Towards an Equitable Society: Driving Financial Inclusion through DFS

    LightCastle Analytics Wing
    LightCastle Analytics Wing
    Driving Financial Inclusion through DFS

    To increase financial inclusion in the country, the importance of digital financial services can not be stressed enough. In recent years, the growing digital consumer class has embraced mobile financial platforms owing to the fast transaction, cost-efficiency and convenience. However, a large portion of the population is still financially excluded. According to Financial Inclusion Insights 2018, around 52% population of the country remains unbanked.[1] Thinning the rank of financial exclusion requires a strong policy-backed and well-regulated DFS ecosystem in the country.

    Due to low levels of competition in the market, the MFS providers adopted a conservative approach and established the platform as only a way to transfer money rather than a ‘mobile wallet’, limiting the manifold usage of MFS.[2] This is going to change soon as more market players are gathering speed owing to soaring transactions in MFS platforms during COVID-19. Alongside, agent banking gained momentum due to its reach to the remotest parts in the country. With proper regulations in place, the huge unbanked population can be brought under the umbrella of formal financial services, leading to increased financial inclusion in post-pandemic Bangladesh.

    Increasing DFS Adoption in Bangladesh

    The DFS landscape of Bangladesh has significantly evolved over the years. Aggressive expansion of agent banking and the launch of e-KYC (electronic know your customer) has boosted the DFS platforms. Around 92% of the population have their reach to financial sector access points within 5 km.[3] Over the last five years, the MFS industry is growing steadily at a 20% CAGR.[4] Sixteen companies offer MFS; however, the industry has been somewhat monopolistic with bKash leading the way. Meanwhile, Nagad, a DFS platform of Bangladesh Postal Service has put up a tough competition as it has transaction limits beyond the threshold set by Bangladesh Bank.[9]

    In 2019, the launch of the ‘Porichoy’ portal by the ICT Division, which is connected to the Electric Commission database, has opened the gateway for faster and easier verification of NIDs. The e-KYC mechanism helps reduce the cost and time of enrollments for customers. Moreover, guidelines for e-money services were issued by Bangladesh Bank in 2019 to promote e-wallet adoption in the country.[3] Only payment service provider (PSP) license owners are permitted to offer e-wallet services, meaning FinTech companies will need a PSP license to operate in the country.

    Digital Payment Integration: Boosted by COVID-19

    Over the years, bKash has collaborated with various e-commerce and f-commerce platforms to make online payment convenient. The digital payment segment in ride-sharing and food-delivery platforms is also dominated by bKash. In 2018, bKash partnered with the market leader in ride-sharing services, Pathao. In August 2020, Uber also teamed up with bKash to allow riders to pay the fare in a convenient, contactless and protected manner.[5] Payment integration is going to be strengthened as the Bangladesh e-Commerce industry has been experiencing rapid growth.

    Driven by the demand for cashless transactions, the use of MFS platforms escalated substantially during the pandemic. The number of average daily transactions increased by 4% in the third quarter of FY 2019-20 compared to the second quarter of the same fiscal year. During the crisis, MFS platforms were used for multi-dimensional purposes. A huge number of MFS accounts were opened in April 2020 to disburse the wages of garment workers in the trying times.[8]

    Paying utility bills, streamlining remittances, disbursement of donations and safety net funds, etc. are the new horizons in which MFS platforms were used. Identifying the need for internet banking, Bangladesh Bank has heightened the transaction ceilings for individuals to BDT 5 lakh, which was previously BDT 1 lakh. According to the Financial Inclusion Insights, 35% of Bangladesh adults were digitally included via mobile, bank, or NBFI.[1] A surge in digital financial inclusion can be predicted given the accelerated use of digital transactions taking place during the pandemic.

    Potential Pitfalls in DFS Landscape

    LightCastle Business Confidence Index 2019-20 has identified the digital financial services sector as one of the most promising sectors of the decade. However, the industry will flourish faster if specific challenges are addressed. The DFS industry reveals weakness in building an ecosystem enhancing B2B transactions as 90% of the transactions comprise cash in-cash out and P2P transactions.[6] High transaction fees disincentivize registered MFS users to make business transactions. In addition, the lack of interoperability has been limiting the DFS platforms to work collaboratively and move towards a cashless society. Moreover, most of the cottage, small and medium enterprises that struggle with cash flow maintenance, are financially excluded. 

    One of the crucial challenges is the lack of financial and numerical literacy among most of the unbanked population in the country who are typically from the rural and lower-class society. Women are overrepresented among the unbanked population in Bangladesh as 65% of unbanked adults are women.[7] The gender gap is further acute in poorer households. The DFS platforms should be able to tap into these sections to reduce the gap as well. As FinTech will keep booming, cybersecurity and operational risks are going to be major challenges. The continuity of the use of DFS platforms to disburse wages of garment workers in post-pandemic Bangladesh also remains a concern. Nonetheless, faster adoption of fintech is imperative to elevate financial inclusion in the country.

    Strengthening the DFS Ecosystem

    Despite the existing challenges, the DFS platform is projected to grow steadily in the future as the digital consumer class is expanding. However, being registered under formal financial services only serves the number one purpose of financial inclusion. The larger goal  of financial inclusion is using FinTech to maintain the overall financial well-being of the population by promoting integrated solutions. Financial inclusion is truly beneficial when individuals or entities start using multivariate financial services on a regular basis. Rural-based FinTech services need to be given an extra push to increase the financial literacy of the unbanked population. SMEs, the bloodline of Bangladesh’s economy, need DFS to access a plethora of financial solutions. To create a favorable competitive market, Bangladesh Bank and Microcredit Regulatory Authority (MRA) might consider working together to develop synchronization among Microfinance Institutions (MFIs) and MFS players, which will benefit the SMEs.

    Government regulations about transaction fees should be revised to encourage collaboration among private associations to enhance B2B transactions that will result in a significant increase in digital financial inclusion. Countries like China and India have advanced their financial systems remarkably through rapid expansion of FinTech backed by well-structured regulations and policies. Following a similar route, advanced financial solutions such as loans, savings, investments, insurances, crowdfunding, etc. should be popularized in Bangladesh through governmental initiatives. Additionally, interoperable payment systems can be established to speed up the journey towards a digital economy. To reduce fraud risks, adopting advanced technologies including blockchain is imperative. In conclusion, with adequate regulatory interventions, the booming Fintech industry can shortly gain maturity reducing financial exclusion and increasing digital financial inclusion within the country.

    Ishrat Jahan Holy, Content Writer and Silvia RozarioSenior Business 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.