Integrating Fragmented Networks: The Value of Interoperability in Money and Payments

Payments technologies pose an economic dilemma: network effects can lead to a small number of dominant platforms, but efforts to increase choice can risk market fragmentation. We examine whether interoperability can help resolve this tension, using data from India’s Unified Payments Interface—the world’s largest fast payment system by volume—as well as from a major pre-existing fintech firm. When the two networks became interoperable, overall usage of digital payments rose. Consistent with a model of payment choice that we propose, this increase was driven by regions where digital payments were more fragmented across platforms ex ante. Our model implies that the unification of networks increased total usage of digital payments by more than 50% in the year after integration.