 billion and values exceeding $300 billion, at last count in August 2025. India’s UPI took off successfully also because of government investments in digital infrastructure and its digital ID program called Aadhar (akin to a Social Security number) to boost financial penetration by enabling enrollees to open bank accounts, Zeng explained.
An important development underlying UPI’s rise was that a year after its launch, the Reserve Bank of India mandated interoperability across UPI apps. That mandate required a dominant fintech-operated private payments network operated by a fintech firm to be integrated into the UPI system. The paper’s authors analyzed the outcomes of that integration for both the fintech firm (which preferred to be unidentified) and other UPI apps across several parameters, including total and per-transaction payment volumes, transaction sizes, and geographical distribution of transactions.
Prior to the integration, the fintech firm provided only closed-loop payment services, where transactions could take place only when both counterparties used its digital wallet. After the integration, the total usage of digital payments in India jumped by more than 50% in the first year after integration, their study found. The interoperability also unlocked “unrealized cross-platform network benefits” in fragmented geographical districts, such as sharp increases in the number of transactions per user and average transaction size.
Network Effects vs. Fragmentation: A Dilemma Solved
Interoperability also resolves an “economic dilemma” where network effects could result in a few dominant platforms, but efforts to increase choice could create market fragmentation, the paper noted. Interoperability can reduce market fragmentation even if users keep using their own favorite payment platform, the paper explained.
“With more digital payments, you leave more digital footprints…. Fintech lenders can access those transaction records to understand their customers better.”— Yao Zeng
“This dilemma recurs in many contexts, from regulating card networks and fintech firms to introducing public payment options like FedNow or a Digital Euro,” the paper stated. “Payment interoperability offers a potential escape from the dilemma.” Thus, users can have the best of both worlds: the freedom to choose their favorite platform and have access to the full network of users.
Interoperability also allows easier market entry for new providers. “If you don’t have interoperability, then network effects can lead to dominance,” Zeng said. But with interoperability, a new player does not have to convince everyone to move to its platform, he added. Some users can stay on the existing platforms, while others could join the new platforms, and still transact with the dominant players.
Higher digital transaction volumes driven by interoperability could lead have an economic multiplier effect, too. Below are some of the benefits the paper’s authors identified in their study:
- Interoperability played a significant role in the takeoff of the UPI platform.
- Borrowing increases in districts that benefited from the integration of previously fragmented networks.
- These increases were larger for households more likely to benefit from digital payments activities, specifically entrepreneurs or hawkers.
- More households can access credit after integration.
- The greater use of retail digital payments reduces friction in credit markets, allowing more households to borrow.
Downsides of Interoperability
The UPI infrastructure has been provided by the Reserve Bank of India and transactions on India’s UPI system have always been free, Zeng noted. “We start with a setting where there were no fees for transactions within either network,” he said of their study sample. “Bringing together the networks makes it more attractive for people to adopt the system.”
But elsewhere, interoperability could have downsides over the long run in terms of disincentivizing providers to invest in infrastructure. Zeng pointed to studies that showed that with interoperability, cell phone operators in Africa who operate payment networks have a lesser incentive to invest in cell phone towers when they are not allowed to charge fees. “After all, if a network can free-ride on other networks under interoperability, then why do the hard job in the first place?” Zeng said.
“If you don’t have interoperability, then network effects can lead to dominance.”— Yao Zeng
“In that setting, interoperability can be quite tricky because the providers of the payments from a consumer perspective are also the providers of the infrastructure,” Zeng said. “So, if you change the way that the payments work, you also change incentives to provide infrastructure in Africa.”
Other friction points might show up over time, though. In India, some payment providers have tried to corner volumes by encouraging transactions within their apps, eroding interoperability. Although the UPI system is interoperable, 95% of the transactions originate on three apps, Zeng noted.
The paper points to cash-back offers from the major UPI app providers that incentivize within-app transactions — or using QR codes that are readable only by a given app. In response to that, the Reserve Bank of India prohibited the use of non-interoperable QR codes recently.
“For policymakers, maintaining a truly interoperable system may require continued efforts to respond to such attempts and introduce interoperability in multiple dimensions,” the paper noted.
Shaping the Evolution of Digital Payments
According to Zeng, the findings of the paper are relevant for policy planners and regulators to think about growing and improving domestic payment systems in both advanced and developing countries. “Many developing countries are trying to improve payment systems and have better adoption of digital payments,” he said. “The public-private approach to payments in India seems to have worked with interoperability.”
Interoperability could be relevant also for cross-border payments, “which [currently] are really slow and inefficient,” Zeng said. U.S.-based payments provider PayPal recently announced PayPal World, a series of global partnerships that will connect many of the world’s largest payment systems and digital wallets on a single platform, starting with PayPal and Venmo, another payment provider that PayPal owns (it bought Venmo as part of its Braintree acquisition in 2013).
Interoperability is also high on the agenda for regulators in China, where efforts are underway to link the two dominant platforms of Alipay and WeChat Pay. But that task faces an uphill road, with resistance from consumers and techno-infrastructure challenges the payment providers have to overcome. In June 2025, China launched a cross-border payment system that linked banking systems in Mainland China with those in Hong Kong, which enabled easier money transfers.
In terms of design, India’s UPI system scores over other forms of digital payments in that customers’ money stays within the banking system. In China’s model, that money does not stay within the banking system, and would be with the payment platforms, Zeng noted.
Other digital currency innovations, such as stablecoins and bitcoins, by design operate outside of the banking system, raising concerns over potential bank runs and fears that they could crowd out bank deposits, Zeng added. Interoperability overcomes those concerns for regulators and market players. “When you think about the potential interaction between monetary policy, bank regulation, and financial stability risks, introducing interoperability could be a relatively less disruptive way of achieving faster and more efficient payments.”
