In Dar es Salaam, Amina sends part of her wages to her village every week. Each time, she pays a fee, and her family also pays a fee to withdraw the funds from the nearest agent. This means that on a typical weekly transfer of TSH 10,000, Amina spends nearly TSH 2,000 in extra fees.

Her mother sometimes suggests sending cash with relatives travelling back home, but Amina trusts the speed and transparency of the banking system more than her relatives.

Millions of people in emerging markets face this same trade-off; they have accounts with a financial institution and want to use them, but high fees take away from their earnings or business profits, discouraging their use.

Tanzania Instant Payment Systems: A Step Toward Interoperability

The Tanzania Instant Payment Systems (TIPS) offers a viable pathway to reducing costs for DFS.  Launched in 2021, TIPS connects all major financial service providers (FSPs) in the country, seamlessly enabling transfers between them, known as interoperable payments.

Unlike earlier systems, TIPS offers a single, centralized connection, replacing multiple bilateral integrations. As adoption grows and payment volumes increase, the marginal cost per transaction could drop, making the system more cost-effective. These dynamics matter most when existing interoperable systems serve as the cost-effectiveness benchmark for new implementations.

What Financial Service Providers Are Saying

IPA conducted semi-structured key informant interviews with nine firms in Tanzania to understand the impact of TIPS. What we found was a mix of positivity around long-term benefits and skepticism around short-term challenges. Below are the key takeaways.

• Operational efficiencies: FSPs acknowledge that TIPS has streamlined their operations by replacing multiple bilateral integrations with a single, centralized connection. It enables faster customer onboarding, simplifies reconciliation through a single account, and reduces the technical burden on FSPs.
• Trade-offs in centralization: While centralizing all transactions across providers reduces pre-funding requirements and enhances liquidity, reliance on one central system creates vulnerability to outages. Many FSPs, therefore, maintain the previous system as a backup.
• Cost savings are uncertain in the short term: While TIPS has introduced operational efficiencies like centralized pre-funding and streamlined reconciliation, FSPs have not yet realized significant cost savings due to upfront investments, ongoing infrastructure requirements (such as expanding and maintaining cash-in-cash-out networks), and their decision to maintain the previous system as a backup.
• FSPs don’t anticipate major cost savings without a significant increase in payment volumes: Uncertainty around future TIPS fees and cost structures further complicates financial planning. Mobile money providers noted that, unlike banks, they lack a sufficiently diversified product portfolio, limiting revenue streams and naturally resulting in lower margins compared to banks.
• Shifting market dynamics: FSPs expect TIPS to intensify market competition by reducing barriers to expansion, particularly for merchant payments, leading to a “race to the merchant” as providers compete to expand their networks. Banks, in particular, see an opportunity to leverage TIPS to offer value-added services like credit and business analytics to micro and small merchants, potentially gaining market share from mobile money providers.

A Slow but Strategic Transition

Our findings suggest that while FSPs see the long-term potential of TIPS, they are cautious. Legacy systems still remain in place, and trust in the new infrastructure will take time to build. Operational costs, which are incurred regardless of payments interoperability, undermine any benefits realized from integrating into TIPS, at least in the short term, before higher payments volumes help achieve economies of scale. 

Policy Considerations

To maximize TIPS’s potential and broaden DFS adoption, policymakers should:

1. Harmonize pricing policies across providers after taking time to understand the cost structures of the broader DFS sector, especially the differences between the types of institutions involved in the sector, before encouraging FSPs to reduce pricing of DFS.
2. Monitor and continuously improve the functional reliability metrics of the new payment system to help build trust of FSPs before persuading them to reduce reliance on legacy systems.
3. Aim to strike a balance between trying to maximize consumer welfare through lower pricing of DFS and financial sector viability to avoid discouraging FSPs from expanding product offerings and infrastructure in underserved areas.

This blog is part of IPA’s blog series on the Tanzania Affordable Digital Finance Initiative (TADFRI), which seeks to reduce DFS costs for consumers through generating robust evidence for suitable policy development in Tanzania.