TRADITIONAL BANKS BENEFIT FROM THE INNOVATION AND AGILITY OF FINTECH

Mr Mostafa, Chief Technology Officer, Prime Bank Limited is currently playing the major role for digital transformation of the bank. Before joining here, he was in BRAC Bank and United Commercial Bank – the two large Banks in Bangladesh and is well recognised for his digital transformation initiatives and change management in those banks.
Having graduated in Computer Science from Khulna University and his MBA from IBA, Mostafa started his career as a software developer and still loves programming.

He is also a Fintech enthusiast and a keen observer of the development of Fintechs and related support system in Bangladesh.

Is it necessary to have some digital banks in Bangladesh right now? Or can existing banks go digital and fulfill the purpose?

What I understand from your question is, since all the commercial banks in Bangladesh can do everything digitally by default as per their license, there is no such hindrance, then why is there any requirement for new licenses of digital bank? Was there any impediment in the existing licensing? Where is the problem?

The question is very valid. There are no such services in a digital bank that traditional banks cannot offer, nor there is any such restriction from BB. But traditional banks by its nature and by its establishment, from very early stage, provide banking services in a traditional way. I would like to highlight on two key challenges that traditional banks face in their journey to become fully digital.

First is the management and mindset in a traditional bank. It is not easy for most of the traditional banks to understand the need and means of transforming the bank to fully digital. To most of the bank management, digital banking is still a matter of IT department or Digital Banking department. That’s not going to help become fully digital. To bring the digital transformation in and out, bank need to be digital at core, and changes and acceptability must come from all levels and corners. With the current long legacy of people with traditional mindset and processes, this transformation is really challenging. Second, a traditional bank’s digital services or technology services co-exists with their traditional physical branch services or other services that people traditionally consume. Their internal process, people and even technology are all established keeping the traditional services in mind. So, even if they become fully digital and automate everything from customer account opening to lending, they need to calculate their establishment cost considering these two things. In such case it is really difficult to not to give the customers the cost burden, and then it is not viable for the customers or generations who want full automated services. But if the traditional banks can ensure an autonomous and end-to-end digital unit for the millennials or generation Y or Z customers or those who want to have whole digital services and who will have nothing to do with physical branch or any physical process, in that case probably it is possible to segregate the investment and return. Autonomous digital unit is an option, but it is really challenging and very few bank will be able to move to there soon.

There are examples globally where traditional banks have addressed the above issue smartly and have been able to brand themselves as a true fully digital bank. But for most of the banks, especially in Bangladesh, this transition will take a very long time and effort due to those legacy challenges and mindsets.

Here, a licensed digital-only bank or challenger bank can enter with completely different mindset, different kind of investment mode, and management setup, and this new setup can have various advantages from day one. For example, it can leverage technology to subside the costs of new acquisition and cost-to-serve and also have the benefit of low-cost deposits to sustainably supply credit to its customers. It can setup highly tailored, agile and integrated process and technology from the starting. It is also easier for digital banks to make partnership, integration and create end-to-end service process flow with fintech companies since it is digital from the very beginning.

Considering all these things, there is a need for licensed digital-only banks with a different mindset; BB is probably thinking from that perspective. Having said this, in the long run, all traditional banks will have to be transformed into fully digital banks because eventually in a decade or so, there will remain very less or no customers who would want to visit a branch for banking service. Digital banks can show the path.

What banks can do to respond to /embrace Fintech?

Fintech companies and traditional banks both work as financial intermediaries. Banks have been in business for hundreds of years, but they still need to make radical changes to meet the expectations of modern-day customers. 

The initial wave from the traditional banking organizations was to treat fintech companies as a massive competitive threat due to their ability of innovation and agility. However, with time more and more traditional financial institutions see fintech firms as a gateway to enhance their digital capability. Banks are increasingly being inclined to this idea of collaboration to satisfy ever changing customer expectation for latest digital experience, to reduce the cost, to increase customer reachability and new customer acquisition, and to reduce the go-to-market time. Banks started to engage Fintech companies in various approaches – some banks/financial institutions are enabling fintech products through Open Banking APIs, some others are allowing fintech apps to establish digital wallets on their site. As an alternative, some banks are buying or investing in fintech companies. We can’t expect people to switch completely away from banks to fintech. Traditional banks have a level of trust and familiarity with their customers that is difficult to attain for most non-traditional financial institutions. But if fintech and banks can cooperate and collaborate, they’ll both make a bigger impact. Traditional banks benefit from the innovation and agility of fintech. And they boost confidence in financial technology due to decades of customer loyalty and trust, business size, and an established network.

This collaboration is visible to be in progress in Bangladesh also, and despite the limitation in legal framework and institutions to support interoperability and security, some banks are either in progress or actively looking into partnership in different approaches. For collaboration, Open Banking is already in practice in many cases, although an open banking standard & guideline from the regulatory bodies are the need of the time now to facilitate the integration further like the other parts of the world. Government led IDTP project which is going to take off soon also will help the collaboration. Other support from government and regulatory such as interoperable ID systems etc. are also the need of the time.

As the whole finance system continues to evolve, allocating resources for digital agility is increasingly a priority for banks. A win-win situation for both is long-term partnerships that combine innovation & agility i.e. fintech and support and trust i.e. banks to build the sector for the digital future. 

Do you think cryptocurrency should be made legal in Bangladesh?

Bangladesh Bank as a regulator has made its position very clear that, blockchain as a technology can be used but bitcoin as a currency and any crypto currency for that matter, is completely banned.

Blockchain and distributed ledgers and their various applications have tremendous possibility to contribute to life changing technological advancement in many areas.  In 2020, the ICT Division of Bangladesh published a detailed paper on blockchain technology called National Blockchain Strategy: Bangladesh (NBSB). The paper highlights numerous advantages of blockchains in various sectors such as agriculture, finance, supply chain etc. It also touched on the topic of how public blockchains such as Bitcoin and Ethereum can promote technological innovation.

Its not like we haven’t started implementing blockchain based applications. And there are many applications of Blockchain as a technology in financial industry also.  But one of the hurdles here is that we are not getting enough good human resource having the knowledge and implementation experience of blockchain based applications. One of the reasons I think is that cryptocurrencies and crypto-assets are, for many of us, yet just theory found in the book and we are trying hard to learn from the textbooks and other sources and from observing others, albeit we know that the best motivation of learning comes from seeing and believing.

While El Salvador as the first country declared bitcoin as legal tender in September last year, followed by Central African Republic to become the second country in April this year, I am not saying that it has to be legal tender in BD, but our regulators need to find ways to control and monitor cryptocurrencies and putting restriction only where necessary instead of a complete embargo that is hindering our learning, research, and development on blockchain and crypto asset-based implementations.

Bitcoin and other crypto currencies may or may not be sustainable as a currency ultimately and it is true that Bitcoin is in identity crisis – is it currency or is it commodity? Many countries have already determined it as a commodity and regulating it that way. I am sure our regulators are not sitting idle here and carefully observing the development of crypto related governance framework in other countries. Just for example, in the USA crypto currencies are determined as commodities and regulated under CFTC (Commodity Futures Trading Commission). In India they have come up with some ideas for better controlling it, there crypto-currencies have been compartmentalized by their use-cases and regulated category/type wise.

Crypto assets or digital assets, along with their underlying Technology blockchain is a game changer and along with other present and future technologies, it is going to be one of the most important 4IR technology creating the basis for many upcoming technological innovations. Advancing from the Bitcoin and cryptocurrencies, some new classes of blockchain have emerged such as smart-contracts, digital assets which are extremely valuable with so many use-cases and future technology adoption. Smart-contracts, crypto assets and blockchain or distributed ledger technology as a whole will obviously stay and evolve in different forms in both in actual and virtual world. Unique and non-interchangeable crypto assets, such as NFT (Non-fungible Token) is the key to enabling some of the most revolutionary and disruptive applications of blockchain.

However, without a farm knowledge on the main blockchain applications, acquiring knowledge and contributing to the implementation of new avenues of future technologies is extremely difficult. For example, if central bank wants to incorporate digital currency (CBDC) in future, knowing well existing crypto-technology-stack will obviously help big time if not be necessary. For another example, without understanding NFT and how they fit in the bigger picture, it is really difficult to understand today’s Metaverse, the virtual reality that are coming towards impacting our life very quickly, and we as a country needs to fully ready from every aspect to embrace Metaverse, and its every strength, including its ability to disrupt financial services in a revolutionary way, positively.

So, finally what I want to say is that we must not close our mind and full restrictions will obviously hinder our overall understanding. There must be some kind of window available for all kind of experiments which will take place in crypto world.

You mentioned about Metaverse, do you think it is coming soon in the mainstream banking business?

Metaverse such as Decentraland or Sandbox will become new social networking media, bundled with other entertainment and interaction center, and you also can’t deny its potentiality to become unified communication channel for everything including collaboration with colleagues as a virtual work-place. NFT’s representing various virtual items such as Land, art-works, sneakers etc. are being sold with extremely high cost. People are willing to pay as much as $70,000 for a single furniture although they will not be use those in the actual world. Even though the people that buy his NFT sneakers won’t ever be able to wear them, they’re still willing to pay upwards of $10,000 for a pair.

You don’t need to work hard to chip into the virtual world. It will come naturally just the way internet and then social media has been adopted. And so eventually bank and banking business will also adopt this because some people would start preferring to interact with the bank virtually, just the way now people want banking over internet.

Singapore-based DBS bank just announced their partnership with The Sandbox metaverse to create DBS BetterWorld – an interactive metaverse experience. DBS will acquire a 3×3 plot of virtual LAND in Sandbox for various services and experiments in the virtual world.  JPMorgan became the first bank to open a lounge and an office in the Decentraland metaverse in February this year. In the metaverse lounge, to put it simply – you choose a digital avatar for yourself, enter the bank lounge and access the available banking services, all virtually, probably with a VR headset. After JPMorgan, a number of banks have been investing in metaverses including HSBC, Union bank of India and now DBS.  So it’s all happening! 

But it will take time to get into widespread financial services. First it will be adopted by mass people for social interaction, entertainment and probably education/knowledge building, and then eventually banking services for masses will come. If you want me to predict, I will say around 15 years. But you never know, things are coming up much faster than predication now a days. One space that metaverse will takeover sooner is social networking and entertainment; there is no doubt about it. 

An interesting fact about metaverse technology is that it encompasses many cutting-edge technologies such as Blockchain, IoT, AI/ML, AR/VR etc. that we know as 4-IR technologies. So, if we want to play a good role in metaverse technology domain, we need to create skilled resources on all these cutting-edge technologies.

There are lot of hypes going on 4-IR. How Bangladeshi banks are doing in adopting 4IR technologies?

4-IR is the new buzzword for the country and for the banking industry in the country. 4-IR technologies such as blockchain, IoT, AI/ML etc. are revolutionizing and radically disrupting almost every business sector, and banking is no exception. It is true that to fully exploit its full business benefits, where there are clear business cases, it will take time, but surely not as much as previous IRs took. Because now the adoption of technologies has also been technologized.

For example, the invention and adoption of metaverse is being fast-paced because we already have technologies such as AR,VR, IoT, ML, and blockchain & NFT. Artificial Intelligence, OCR etc. made the innovation and adoption of ML/NL technologies faster. For banks also we already have a lot of technologies ready to embrace 4IR technologies such as Robotic Process Automation, Chat/Voice Bot, IoT based transaction etc.

However, we need to understand that for banks and for any business for that matter, technologies are for business, not the vice-versa. And adopting a new technology is expensive – it’s not just the technology itself, it may mean to revamp or at least re-align many things in the organization that may include even a paradigm shift of the culture of the bank. It is true for any technology not just 4IR technologies. Therefore, it is important to identify the right business case or carefully observe/follow others and understand the impact on the long-term business or business opportunity. So, there must be a balance so that you don’t fall behind and also you don’t do bad investment. However, if you are a big bank and can afford a fail-first approach and want to be pioneer if your RnD succeeds, it is good for you and for the banking industry. Few banks in BD have this capability and capacity.

Our last question was “Do you think that any CEO of traditional Banks without having a tech background can run a Digital Bank?” And “Do you think any Tech guy can run a Digital/Traditional Bank without having any Banking experience?”

Interesting questions. To answer the first part of your question that – if a traditional bank’s CEO without a tech background can run a digital bank, generally speaking, it would be difficult for many of the current CEO’s of the banks in Bangladesh in my opinion, because they bear the mind-set of thinking technology as a cost center, some of them, with due respect, themselves are not sophisticated or digital-savvy enough to even come out of paper based approval process and promote software based approval or eApproval. They are veteran bankers and managers and I have no objection because they never needed it before. But it is really difficult to think digital for the customers for someone who himself or herself is not technologically sophisticated. However, with right tech-guys around in the senior management team, and the CEO having a tech-savvy mind, it is of course possible.

For the second part – if any Tech guy without banking background can run a bank, my answer would be NO in general. Even to run a digital bank, it is important to have both management skill and banking domain knowledge. A tech-savvy bankers or a banking tech person with a visionary mind and leadership qualities can be a good choice.

However, there will always be exceptional people with keen observation power and quick learning ability. And, sometime not knowing something is a blessing because you can find-out a completely new way of doing something.