Deep Dive into FinTech Innovation in Bangladesh

    LightCastle Analytics Wing
    LightCastle Analytics Wing
    Global FinTech & Bangladesh - 2

    The recent surge in digital transactions in Bangladesh triggered by the COVID-19 pandemic has lately been the talk of the town. According to Bangladesh Bank, the average daily mobile financial services (MFS) transactions increased by 7% in the third quarter of FY 2019-20 from its previous quarter.[1] Moving towards a cashless society, digital transactions are gradually being woven into the fabric of life. With increasing demands, this sector would only keep on growing in the coming years. Needless to mention, the FinTech industry in Bangladesh enjoys an unsaturated market bursting with opportunities for cutting-edge and innovative financial services. So far, the MFS platforms have gained the most popularity. Despite the increasing adoption of these services, lack of interoperability remains a major concern that obstructs further growth of DFS in Bangladesh.

    Wallet Interoperability: A Much-Needed Step

    Wallet interoperability refers to the idea where payments can be made from a wallet to any merchant who accepts digital payments. Currently, the digital wallets function in a closed-looped ecosystem. Interoperability among the DFS wallets is much needed to drive the growth of the industry. For example, interoperability between MFS platforms will allow a bKash wallet user to send money to a bKash wallet user, and the other way around. This can also help the e-commerce industry by boosting digital payments and improving financial penetration. One of the core reasons behind India’s digital financial revolution is its successful implementation of interoperable digital payment systems.

    How Wallet Interoperability Changed India’s Payment Systems

    As India has accomplished to leverage technology to make payments accessible to all, it serves as a benchmark to many countries, including Bangladesh. The inflection point of India’s digital payment journey was the launch of the United Payments Interface (UPI) in 2016, which is a proxy-based payment system. 

    UPI transactions have been growing and making records with constant support from the government, Reserve Bank of India (RBI), largest public sector to private sector banks, FinTech firms and customers. The CAGR of UPI from FY2017 to FY2020 is around 785% in volume and nearly 570% in terms of value.[2] According to PricewaterhouseCoopers’ projections, the volume of the UPI product would reach approximately 59 billion owing to its high P2P type of transaction penetration.

    FIGURE: UPI Transaction Volume Projections (In millions) / Source: PricewaterhouseCoopers

    The mounting usage of smartphones and convenience allied with QR-based payments has led to increased adoption of an interoperable payment method; Bharat QR. Another major component of retail payment transactions, utility bill payments, is made easy by Bharat Bill Payment System, which is intended to be a one-stop interoperable, cost-effective, accessible ecosystem. It offers a single platform that allows banks, payment service providers, retailers, billers and customers to connect and pay bills.[2] 

    Aadhaar enabled Payment Systems (AePS), a bank-led model that permits interoperable transactions at micro ATMs, has been a game-changer for the government in achieving its objective of financial inclusion. AePS has been used in the state’s financial inclusion schemes and to disburse the stimulus packages during the COVID-19 crisis. In Bangladesh, the MFS platforms were also used to complete similar tasks amidst the lockdown. With more than 85 million registered MFS accounts in the whole country, wallet interoperability can create a crucial impact, both in driving financial inclusion and in fulfilling the vision of the digital economy.

    Where Does Bangladesh Stand? 

    Since the issuance of MFS Guidelines in 2011, the journey of MFS platforms in Bangladesh started under a bank-led structure. According to the World Bank’s 2017 Global Findex Database, financial inclusion in Bangladesh had increased to 21% from 3% in 2011 and DFS and MFS played a huge role behind this.[3] bKash is the leading MFS platform with the highest number of users. Tweaking the level-playing field, Nagad, a digital financial service platform was launched in 2019 under the authority of Bangladesh Post Office that offers higher transaction ceilings for consumers.

    Governmental Initiatives for FinTech Progression

    To magnify and expand digital financial inclusion, the Digital Financial Services (DFS) Lab, a joint initiative by Bangladesh Bank and a2i has been developed. Primarily, the lab works towards creating citizen-centered product and service innovation to assist rural e-commerce and increase financial literacy. 

    Moreover, an MoU has been signed between Bangladesh Bank and ICT Division with a view to implementing an “Interoperable Digital Transaction Platform (IDTP).[4] The initiative envisions launching digital payment services in all areas taking into account the ‘National ICT Policy 2018’. This platform will offer Application Programming Interface (API) which will be used by FinTech organizations to make all kinds of financial transactions and boost digital financial inclusion.

    Bangladesh Bank has permitted iPay Systems, D Money Bangladesh and Recursion FinTech to operate as payment service providers and allowed three other entities; IT Consultants, SSL Commerz and ShurjoMukhi to work as payment system operators.[5]

    During the COVID-19 crisis, the utility of these platforms was maximized by paying salaries of readymade garments workers along with disbursing stimulus packages and safety net funds to remote areas. In the RMG sector, MFS platforms are being profoundly used to pay the wages of workers. Introducing interoperable digital payment systems in RMG would facilitate making payments both for the industry as well as for the workers.

    Going Digital: Innovation in Banking System

    The banking sector in Bangladesh has also realized the urgency of shifting towards digital. This becomes crucially evident as transactions through electronic funds transfer (EFT) steeply increase. According to Bangladesh Bank data, the volume of transactions EFT substantially increased from March 2020 to June 2020.[6] Banks have witnessed significant growth in online transactions during the pandemic indicating the up and coming demands for digital banking services.

    FIGURE: Average items processed per day by Bangladesh Electronic Funds Transfer Network / Source: Bangladesh Bank

    Current Scenario of Digital Banking Services

    Since the launch of the digital banking app City Touch, City Bank has been the leading internet banking service provider in Bangladesh. While the internet-banking channel used to see transactions worth BDT 550 crore on average per month, transaction value reached BDT 750 crore in June 2020.[7] Dutch-Bangla Bank Limited, Eastern Bank (EBL), Standard Chartered Bank, BRAC Bank, and Mutual Trust Bank (MTB) offer internet banking through its apps NexusPay, EBL Skybanking, SC Mobile Bangladesh, BRAC Bank Mobile, MTB Smart Banking respectively.

    These banks witnessed a weighty growth in internet banking in June 2020 in comparison to the pre-COVID-19 period. In the same month, MTB saw a 30% increase in its online transactions.[7] Furthermore, getting immense response during the pandemic, PrimeDigi, a unique digital proposition by Prime Bank has led the bank to win AsiaMoney’s prestigious Best Digital Bank Award.

    All the banking service providers observed more usage of their apps during the crisis. One of the reasons behind the surge can be increased online payments of salaries. However, the upward trend can be predicted to continue considering consumers would prefer digital banking services to traditional ones due to convenience, efficiency, speed and affordability.

    Impending Innovation in Banking System

    Islami Bank Bangladesh Limited (IBBL) has announced its plans to launch real-time online investment banking riding on the latest financial technology (FinTech) by the end of 2020.[8] Similarly, Dhaka Bank Limited (DBL) has intended to introduce diversified FinTech based-services to safeguard uninterrupted banking services.[9]

    On the other hand, Bank Asia plans to form a neobank and change the banking landscape by offering branchless banking services. Moreover, the country’s first-ever blockchain transaction was executed by Standard Chartered which was completed digitally by Contour, a global network of banks, leveraging Corda blockchain. This will make the financial transactions among local and foreign textile companies paperless, cost-effective, faster and error-free.[10]

    Much advanced innovations are already being implemented globally and Bangladesh needs to catch up with full force. Artificial Intelligence, distributed ledger technology and many sophisticated technologies have remained unutilized. Collaboration with foreign FinTech companies will be critical to apply such high-end technologies in the country.

    There is no denying that FinTech is the future. The neighboring country, India has reshaped its financial sector and has become a benchmark. RBI’s timely guidelines for the interoperability of payment systems allowed the digital payments sector to reinvent itself in India. Developing an interoperable wallet system is complex, but very possible. Taking baby steps, Bangladesh can start by making the MFS platforms interoperable. Regulatory sandboxes also helped India to evaluate the effectiveness of FinTech startups through trial and error. Bangladesh can replicate similar policies to drive a digital financial revolution and in turn, increase financial inclusion.

    Ishrat Jahan Holy, Content Writer and Rageeb Kibria, Principal Consultant, at LightCastle Partners, have prepared the write-up. For further clarifications, contact here: [email protected]

    References

    LightCastle Analytics Wing

    LightCastle Analytics Wing is the research division of LightCastle Partners. It is tasked with producing periodic reports on the different sectors of the economy, analyzing trends in markets and making methodical, thorough and intelligent analysis to improve strategy and drive business growth.