Understanding the Difference Between IPS and Inclusive Instant Payment Systems (IIPS)

In the world of financial technology, the terms instant payment systems (IPS) and inclusive instant payment systems (IIPS) are both used to refer to digital financial transfers that allow the recipient to use the money within seconds. Though they share similarities in offering rapid financial transactions, their core objectives and impacts differ significantly. As more nations adopt a financial inclusion strategy that includes instant payments, the more important it is to understand the differences between them.

So, what is the difference between IPS and IIPS?

IPSs are designed to perform immediate transfers of funds between accounts within seconds. The primary goal is to offer a seamless and efficient funds transfer or remittance experience, eliminating the delays associated with traditional banking transfers. These systems have gained popularity worldwide due to their speed and convenience, catering primarily to the existing banked population.

IIPSs, while built on the rapid transfer capabilities of IPS, are specifically tailored to promote financial inclusion. They aim to bring financial services to the unbanked and underserved populations, addressing the unique challenges faced by these groups.

There are several other key aspects that differentiate an IIPS from a standard IPS. For example, in terms of scope and objective, the primary focus of an IPS is on speed and efficiency, catering mainly to individuals and businesses already integrated into the formal financial system. In an IIPS, the focus extends beyond speed, aiming to include marginalized populations such as the unbanked, underbanked, women, rural communities, and informal workers. The objective is to create a more equitable financial ecosystem.

With regards to system design and interoperability, IPSs typically facilitate transactions within established financial institutions, primarily banks. In IIPSs, the systems are designed with broader interoperability, incorporating not just large banks, but also mobile money operators, Savings & Credit Co-operatives (SACCOs), and other non-bank financial institutions. This multilateral interoperability is crucial for reaching underserved communities.

Regulatory involvement for an IPS means that the system operates under standard financial regulations with a focus on compliance and security within the existing banking framework. With an IIPS, a more active role for central banks and financial regulators balances the interests of private sector players with national financial inclusion goals. This regulatory support ensures that inclusive policies are embedded within the system’s governance.

With regards to consumer focus, IPSs primarily target individuals and businesses who are already familiar with digital financial services, providing them with a faster alternative to traditional transfers. An IIPS by design offers a wide variety of use cases like merchant payments, e-commerce, agent transactions, and government benefit transfers, as opposed to an IPS which requires clunky overlays to offer these.  An IIPS by design aims for lower transaction values, not higher.

IIPSs emphasize accessibility and affordability, aiming to serve populations with limited or no prior engagement with digital financial services. This includes developing user-friendly interfaces, low-cost transaction models, and robust consumer protection mechanisms.  Bringing together low cost, low value transactions to new digital customers requires a transaction certainty, which means senders need confidence that if money leaves their account, it is guaranteed to arrive at the recipient’s account. High levels of certainty are only achieved when all checks are made, and terms of the transaction are agreed upon prior to executing the transfer.

Overall, the difference between an IPS and an IIPS lies not just in the speed of transactions but in the underlying commitment to financial inclusion. While IPSs focus on efficiency within the existing financial ecosystem, IIPSs strive to bring the underserved into the fold, ensuring that financial services are accessible, affordable, and equitable for all.

Already more emerging economies across Africa and Asia are adopting financial inclusion strategies that feature IIPSs to benefit their underserved population – particularly those in rural areas, and especially women. This segment of society remains excluded from more traditional financial systems, so IIPSs are crucial to reach them.  Here, developing countries are adopting digital public goods (DPGs) to modernize their IIPS to be fully inclusive. Digital public goods are open source software that adhere to privacy and other applicable laws and best practices; do no harm by design; and help attain the UN’s financial inclusion Sustainable Development Goals (SDGs). This DPG approach seeks to maximize IIPS benefits while minimizing exclusionary impacts and offering countries the control to customize and iterate their IIPSs to better understand and meet the needs of the underserved.

DPG-enabled IIPSs can serve as a gateway for women and vulnerable populations to interact with the greater financial system, enabling them to build transaction histories and access credit, savings, and other financial products that people in developed economies take for granted. There is enormous potential for digitizing government-to-person social payments and mobile payments to enhance financial inclusion. This is why DPG-enabled IIPSs that are inclusive by design are critical to bringing entire populations into the digital economy.