The Play for Digital Banking – Accelerating Consumer Finance for Bangladesh

Historically, Bangladesh has made headlines in international media as a Least Economic Developed Country with stories of extreme poverty, natural disasters, industrial accidents and corruption in the forefront. While we continue to watch analogous anecdotes in the global forum with a heavy heart, everything is not dark.

With consistent GDP growth rate of 5%+ over a decade Bangladesh has entered the lower rungs of middle income nation as classified by World Bank. As an emerging economy Bangladesh is also shortlisted as one of the fastest growing nations in the next decade. The growth is often attributed to our twin engines – RMG export and remittance however our bulging middle income population has kept on providing impetus.  And with this growing middle and affluent class comes increasing technology adaption, rising consumer finance demands and inception of the digital economy.

In a country where ~60% of the adult population is unbanked, technology can help propel consumer finance which will bolster domestic expenditure to drive additional growth. Let us take a look at the factors that will drive consumer finance and why the growth will come from digital banking.

Bulging middle class coupled with demographic bulge and density dividend: Currently just 7% of the population, our middle and affluent consumers will grow at 10%+ to triple by 2025 across Bangladesh. But that is not the only factor. This consumer group would be young (50% under the age of 35) – easier to hook into long term financial products and easier to reach – Bangladesh is the 5^th densest country in terms of population/Sq m.

Smart Devices Adoption and Technological Leapfrog: A younger consumer class means technology solutions are easier to scale with lower customer acquisition costs (yes since most of them are always on their phones) coupled with falling smart devices prices and lucrative EMI plans. This would also mean since this consumers are getting adopted to latest technologies we can leapfrog a few steps like traditional banking and directly move into FinTech solutions. This is exemplified by break-neck growth of mobile financial services and emergence of payment gateways like PayPal.

Investments in Telecom, ICT Solutions and Rise of Tech Startups: In terms of infrastructure Bangladesh has seen positive investments from global telecom giants like Telenor, Robi Axiata and VimpleCom or VEON which has resulted in 80%+ mobile penetration and 50% internet penetration. Additionally, the government has incentivized ICT solutions with Hi-tech/software parks, tax breaks and easier access to finance. With private sector investments flowing into the sector (like Grameenphone the largest telecom running their fourth accelerator batch now) – we are seeing FinTechs like SmartKompare and Bank Compare in the market. Both the Startups allow consumers in digital space to choose from the repertoire of financial services that banks have to offer and reached them in second screen.

Financial Sector (Banks and NBFIs) embracing e-banking and customer technology interfaces: Apart from integration with mobile financial services, third and fourth generation banks have started taking e-banking seriously with investments in consumer apps, online web portals, internet and sms banking. While digital marketing is yet to become a norm for financial institutions – things are changing very rapidly. Near future will see FIs investing heavily in social media and second screen driven communications. Even asset-management firms like IDLC has taken Facebook based communication as an integral part of their marketing strategy.

While the above are driving factors for digital banking however if the sector does not engage in technological innovation disruption might just be around the corner. We might think crypto currency revolution like Bitcoin is largely a global phenomenon and Bangladesh is sheltered but the world is speeding towards globalization at a faster rate. Let us take a sneak peak at alternatives to digital banking.

Crypto-currency is on the way but crowd funding is here: Startups like Projekt.co were one of the pioneers in the crowd funding space, if we ignore multi-level-marketing initiatives. Globally, crowd funding initiatives like Kickstarter have funded super successful businesses like Pebble (who created the smart-watch category) and “Modular” Phones. Bangladesh with its younger consumer demographics willing to take calculated risks and a low tolerance for traditional channels might just be enticed to consume similar investment products.

With Bangladesh Securities and Exchange Commission handing out Alternative Financing Licenses to independent fund managers, venture capital firms like BD Venture are eyeing the idea of equity-crowd funding platform – where consumers via technology channels can invest in businesses (mainly Startups) directly.

In future as a consumer you can – not only invest in Gov Securities, Banking Products and Capital markets but also directly in businesses. Africa and India also have seen emergence of peer-to-peer lending platforms like Faircent and i2iFunding and this can disrupt personal loan financing market in Bangladesh as well.

Mobile Based Credit Ratings: One of the prime pillars of consumer finance products is accurately assessing the credit worthiness of clients or prospective customers. With mobile devices becoming an integral part of our lives (the first thing we see when we get out of bed and the last thing we see before sleeping in most cases is our smartphone) – technology now allows us to determine credit ratings of customers. This is exactly what Tala Mobile, a company operating in Africa does.

Tala can access a range of data from basic biographical information to the number of people you contact daily to measuring your network and support system. Tala knows where you go during the day, whether you demonstrate consistency and whether you pay your bills on time. The big revelation: your routine habits are more meaningful than traditional credit scoring.  Right now operating in Kenya, Tanzania and the Philippines the company will go global and add impetus to alternative consumer finance channels.

Initial Coin Offerings: You must be thinking a lot of the concerns I raised can be linked back to digital banking channels. For example mobile based credit rating can integrate with the bank’s credit score or crowd funding platforms can have custody accounts in banks. However, the future is getting more interesting – with crypto-currencies opening up – consumers have the option to invest directly in digital currency companies via initial coin offerings. Think about it- with such currencies gaining popularity you might replace traditional currency altogether from your life!  A quick look at the Bitcoin stock returns (currently market cap of USD 30 billion- growing 645% in two years) will show that the concern is not a sci-fi story but is happening.

All this factors show that digital banking has become imperative in consumer finance and its importance will grow exponentially in the coming future. Apart from working with stakeholders and being more nimble by partnering with FinTech companies, the FIs can start by taking up digital banking as core part of their growth strategy. While we definitely see the emergence with banks entering in multiple partnerships with telecoms – we are yet to see them come mainstream in digital marketing as opposed to traditional channels.

A stronger ICT integration focused towards consumer experience would add impetus to growth. This doesn’t necessarily have to come from internal R&D. Compared to countries like India where large banks are investing in FinTech Startups to spur innovation – Bangladesh is still at its nascence. Apart from the case of GP, corporate based accelerator programs or investments are yet to pick up and banks at this stage can be pioneers and reap the benefits.

This article was originally published in The Financial Express on 30, November, 2017.

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