Faruq, a twenty-something RMG worker living in Dhaka’s outskirts, receives his salary into his Mobile Financial Service (MFS) account, sends money to his mother in the village in less than 5 minutes, pays his corner shop dues, and plans to put the rest of the money into a savings account.
Rima Begum, a resident of Sylhet Sadar, uses the recently launched bKash IDLC Online DPS. “I did not have the opportunity to open a savings account before,” says Rima. “When I learned about IDLC Online DPS through the bKash app, I found it easily accessible and started saving a small amount each month.”
Ahmed Faisal, a 28 years-old founder of an IT company in Dhaka, does not enjoy going to the bank and has been doing all his banking transactions online.
In Bangladesh, mobile financial services have transformed the financial services landscape over the last decade. It has changed how people send money from one place to another and has slowly given rise to digital payment. The country has seen a decent rise in online banking. Recent developments show financial service providers are willing to go further. Several NBFIs and Banks have introduced digital services such as online deposit, online DPS, and credit services independently and in partnership with MFS players in an effort to serve growing digital consumers and reach users who essentially don’t have access to formal banking services.
These developments are not surprising, considering Bangladesh’s digital financial landscape is still in its infancy but the market is growing fast. Data from Bangladesh Bank shows transactions through internet banking reached Tk 20,559 crore in December 2021, up 154% year-on-year. For MFS, Bangladesh Bank data shows a 28% increase in transactions between Jan 2021 and Jan 2022. Besides P2P transfer and payment, MFS use cases have expanded to payment of wages, bonuses, various social security allowances, and government grants.
Judging by how digital financial services have scaled in India, China, Indonesia, and Vietnam, Bangladesh might just welcome a widespread penetration of digital financial services in the next few years.
India’s Paytm took five years to become a unicorn. Unicorns are private companies valued at or above one billion dollars. Paytm went public in November last year in what was termed India’s largest-ever IPO. However, Paytm’s public market experience has been challenging. Apart from Paytm, India has a long list of fintech companies operating across verticals such as Phonepe, Cred, Khatabook, Navi, Lendingkart, Groww, among others.
Vietnam, another Southeast Asian market known for rapid technology growth, has its own fintech unicorns. In July last year, VNLife Corp, the owner of mobile wallet VNPay, raised $250 million from General Atlantic, Dragoneer Investment Group, PayPal Ventures with participation from SoftBank Vision Fund 1. In December, MoMo, Vietnam's biggest e-wallet company, became a unicorn after raising $200 million in investment that valued the company past $2 billion. Launched in 2013, the company claims it owns 60% of Vietnam's mobile payments market. Vietnam is one of the most competitive fintech markets in the region. Dozens of players, including Southeast Asian tech giants Sea and Grab, are investing heavily in the country.
In Bangladesh, bKash became a unicorn, the first private company in the country to be valued above one billion dollars, last year after Softbank invested north of $250 million in the company. bKash is the largest MFS player in Bangladesh.
Compared to markets like Vietnam, Bangladesh’s fintech market is still in its early days. And the country appears to be growing into a distinct digital financial services market as well. MFS market has seen several serious players including Nagad, Rocket, Upay, the newly launched Tap, and several others. There are several players in the digital payment market including Dmoney, iPay, etc. We’re also seeing players in verticals like P2P lending, BNPL, etc. However, except for MFS players, no other player has yet experienced mainstream success.
In the last two years, Bangladesh has experienced rapid growth of various digital services. Ecommerce has seen excellent growth with several companies raising millions of dollars in funding. Digital healthcare has seen meaningful growth with companies like Amarlab, DocTime, and Digital Hospital unbundling healthcare. The growth of the digital economy essentially helps the overall growth of digital financial services.
However, the digital financial landscape isn’t clear-cut for Bangladesh. Finance remains a highly regulated industry in the country. Thus, the trajectory of the industry has been different. Along with MFS growth, we’re seeing a lot of Bank-led innovations in the fintech space, whereas independent fintech players remain on the periphery.
Syed Javed Noor, Deputy Managing Director of IDLC Finance explained this best in an interview with FS: “In Bangladesh, the Central Bank is cautious and maintains a supervisory mindset. The understanding is that no one player should monopolize the market.” [….] “I think innovation in financial services in Bangladesh will probably be bank-led,” he adds.
To that end, as mentioned before, financial institutions have been doing a lot of interesting work in the digital finance space by launching digital products including mobile apps and digital services.
As more financial institutions join the change, however, three main things differentiate one player from the next—the product categories, the distribution model, and the customer segment. Based on these three factors, there are many different ways to approach the market. And for every choice, there’s always a trade-off.
For instance, leading NBFI IDLC introduced two digital financial products between 2021 and 2022. The first product, IDLC Online Deposit, allows customers to create accounts online and make deposits from anywhere, anytime. The product targets urban and semi-urban technology literate users. The product has since received excellent responses, but it does not necessarily expand IDLC’s customer base. The second product, bKash IDLC Online DPS, is designed to cater to the financial needs of the unbanked population. It creates opportunities for IDLC to serve a previously untapped segment of the market while providing previously unavailable savings opportunities to this population.
IDLC’s strategy for online DPS suggests if a financial institute decides to explore remote, untapped regions, it’ll have to figure out distribution and communication challenges.
Many financial institutions are now looking to expand beyond urban and semi-urban digitally literate customers and to serve customers who didn’t have access to financial services before. The urban market is already saturated. While there are still opportunities in the segment, it is a red ocean.
One strategy that came out of this interest is agent banking. First introduced by Bangladesh Bank (BB) in 2013, the model has gained excellent success in helping banks penetrate markets where they did not have a presence before. But it fell short in attracting customers who are not ideal bank target customers, limiting the reach within the periphery of old bank customers. Many banks are now trying new models to address this challenge.
One such approach that is gaining momentum is partnering with MFS companies for distribution. IDLC’s online saving scheme for bKash app users is a good example of that. A leading private bank has also launched a collateral-free digital loan product in partnership with bKash.
The strategy for both of these products is to double down on second and third-tier cities, and rural areas, where the presence of traditional financial institutions is limited.
Most bank users in Bangladesh are in metropolitan areas. Thus, overall banking services penetration remains low. Per World Bank’s Global Findex database, access to bank accounts remains within 50% of the population, and only 9.1% of the population borrows from the formal sector. The state of savings product penetration is in a similar state. A 2018 MicroSave report suggests, “less than a quarter of the population save money, of which less than a third save at a formal financial institution.”
The outlook, however, is different for mobile phones and MFS adoption. The Bangladesh Telecommunication Regulatory Commission (BRTC) data suggests the country has 126 million active internet subscriptions, of which 92% come from mobile users. MFS has seen excellent penetration—with approximately 60% of the adult population having active MFS accounts—and built an extensive country-wide agent network with more than 1.1 million agents. However, MFS usage remains limited to certain patterns. For instance, as of 2021, 95% of all MFS transaction value is in cash-in, cash-out, or P2P payments whereas only 5% are other usages such as merchant payments, salary, utility bills, government disbursements, etc.
Traditional financial institutions don’t enjoy a similar level of penetration. Consequently, most MFS users don’t have access to financial products like savings, credits, etc. The collaboration between financial institutions and MFS players can change this scenario and extend financial inclusion to the population who live outside of traditional banking services.
The first wave of big financial players was born and grew up as metropolitan kids. The next wave of growth for these companies will come from the villages. While the cost to serve these remote areas, considering the logistical challenges, is a big concern, technology can dramatically bring down that cost. With the excellent penetration of mobile phones and MFS services, the next layers of services can easily be built on the existing infrastructure.
The challenge for formal financial institutions is that relying on MFS companies for distribution reduces their control and can create potential competitive challenges in the long run. The advantage financial institutions have is the years of experience, expertise, and a proactive regulatory environment. But they need to find a model and distribution strategy that makes serving customers who are currently outside of the formal financial world feasible.
IDLC is hoping to do this via a coordinated strategy that includes digital products, partnerships, and tech adoption across operations. IDLC currently has 40 branches in 20 cities in Bangladesh. It is the largest NBFI in the country and has excellent penetration among SMEs across the country. The digital adoption indicates the company understands the shifts in the market. Technology adoption can improve efficiency and bring down costs, helping financial institutions save costs that may enable them to offer greater benefits to customers in the form of higher interest rates or cost-efficient services.
The fintech playbook in a formal banks and financial institution-led world, thus, differs greatly from player to player. At this point, there’s yet to be any clear winner in Bangladesh’s fintech landscape. Many players are aware that there’s a huge untapped market, but figuring out how to serve them is a puzzle. While MFS has seen the decent competition, other verticals remain slow.
So far the formal banks and financial institutions are leading the fintech landscape in Bangladesh. Financial institutions have launched various technology initiatives to serve their existing customers with mixed success. Many have tried to branch out into MFS. Others are now looking to find an opportunity at the intersection of the two. On the payment side, PSP license holders are trying to transform the payment space. New players like Chaldal are entering the vertical hoping to tie their consumer ecommerce business with digital payment services.
The market will evolve further as the regulatory environment leaves room going forward for players to maneuver. There are discussions around giving permission to digital and neo-bank models.
Industry insiders have long predicted that access to financial services can transform the economic fate of a large number of people. And that handheld devices can be the next big thing in evolution. For instance, IDLC's digital savings program for bKash app users can change the financial future of a large group of people who did not have access to financial services before.
Fintech adoption in the country is just getting started. As more people go digital, financial institutions will have to double down on their investment in tech in the coming days. The recent enthusiasm over digital financial services from the banks offers a glimpse of that future.
There’s no reason why a formal financial industry-led fintech model can’t work. However, it will take the players to break out from the existing mental models and try new approaches and products.