Digital Payments in Bangladesh: A Road to Growth and Stability

Bangladesh has enjoyed rapid growth in technological advancement recently with a current internet penetration rate of 60.7%.[1] This has opened up a wide array of opportunities for businesses and services to thrive. One of the most noticeable trends in Bangladesh right now is the rise of digital payments. This change has subsequently spurred a digital ecosystem and added value to the overall economy. 

The COVID 19 pandemic was a game-changer for the digital payment ecosystem in Bangladesh due to the need for contactless payments. Besides facilitating trade, the digital payments also helped the government in disbursing financial help to the needy populace during COVID-19. 

The COVID-19 Effect on Digital Payments

The start of the pandemic led to mass-scale lockdowns across the town and this led to more and more people relying on contactless methods to pay for essential products and services. This ease of transaction helped the digital payment ecosystem of Bangladesh reach new heights. 

Increased Volume and Accounts

After the start of the pandemic in March 2020, there was a dip in such payments due to mass panic and businesses shut down, but shortly after that, the payments rose steadily. The rise in the MFS payments is the most noticeable among these as access to these services has gotten easier over time. 

Although the pandemic has decreased trade and commerce throughout the country, the rise in digital payments indicates that more and more people have shifted to digital payment services for their business and day-to-day activities. This has both spurred financial inclusion and has helped boost COVID-19 hygiene practices by limiting human interaction. Moreover, essential services such as grocery delivery, online shopping, etc. have greatly benefited from the ease of payment facilitated by the growth of digital payment services. 

Besides just the volume, the number of accounts of all services has gone up too. There has been a huge growth of customers in both Mobile financial services and internet banking. 

This increase in the number of accounts suggests that more financial inclusion has happened over the course of the pandemic. This also implies that such services have become more accessible to the general population due to their ease of use and availability. 

Growth not Limited to Urban Areas

Digital financial services have penetrated the rural population too through their universal appeal. The prevalence of Mobile financial services is more in these areas compared to other methods. 

As the data shows, MFS accounts are more in rural areas compared to urban ones and these accounts have exhibited a steady growth into the pandemic too. Such accounts are a step in the right direction for the Bangladeshi ecosystem as this means further financial inclusion for all stakeholders. People are also able to obtain remittance through mobile financial services and this has further boosted the popularity of MFS in rural and semi-urban areas.

New Policies and Innovations in the Digital Payment Ecosystem

The pandemic has forced all stakeholders to rethink the digital ecosystem and as a result, many new policies and changes have come about during the pandemic that has affected the ecosystem in both positive and negative ways.

Government Policies

The government of Bangladesh estimates that around 7.7% of the country’s population makes payments through mobile financial services as of 2020.[2] There is massive room for growth in this sector as there are many areas that can benefit from such services. The government has taken quite a few steps to facilitate such services.

• Interoperable Digital Payment Platform (IDPP): Bangladesh Bank signed a Memorandum of Understanding (MoU) with the ICT division back in the January of 2020 to implement an interoperable system of digital payments in the country where customers can access all digital services under one API (Application Processing Interface).[3] This will create a bridge of transactions between various payment service participants, such as customers, merchants, payment and receivables, payment processors, e-wallets, banks and financial institutions, payment system operators, and non-governmental organizations. This is currently in the testing phase by Bangladesh Bank and is soon to be released for all customers to use. 
• Disbursing Cash Aids through Mobile Financial Services: The government disbursed BDT 2,500 each among 50 lakh distressed families in the country using Bkash, the country’s leading MFS provider.[4] The recipients did not need to pay the cash-out fees and NID verification was used to ensure that the right people got the money. This initiative brought more users into the ecosystem and demonstrated large-scale trust in the system, boosting confidence in MFS among all present and future stakeholders. 
• Pro-internet Banking Policies: Bangladesh Bank recently raised the limit for interbank daily online transactions, which included a five-fold increase in the limit for institutional users. This policy change will allow more users to make secure online transactions from their homes and ultimately widen the scope of online banking in the country. 
• Micro Merchant Support: Bangladesh bank has banks, MFS, and payment services to open retail accounts for micro-merchants. This process would not require any additional charges such as VAT or any Tax Identification Numbers. This step has allowed digital inclusion at the lowest level of trade in Bangladesh and is being seen as the first step in creating financial inclusion at the root level of traders.

Private Companies

Private Companies such as Mobile Financial Service providers, banks, and businesses have contributed a lot to the digital payment ecosystem too by bringing in new changes and offers. 

• Mobile Financial Services: Bkash and Nagad have led the way in integrating their services in almost all services to facilitate contactless payments. Bkash focused on its service of payment through QR codes, collaborated with Uber to promote safer traveling, and integrated payments of new services such as insurance premiums under their platform to drive the digital payment change in consumers.[6] Bkash also launched an anti-money laundering solution named AML360 to combat the security concerns that go hand in hand with increased digital payments.[7] Another major player, Nagad brought down its cash-out charges to BDT 9.99 per BDT 1,000 in response to the increased demand from the pandemic to grab a larger share of the market. It has also brought new cashback offers on shopping to entice more consumers in joining its ecosystem.[8]
• Banks and Other Financial Institutions: Besides multifaceted steps from Bangladesh banks, different local banks and financing companies have stepped up to embrace the change. For Example, IPDC financing collaborated with IBM to launch Bangladesh’s first Distributed Ledger Technology platform, Orjon. This platform is currently being used to keep track of pension records of primary school teachers of Bangladesh.[9] Even without innovations like that of IPDC, banks and financial institutions have been quick to adapt to new opportunities and provide good service during the pandemic. 
• Businesses: Most popular super shops were quick to set up online POS as soon as the pandemic started in Bangladesh. They built easy-to-use websites and allowed multi-methods of payments for the consumers. Besides, businesses on social media sites have also used digital payment methods and contributed further to the ecosystem. 

The Way Forward

The way forward is not an easy one as it includes large-scale technological and behavioral changes. There are quite a few impediments to progress too. 

Current Impediments to Progress

1. According to a BRAC Institute of Governance and Development (BIGD) survey, 60% of MFS operators require help to operate their accounts. This puts them at risk of security breaches and indicates that there is a lot of work to be done even after new accounts are opened.[11]
2. Although MFS is very popular in Bangladesh, the cash-out charges are very high. The 15% VAT is to be partly blamed for this problem. These high rates discourage consumers from using MFS more, especially the less affluent people.
3. Credit cards are not very popular in Bangladesh and people still prefer making cash purchases. This behavior stems from a lack of trust and understanding of these systems. 
4. MFS frauds are very common in Bangladesh and act as one of the main reasons for people feeling insecure about keeping funds in their MFS accounts. These scams reduce the credibility of the companies themselves and make consumers gravitate toward traditional payment methods.
5. Smartphone and internet access is still somewhat limited and thus people from fringe areas are less likely to be able to access any form of financial inclusion.

Recommendations

1. Financial Literacy has to be created to enable users to better understand the services that they are availing of. This will boost account privacy and enable users to protect their hard-earned money.
2. Uniformity has to be created in providing financial services so that the modules are easier to explain to the end-users. This can be achieved through interoperability and creating more consciousness about how that interoperability works.
3. Digital Transactions are already heavily encouraged but are gaining popularity very slowly due to their perceived complexities. So processes such as credit card payments and internet banking have to be made more understandable for the end-users so that consumer trust is created at all levels
4. A regulatory sandbox can be created for business and fintech ventures to test out different innovations before piloting them in the market
5. Costs associated with MFS have to be brought down. As the data shows, most MFS accounts are in rural areas and higher fees are likely to discourage people with limited income from using such services. So these fees need to be reconsidered and adjusted according to the current market need.
6. It is important to keep up with global standards in fintech innovation and so favorable regulatory policies should be created that stimulate progress and innovation.

Bangladesh has done a great job in generating financial inclusion at a massive scale for the past few years. But there is a lot to be done in terms of creating an understanding of how different services work at the consumer level. The technological barriers are also a significant threat to achieving a good digital ecosystem. On the bright side, Bangladesh is poised to make these changes with well-positioned companies and favorable public policies. So, it is now up to the companies and the government to make good of these opportunities and achieve a digital payment ecosystem accessible to everyone. 

Authors

Eqra Mohammad Resalat Ohee,  Trainee Consultant, and Farah Hamud Khan, Senior Business Consultant & Project Manager, at LightCastle Partners, have prepared the write-up. For further clarifications, contact here: [email protected]

References

1. Bangladesh – Internet World Statistics
2. Digital Bangladesh 2021: Payment systems and fintech – The Daily Star 
3. BB And ICTD Plan To Implement ‘Interoperable Digital Transaction Platform’ – Fintech BD
4. Beneficiaries getting PM’s cash aid easily through bKash amid pandemic – The Business Standard
5. Bangladesh Bank widens the scope of online banking – The New Age 
6. The future looks bright as the sun for MFS – The Dhaka Tribune
7. bKash launches anti-money laundering solution – The Dhaka Tribune
8. Nagad takes the fight to big players with the lowest cash-out charge – The Dhaka Tribune 
9. IBM Pilots Blockchain Solution For Primary Teachers’ Pensions in Bangladesh – Cointelegraph
10. Small traders to benefit from easier digital payment – The Financial Expres
11. BIGD survey: 60% of MFS account holders cannot operate accounts without help – The Dhaka Tribune

---