DIGITAL BANKING-The Way Forward for Bangladesh

Chinese people identified us (Bangladeshi people) as “Manjala” – meaning low and flat land people. This is one of the major benefits of our land in terms of doing marketing, communication, training, BTL and other activities. Apart from that, we are homogenous, talking in the same language in almost all of the country, predominantly Muslim, and festivity or event celebrations are in our blood.

Since 1990, technology started taking a pivotal role to change our social structure and life. This has started from using computers, internet, and mobile phones. But one sector, which demonstrated slower transformation compared to the other sectors is the financial sector. Banking played a crucial role in our financial sector, but they couldn’t play a significant role in increasing financial inclusivity much till 2010. Since 2011 inclusivity increased significantly based on MFS offerings through mobile phones.

Financial sector is now showing signs of new transformations by adopting new technologies. It is evident that financial sector will become more and more technology focused, or technology oriented. Many technology-based Fintech company can and will provide service to different operators to reach a critical mass through technology and retail network – provided regulatory barriers are not hindering them.

Every industry is going to transform and evolve. These transformations are taking place to give users better experience, new and innovative products, and more inclusivity. Ultimate objectives are to reduce cost, increased convenience and ease to serve to different segments of customers. Also, customers’ needs, expectations, behaviors are changing, and so technology is used more and more to track and adapt to changing customer needs. Offering services through digital channels means service providers can generate or C – Rezaul Hossain DIGITAL BANKING preserve data about customer behavior to evaluate their needs, and provide access to finance based on their lifestyle or business. This, coupled with other benefits like operational efficiency and cost savings are driving organizations towards more and more adoption of digital services to serve its customers.

Banking sector is no different; and to meet the changing customer needs, the mindset of the people working in the banking sector needs to change. Banking customers now want more and more services via digital channels. As a result of that, banking sector (especially private banking) is already going through some transformative and evolutionary processes. The next stage in evolution of banks is “Digital Banks”. Technically most of the banks are already digital (online) or they have the license to do that. Point is whether they are providing all banking services to the critical mass or not? The answer is currently no. On the positive side, we are having a large MFS coverage, and it can evolve, and become more matured to give more services to the different customer segments. So, digital banking (i.e. – offering core banking services through digital channels) can come to Bangladesh in a form of ‘Evolved MFS’ or ‘MFS Plus’. Also, the modern banks can evolve into “Neo Banks”.

When we talk about Digital Banking, two questions come into mind first:
(i) What is a Digital Bank?
(ii)What is the difference between digital banking and online banking?
We will take a quick look at these two questions and then delve into a deeper discussion on Digital Banking from a Bangladesh perspective.

What is a Digital Bank?
A Digital Bank is an organization that can offer banking activities online, which were historically available only at a physical bank branch

Traditional banks (offering online banking) have heavy physical presence; and customers must visit bank premises to conduct many of the core banking functions.

Digital banks have very little to almost nil physical presence. Core banking functions (e.g.: onboarding, loan sanction, mortgage approval, etc.) are done via digital channels.

So, majority of the ‘interactions’ or ‘interventions’ of digital banks are online base; in contrast to the physical nature of interactions/interventions by digital banks.

Advantages

Simplified Onboarding Process: Online (paperless) process and verification should make the account opening (onboarding) process very easy and user-friendly.

Constant Access: Customers can access their accounts 24/7 and carry out all manner of transactions with a few touches of a button.

Faster Processing: Digital banks can carry out transaction processes in a faster pace than the traditional banks; as they would not require legacy system of paper-based approvals where a physical memo moves from desk-to-desk

Operational Cost Reduction: Digital banks offer automated services. The resulting lack of physical branches and less employees means that digital banks have considerably lower costs than traditional banks.

Lower Service Charges to End-Customers: Digital banks can offer services at a lower charge to end customers, as their operating costs are lower than traditional banks.

Information Accuracy: In case of traditional banks, manual paper processing is a necessity. Paper processing is naturally at risk of human error. On the other hand, all data and information processing at digital banks are automated, which provides high level of accuracy.

Access To Finance: Digital Banks can open up Access to Finance for many new customers. As they (digital banks) will have a comprehensive database of customers’ transaction profiles, they can build credit profiles for the customers and offer loans to customers based on the credit profiles

Agility: Digital banks are often more flexible in adopting new technology and being able to quickly offer new services to customers.

New Services and Products: Many digital banks have been able to offer a range of new services to customers including regular spending reports, spending projections and partnerships with other financial apps, etc.

Disadvantages

User Understanding: Understanding the usage of digital banking might be difficult at the first. In other countries, some banks offer online demo. Considering Bangladesh scenario, a physical demo may be required in most cases (specially for the unbanked) to educate them on the usage of digital banking.

Data Security at Organization End: As all businesses of a digital bank are done online, naturally it becomes a lucrative target for unscrupulous hackers, especially ransomware. Digital banks are always at a higher rate of cyber-attack risk and threats.

Data Security at User End: Users perform all transactions with the digital bank via online. If user’s digital identification is stolen or hacked, user is in risk of completely losing his/her account balance.

Dependency on Internet Connectivity Issues: All transactions with digital banks are carried out over the internet. So, a big dependency is there on steady and reliable internet connection; and if internet connection fails, then the digital bank account becomes unavailable.

Reaping the benefits and advantages of digital banks will also depend on proper management of the digital bank itself. Historically, traditional banks are owned and operated by a family or close group of people. So, the crucial management positions are oftentimes filled by members of the family or the close group; who might not always possess the required skillset to run the business efficiently and take it to the next level. If the same trend (of filling important management positions from friends and family) continues in case of digital banks, then unfortunately the full advantages/benefits from digital banks cannot be realized. Bangladesh Bank (BB) may play a role here by limiting the maximum number of family members who can be part of a Digital Banks’ Board and Top Executive Committee. BB can also conduct fit and proper tests for the top management positions; and may come up with other appropriate measures to ensure a capable and professional management body for a digital bank.

Types of Digital Banks:
Diagram 1: Broad classification of Digital Banks

Bangladesh Bank, from their position, needs to analyze the different types of digital banks; and come up with suggested type (or types) of Digital Banks which will be suitable for Bangladesh.

BRINGING IN DIGITAL BANKING IN THE FINANCIAL SECTOR OF BANGLADESH

So, the next question is – how to build a path for inclusion of Digital Banking in the financial sector of Bangladesh? While discussing this question from a Bangladesh perspective, it may be beneficial to look at two other Islamic markets, namely Pakistan and Malaysia, to see how digital banking is shaping up in those countries. The reason for choosing these two markets is that both of them are Muslim countries, and Islamic Banking plays a major role there. There are also few other similarities among these markets and Bangladesh Market.

As we have stated before, MFS offered via mobile phone played a significant role in Bangladesh for financial inclusion. Similarly, mobile penetration will play a significant role in case of digital banking too. So, let us start first by looking at the mobile penetration scenario of these three countries.

*Connections mean Unique SIM cards (or phone numbers). The number of Subscribers differs from the number of connections because a unique user can have multiple connections.

If we look at the above figures, we see that Malaysia, with the lowest population, has the highest connections and subscriber
penetration; while Pakistan, having the largest population among the three, has the lowest connections and subscriber
penetration. Bangladesh is in the middle of the spectrum.

Now, let us take a look at the financial sectors of these three countries.

How many adults are Financially Included?

BangladeshPakistanMalaysia
47% (2018)Formal: 23% (2015)
Informal: 24% (2015)
92% Bank Accounts

Malaysia displays an exceptional high number of financial inclusion. The percentage of their banked population is higher
than that of other ASEAN Countries.

What are the ways for customers to get financial service?

** Branchless Banking (BB) allows financial institutions and other commercial players to offer financial services outside traditional bank premises by using delivery channels like retail agents, mobile phones, etc.

As evident from the previous tables, mobile financial services in both Bangladesh and Pakistan have a far greater reach compared to traditional banking channels. In these two countries, financial inclusion is mostly being driven by banks, NBFI, and MFS.


We have taken a brief look at the markets of the three Islamic Countries. Now let us take a look at the regulatory aspects as well. Because, before rolling out digital banks to the market, the ground has to be prepared via a proper regulatory framework. With that in mind, we now take a brief comparative look at some of the regulatory aspects mentioned in the
draft guidelines of Pakistan and Malaysia; and discuss what should be the right approach for Bangladesh.

The First Question is – who can apply, or set up a Digital Bank?

Question: What should be the broadline goals for Digital Banks?

Question: What are the Minimum Capital Requirements (MCR) for setting up a digital bank?

Question: Which Factors will be considered / looked upon while Awarding a Digital Banking License?

Question: Who should be in the Board of Directors, and who should be the CEO of a Digital Bank?

Question: What should be the ownership structure of a Digital Banking License?

Question: Is there a viable business case for the Digital Bank?

In today’s digital age, people want banking to be simple, seamless and comfortable. They also want innovative, new products and services from their banks – as per the needs of their lifestyles. In this changing landscape, to keep up with the demands of the customers, digital banks have to come in and meet the demand/supply gap.

In Bangladesh, MFS has played a good role in advancing financial inclusion. But, access-to-finance (loans) is still a challenge for SMEs and MSMEs; as that is mostly controlled by the traditional banks and MFIs (as the formal channels). The application requirements, collateral requirements, cost, and fear of regulations are driving lower income people and businesses away from the formal banking channel.

Here is where the digital banks can play a significant role by offering new products and services, and fostering access-to-finance. This will not be a one-day’s work. Time and logical progression will be required to build a loan eligibility profile. For individual customers, this will be built based on the transaction history. In case of a business customer (mainly SMEs and MSMEs), this will be built based upon both transaction data and business profile. It will eventually lead them to qualify for availing unsecured loans.

A challenge that the digital banks will face is the recovery. In case of Banks and MFIs, bad debt ratios are approximately 5.7% and 12% respectively (approximately 9% on an average). Digital banks have to come up with their own strategy to address the bad debt scenario in their business models.

In Bangladesh, digital banking can, and should, use the platform and network readied by MFS operators as a springboard to launch itself in the market. The “Agent Banking Network” and “Sub-Branch Approach” of banks can also play a large role in the coming days to establish digital banking as a practice in Bangladesh.

In conclusion, Digital Bank is currently a need and a logical evolutionary step in Bangladesh market. The regulator and all relevant/ interested parties should work together to prepare a proper guideline and framework for launching and operating digital banks in Bangladesh.

Rezaul Hossain

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