In less than two months, 3 new directives from Bangladesh Bank (2) and Finance Ministry (1) have been issued which will significantly change the MFS industry landscape within the next few years:
Let's take a closer look into each of them and their potential impact on the MFS market.
On Oct 27th, 2020, four MFS providers bKash, ‘MCash’ of Islami Bank, ‘U-cash’, and Al Arafa Islami Bank’s ‘Islamic Wallet’ were supposed to launch interoperability for the first time. However, some unfortunate technical issues at NPSB (National Payment Switch Bangladesh) system halted the launch. Bangladesh Bank, however, is hopeful to introduce it within next year.
If interoperability finally arrives, it will hit up the market competition for good. Customers will enjoy the flexibility of choosing any service provider and pricing will be a key factor in how customers decide and choose a service.
Currently, the industry is quite disproportionate as around 90% of the transaction comes from Cash-In, Cash-Out, and P2P transfer business. Whereas all the other services like utility bill payment, mobile recharge, merchant payment, education payment, etc. only account for the remaining 10%.
We might see two groups of customers, one group who are predominantly using basic services such as Cash-In, Cash-Out, and P2P will opt to use the service providers who provide a cheaper rate. Whereas, another group will choose based on the range of services a provider offers.
In MFS cash-out business, the charge ranges from Tk. 11.50 to Tk. 18.50 per 1,000 taka transaction. In presence of interoperability, customers will want to transfer money from a higher charge rate wallet to a lower charge rate wallet. However, the receiver wallet operator has to pay the sender wallet operator a 0.8% fee on the transaction value. Though the sender wallet operator could have gained 1.85%, if the money was withdrawn through its own agent channel, it will have a chance to save up the commission money for not using its agents and distributors network in case of this MFS to MFS transaction. Thus, which operator will be better off in this context, depends on how much commission they are paying to agents and distributors. Not to mention, MFS operators spend 70-80% of their revenue paying commission to agents and distributors.
Around 2 million micro-merchants currently operate in Bangladesh with an annual trade volume of $18.42 billion, approximately 6% of the country’s GDP. Yet, the majority of them have low interaction with financial institutions, underserved, and left out of the digital payment options. Trade license, Tax Identification Number have been the biggest blockers for FIs to acquire these merchants. In a new directive from Bangladesh Bank, the governing body of the FIs has given permission to open merchant accounts for these micro traders where the permission includes 300,000 F-commerce-based businesses as well. This is an excellent move from the regulator to push the financial inclusion agenda and make digital payment ubiquitous.
The new merchant account will be called ‘Personal Retail Account’ with certain limits of transactional facilities. This will be a new combat zone, especially for MFS operators to acquire as many merchants as possible and strengthen their foothold in the payment market. As the payment market will dictate the future of MFS industry, ‘PRA’ will have huge significance to build a true payment ecosystem.
Around 130 social safety net programs (SSNP) are run by the Government of Bangladesh with a budget of Tk. 743.67 Billion (FY 2019-2020). At present, the government is using multiple channels for SSNP disbursement (majority by Sonali Bank and a small portion by a few payment service providers) and each channel has a different commission rate for disbursement. That being said, there is a great potential to streamline the entire disbursement process and curtail the cost, according to a study commissioned by A2i in 2019. As GoB aspires to gradually bring all SSN programs under Direct-to-Citizen (D2C) model, MFS is in a better position among other payment service providers in terms of cost and speed and also ensuring a level of transparency in G2P disbursement.
An estimated current cost of disbursing through bank channel is 1.68% of the disbursement amount where MFS can serve at a commission of 0.8%-0.9%.
In a recent directive from the finance ministry, GoB has finally given the priority to MFS operators for G2P disbursement, however, offered a flat cash-out charge of 0.7% which is under their acceptance commission rate. It means operators with a higher cost structure will have to rethink their cost strategy to seize the market. Operators with a lower cost structure will enjoy a hefty amount of profit. This is surely going to promote a competition to capture a 743 billion taka market. We can’t wait to see how market players come up with innovative ideas to seize this massive opportunity.
We have only seen a glimpse of what MFS can offer in the last ten years of its market presence. Considering the cumulative effect of these latest 3 policies, it can give a serious push to inflate the market size, foster service innovation, and change the industry outlook in the next few years.