The value of shared digital market infrastructure: reality or imagined?

By Diana Akullu Wanyama

Shared Digital Market Infrastructure (SMI) refers to a situation where multiple institutions share the services of a single industrywide digital infrastructure to achieve efficient, secure and cost-effective transactions and operations.

Over the past five years to 10 years, shared market infrastructure (SMI) has reshaped Uganda’s financial landscape by reducing costs, enhancing efficiency, and improving accessibility.

Despite these benefits – all of which should result in better and lower costs for financial sector consumers- some big players [1]in Uganda’s financial system have been hesitant to adopt SMIs. In some cases, those who previously were using SMIs have since reverted to their proprietary digital infrastructure. There are exceptions were institutions use both their proprietary infrastructure and the SMIs. This raises the question: Is the value of SMIs a reality or is it imagined?

The benefits of shared market infrastructure

Let us consider examples of shared digital infrastructure in Uganda’s financial ecosystem i.e. The Shared Agent Banking Services digital platform (SABS), Interswitch system for Automated Teller Machines (ATMs) and the Electronic-Know-Your-Customer (e-KYC) digital platform[2].

SMI offers several advantages including reduced capital and operational expenses. For instance, subscribing to the Shared Agent Banking System costs about USD 10,000 (Ushs 37M), compared to USD 300,000 (Ushs 1.1Bn)[3] for setting up an independent agent network. Similarly, subscribing to the shared e-KYC system requires an annual maintenance fee of less than USD 6,000 (Ushs 22M), whereas developing and maintaining an independent platform typically costs around USD 50,000 (Ushs 185M) plus an additional cost of the annual maintenance fee[4]. Similarly, banks on the Interswitch network enable access for their customers to over 650 ATMs across the country without incurring the power, security, internet connectivity and other related costs for the entire network.  These cost savings enhance operational efficiency and reduce the cost to serve customers for financial service providers.

SMI increases access points for financial institutions especially in the rural areas, helping bridge the gap between service providers and underserved populations. For example, with SABS or the Interswitch, customers can use agents or ATMs from other financial institutions within their local area. The Interswitch platform offers access to over 650 ATMs countrywide, while SABs provides access to a network of 15,200 agents nationwide. This improves convenience and eliminates the need for long trips to bank branches.

SMI fosters innovation by making it easier and quicker for financial institutions to introduce new products and services. For example, through the Interswitch platform or SABS, institutions can introduce new features like mobile payments or digital wallets without the need to invest heavily in independent infrastructure which would slow down innovation and increase costs. Shared e-KYC provides an easy avenue for incorporating other additional services for the financial institutions e.g. Anti-money laundering screening, document verification.

Fintechs are increasingly benefiting from SMI. SABs data shows a significant 200 percent increase in the number of non-bank institutions, including Fintechs utilising the platform, growing from 5 in June 2023 to 15 in June 2024. This trend reflects the value and cost efficiency that Fintechs find in joining SABS.

Challenges for Larger institutions

Larger institutions may find the benefits of SMI less clear as they often have invested in their own infrastructure and SMI lacks alignment with their strategic priorities or competitive advantage. As a result, shared platforms may not be a core focus, delaying or reducing their interest in adopting them.

Additionally, there are concerns about brand dilution—where shared platforms may weaken their unique brand identity. This can be mitigated through joint branding initiatives, ensuring the institution maintains visibility while benefiting from the shared infrastructure.

It is also observed that some large institutions in the Tier I category have adjusted their business model to reap economies of scale through the shared infrastructure. As a result, their SABs transactional costs are among the lowest, allowing the institution and their agents to generate income from other bank customers. The institution also benefits from customer retention and expansion.

As shared infrastructure evolves, there is potential for larger institutions to see value in joining, particularly as these platforms offer access to a broader customer base, enhanced security and reduced costs. The case for shared infrastructure is strong but requires a nuanced understanding of the diverse needs of the different institutions. Some examples of the nuanced needs include cost structure flexibility, and robust service level agreements around uptime, security and performance.

For adoption for the larger institutions, SMI providers should consider joint product development and research, and development can further enhance the value proposition.

Ultimately, SMI is not just a strategy for cutting costs- it is a pathway towards a more inclusive and efficient financial system in Uganda.

[1] This refers to the top banks by asset size in Uganda

[2] https://fsduganda.or.ug/our-work/digital-economy/electronic-know-your-customer-project/

[3] Based on Interviews with Key industry opinion leaders – Aug 2024

[4] Based on Interviews with key industry opinion leaders – September 2024

 

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