How Linking Payment Platforms Boosted India’s Digital Economy and Credit Access

In a timely and incisive contribution to the field of digital finance, researchers from the International Monetary Fund (IMF) and the Wharton School, Alexander Copestake, Divya Kirti, Maria Soledad Martinez Peria, and Yao Zeng, have published a working paper titled Integrating Fragmented Networks: The Value of Interoperability in Money and Payments. This June 2025 publication explores a foundational tension in digital payment systems: the trade-off between the network effects that drive users toward dominant platforms and the market fragmentation that arises from competing systems. Using India’s Unified Payments Interface (UPI), now the world’s largest fast payment system, as a case study, the authors present robust theoretical and empirical evidence showing how interoperability between platforms can dramatically enhance the adoption and use of digital payments, especially in fragmented markets.

The Interoperability Imperative

Digital payment systems, much like physical money, derive their usefulness from the breadth of their acceptance. The larger the number of people using a platform, the more valuable it becomes to each participant. But this network effect can also create monopolistic tendencies, reducing consumer choice and enabling rent-seeking behavior. Conversely, fostering multiple platforms can promote competition but risks fragmenting the network, thereby weakening its value. The IMF-Wharton paper positions interoperability, the seamless ability of users across different platforms to transact with each other, as the key to resolving this tension. By linking previously separate user bases, interoperability allows systems to capture the benefits of network scale without forcing convergence on a single platform.

India’s UPI Revolution as a Natural Experiment

The authors base their empirical work on a compelling natural experiment: the Reserve Bank of India’s decision to mandate interoperability between UPI and a pre-existing closed-loop digital payments platform, referred to in the paper simply as "the incumbent." Prior to this reform, users of the incumbent could only transact with others on the same platform. After integration, they could transact freely with UPI users across apps. India’s diverse payment landscape, with districts varying in the degree to which users were split between the two systems, provided fertile ground for studying how integration impacted usage. Granular district-level data covering transactions, users, and even ATM withdrawals offered a rare opportunity to isolate and measure the effects of interoperability.

A Model That Mirrors Reality

The researchers developed a theoretical model in which users choose between two digital platforms and an outside option, cash. In fragmented markets, users are divided between platforms, limiting their ability to interact and thus reducing the utility of digital payments. Interoperability changes this dynamic by enabling users to maintain their platform preferences while accessing a unified network of counterparties. Crucially, the model predicts that the benefits of interoperability are greatest in markets that were more fragmented prior to integration. These are the markets where users previously faced the highest barriers to transacting digitally across platforms.

Evidence of Transformation at Scale

Empirical results validate the model's predictions. In districts that were more fragmented before the integration, digital payment volumes surged by 88% relative to their own pre-integration levels, and by 118% when compared to less fragmented districts. Importantly, this increase was not driven solely by newly enabled cross-app transactions, though these did spike significantly, but also by greater activity within each platform. Users of both UPI and the incumbent app increased their transaction volumes, indicating that the enlarged effective user base made digital payments more attractive overall. The primary driver of this growth was an increase in new users rather than more intensive usage by existing ones. This finding underscores interoperability’s role in broadening access to digital payments.

To ensure their conclusions were robust, the authors employed a variety of empirical techniques, including matched sampling and instrumental variable analysis based on geographic distance to fintech launch hubs. These methods confirmed that the results were not driven by confounding factors like pre-existing economic conditions or population density.

Beyond Payments: Lending and Inclusion

The paper also investigates the downstream effects of digital payments on broader financial behavior. Using household survey data, the researchers found that borrowing from non-bank financial institutions rose more sharply in districts that had experienced higher digital payments growth due to interoperability. This effect was especially pronounced among entrepreneurs and street vendors, who often lack formal credit histories. The implication is clear: as users generate digital transaction records, they build financial footprints that make them more visible to lenders. Interoperability, by expanding the reach and attractiveness of digital payments, indirectly fosters greater financial inclusion.

A Blueprint for Global Financial Infrastructure

This study carries significant implications beyond India. As policymakers worldwide consider launching central bank digital currencies (CBDCs), building real-time payment infrastructure, or regulating large private fintech platforms, the lessons from India’s experience are highly instructive. Interoperability emerges not just as a technical enhancement but as a foundational design principle. It empowers consumers, boosts platform adoption, mitigates monopolistic behavior, and accelerates financial deepening. The research warns that introducing new, non-interoperable systems can increase fragmentation and reduce the potential benefits of digital finance.

The IMF-Wharton working paper makes a strong case for interoperability as a catalyst for digital transformation. It demonstrates how bridging fragmented networks doesn’t merely improve efficiency; it unlocks a broader, more inclusive, and more resilient financial ecosystem.