Mahmudul Hasan and Md Mehedi Hasan of The Daily Star published a fascinating report a few days ago titled "Most MFS Operators Struggle in a Booming Market." The report suggests that although the overall MFS market has seen excellent growth over the last decade, except for the major three players, most MFS operators struggle to find a growth path.
From the report:
“In 2011 when mobile financial service (MFS) was introduced in Bangladesh, 27 banks took the approval from the central bank as many had correctly predicted an impending boom in mobile banking amid rising usage of cell phones.
Not all licencees saw the light of the day and 19 firms rolled out the service by 2016. Of them, 13 entities currently exist in a market that witnesses more than Tk 3,500 crore worth of transactions every day and the amount is only rising.
Dutch-Bangla Bank Ltd pioneered the country's first MFS operation in March 2011 by introducing DBBL Mobile, which was later rebranded Rocket.
bKash, a subsidiary of Brac Bank, followed suit three months later.
Currently, bKash, Nagad -- an MFS wing of Bangladesh Post Office that made a foray into the industry in 2019 -- and Rocket control more than 80 percent of the market in terms of subscribers, which numbered 20.4 crore in May.”
The data that bKash, Nagad, and Rocket combinedly dominate 80% of the market in subscriber numbers is slightly misleading. This is because Rocket's market share among the three leading players is quite insignificant. From the same report:
“Presently, bKash and Nagad dominate the sector with more than 75 percent market share between them in terms of customers. In terms of transactions, the share stands at over 85 percent.”
Simply put, MFS has gone mainstream in Bangladesh. The first MFS service, Rocket, previously known as DBBL Mobile Money, was launched by a bank — Dutch Bangla Bank. Despite having regulatory upsides, bank-led/run MFS services have largely failed to build a meaningful position in the market. Well, you can say that bKash has done it, and it is a BRAC Bank subsidiary. The reality is that bKash is a different story, and that's precisely the reason why the question regarding the performance of the other bank-led/run MFS players comes up.
This begs the question: Why? The report tries to answer this question:
“Experts and industry insiders say the reluctance to invest, a lack of skilled workforce, and the dominance of two to three players have been standing in the way of other operators.”
Although these reasons make sense, reluctance to invest on the part of the owner banks and steep competition in the market are not the real reasons for the sorry state of the bank-led/run MFS players. These are merely symptoms of a bigger problem.
Reluctance to invest is a decision and commitment problem. It means that you are not sure or you are confused. You are half-hearted in your efforts. And half-heartedness is a recipe for disaster in business and life.
Dealing with competition effectively is a function of how well-run your company is. If your trifecta of business works—market, operation, and capital—competition should never kill your business.
The real reason, however, for the failure of most bank-led and bank-run MFS services is that they are bank-led or bank-run. These MFS services are not independently run companies. These companies, although some are independent subsidiaries, almost always depend on their parent company, which is a highly profitable bank, for not only capital but also for important decision-making. More importantly, in many instances, these parent banks are/were well-run companies.
MFS is not something you can make happen overnight. Initially, the growth can be slow. The size of the business can look insignificant compared to the balance sheet of a well-run bank. The whole thing might look like a bad idea and a bad investment to the CFO and business-savvy board members of a bank.
While my core business, which is a bank, generates this huge return, why should I invest in something that is struggling and doesn’t show equal potential? Why should I not instead invest in growing my core business—which is banking?
This is a legit business question to ask for any well-run company. A dichotomy that many well-run companies go through. This is one of the reasons why many well-run companies fail to innovate and get disrupted.
Let me explain it in a different way.
Imagine you are a successful company. You have two products. One product brings about all your revenue and you have a strong market position in that product segment. The product is profitable and is also growing consistently. Now, you see a second opportunity in the market. You decide to invest in the second product, which can potentially surpass your core product in the long term. But after a while, you see the new product is not growing as fast or the market opportunity doesn’t look as lucrative as your first product, which is not only killing in the market and it has significant short-term growth opportunities if you invest. As a successful and thoughtful executive, what would you do? You would choose to divert your investment to the first product and prioritize your second product as little as possible.
In our case, ultimately, you decide not to invest in the MFS company. You decide to focus on your core business, which is banking. A few years later, the MFS service that you deprioritized becomes a huge success. It disrupts the banking industry and forces your bank to change its business model.
This is a classic example of the innovator's dilemma. Your existing business is so successful that you don't feel like investing in a new product that is not bringing large enough success in a short enough time. Even though the second product can become a huge business in the long run.
This is what happened with almost all the bank-led and bank-run MFS players. Many of these players started with high hopes. Some of them even made meaningful investments in the early few years. There are still bank-led players who are making meaningful investments these days. But none of these players operate with enough independence. The parent banks still call all the major shots. When the mood or board changes within the banks, it changes everything in the MFS as well.
If you follow the bank-led/run MFS players, this pattern is clear. Many of these players go through periods of fanfare, followed by a dip, followed by fanfare again, followed by a dip again. A clear sign of a lack of commitment from the management.
In most of these instances, if a bank decides not to invest heavily in its MFS business, it is a perfectly logical and healthy short-term business decision. Why should you invest in a losing project instead of the one that is winning? This is the core challenge of the bank-led/run MFS players. Often, decisions for a bank-led/run MFS are viewed and made through the lens of the parent bank's business. The bank's own interest precedes the interest of the MFS itself. Often, the question is not whether this decision would benefit the MFS to get to the next stage. Rather, the question is always whether the decision to invest more money in the MFS makes sense for the bank.
Contrast that with the country's MFS leader, bKash. bKash is a subsidiary of BRAC Bank, but that relationship ends there. bKash is a founder-led organization. Kamal Quadir founded bKash, and he continues to run it to this day. bKash is run independently. While bKash has people from BRAC and BRAC Bank on its board, the decisions don't come from BRAC Bank and are never viewed through the BRAC Bank lens. bKash has other stakeholders as well. Although BRAC Bank is the largest shareholder, albeit partly for regulatory reasons, bKash has been on its own journey.
Not only does bKash operate with complete independence, but it has also charted its own path throughout its journey. It has raised strategic investments from investors like the Bill and Melinda Gates Foundation, Alibaba, and SoftBank, among others. bKash has been operating like a startup since its inception, not as a mere subsidiary of some bank and part of a larger organization.
Late Harvard Professor Clayton Christensen published Innovator’s Dilemma in 1997. The book is often called one of the most — if not the most — important books in business and innovation. In the book, Christensen offers a compelling argument about why successful incumbents fail to innovate:
“The reason [for why great companies failed] is that good management itself was the root cause. Managers played the game the way it’s supposed to be played. The very decision-making and resource allocation processes that are key to the success of established companies are the very processes that reject disruptive technologies: listening to customers; tracking competitors actions carefully; and investing resources to design and build higher-performance, higher-quality products that will yield greater profit. These are the reasons why great firms stumbled or failed when confronted with disruptive technology change.
Successful companies want their resources to be focused on activities that address customers’ needs, that promise higher profits, that are technologically feasible, and that help them play in substantial markets. Yet, to expect the processes that accomplish those things also to do something like nurturing disruptive technologies – to focus resources on proposals that customers reject, that offer lower profit, that underperform existing technologies and can only be sold in insignificant markets– is akin to flapping one’s arms with wings strapped to them in an attempt to fly. Such expectations involve fighting some fundamental tendencies about the way successful organizations work and about how their performance is evaluated.”
Clearly, this is the position bank-led/run MFS players find themselves in. When a board of a bank finds that investing in its banking business is more profitable for the bank than investing in an MFS service in the short term at least, because that's all we can see, they make the logical decision that any astute business executive would make.
I have written about innovator’s dilemma before. Nothing fails like success. I previously wrote in Innovator’s Dilemma is Everywhere:
“I’m particularly interested in one perennial innovator’s dilemma among Dhaka’s telecom operators. Take, for instance, Grameenphone. The country’s largest telecom operator is also one of the most valuable companies in the country. It has been under regulatory pressure over the last couple of years for various reasons. But it has been a consistently excellent business for many years. It makes a ton of money.
Interestingly, despite its half-hearted attempts at various ventures over the years, the company failed to produce any meaningful success outside of its core business. GP should get credit for several efforts it has made over the years. Some notable recent initiatives include now defunct ecommerce marketplace Shoparu, Kidorkar, and OTT platform Bioscope, which it still runs. GP has also experimented with several other initiatives in the past; apparently, most of them died.
I understand that there are nuances behind many of these failures that I’m probably missing. For instance, there may be regulatory challenges. It may so happen that GP didn’t want these businesses to succeed independently. Instead, it wanted to run these businesses to power its core business such as data. These are all possibilities.
All these reasons considered, I also think that in many instances GP has suffered from the innovator’s dilemma — its existing business is so good that it is hard for the company to invest in something less profitable or small in scope. Cash is a dangerous addiction.”
I don’t think the reality is much different for all the banks that have been or are trying MFS services but struggle to find meaningful success. I wrote in the previously mentioned essay:
“Interestingly, this has also been the case for other two telecom operators in the country as well — Banglalink and Robi. Both operators have also tried various experiments over the years. We have covered some of those experiments and most of them either failed or were eventually neglected.
One thing going for telecom operators in Bangladesh is that failing to innovate outside or within their core business has little consequences. Success in these new areas will definitely bring outsized rewards but failure is not consequential. There is no apparent competition where these companies face an immediate threat to their core business. Hence the motivation to break out of the innovator’s dilemma is naturally minimum.
Human motivation is primarily driven by pain. More than gaining something, we are more driven when there is something at stake. For telcos, maintaining the status quo is not costly for now but it can change in the coming years.
The interesting thing is that the innovator’s dilemma is everywhere. As Christensen alluded to the fact, upstarts come and disrupt large businesses precisely because large businesses are so successful and good at what they do that they find it unattractive and sometimes irrational to get into these evolving new spaces.
While I have used the example of the telecom sector in Bangladesh, examples of this reality are everywhere. If you pay close attention, you will see most companies wait too long on their good fortunes.”
The real challenge for the banks was that none of the banks saw MFS as a potential threat to their core business. There is no consequence of failure in MFS.
However, this can potentially change as the country gears towards digital banking.
I want to make it clear that I'm not saying that if tomorrow some banks decide to commit 100% to building a successful MFS business and compete with bKash, it will become successful. Business is usually a function of market, operation, and capital. Efficient operations across these three areas can eventually produce meaningful results. So the success of any venture in a competitive market depends on a lot of different things.
However, I think in order for bank-led/run MFS players to have a chance in the market and in the competition against existing market leaders, they have to start with commitment and overcome the innovator's dilemma.
The first step in the right direction would be independence: banks should turn their MFS businesses into separate and independent entities and should be willing to involve third-party investors/partners where feasible. In fact, parent banks should stay away from making these decisions and instead, should allow the MFS entity makes that decision for itself.
Currently, there are a few players that are experimenting in this direction. Trust Bank and Axiata joined together to create Trust Axiata Digital Limited, which now runs TAP Pay. The initiative is in the early stages of its operation, and we will have to wait to see how it pans out in the long run.
UCBL has turned its MFS player into UCB Fintech Company Limited. These examples are in their early days, and we will be following their development closely. But independence can create room for growth and challenge to mature for these entities. It will allow each entity to develop its own leadership, strategy, and execution muscle. It will make accountability straightforward.
The second function is a long-term investment. bKash has been around for over 10 years now. It takes time to find a breakthrough in any market. Moreover, the MFS market in Bangladesh has reached a point where competition can be a challenge for new entrants. However, it doesn't mean it will be impossible to break out in the market.
The MFS market, in many ways, is still in its early days in Dhaka. The usage pattern in MFS remains predominantly P2P, whereas shopping and payment is a much larger market for transactions. There are rooms for huge growth for all the players in the space, and none has yet claimed their position in all these verticals. To that end, breaking into the competitive nature of the market shouldn't be an impossible challenge for a player willing to commit for the long run and execute well.
bKash offers an excellent example for all of its competitors and offers a fitting case study in escaping the innovator's dilemma as well for the bank-run MFS players.
As I mentioned earlier, successful businesses are a function of many things. Jim Collins talks about a three-pronged flywheel in his excellent book Good to Great, which is a combination of disciplined people, disciplined thought, and disciplined action. You have to master those things if you want to build a truly enduring and great organization.
However, that is a different challenge. For bank-led/run MFS players in Dhaka, I think the real challenge comes from the innovator's dilemma. MFS initiatives of banks must come out of the shadow of the parent banks and operate independently as separate businesses if they want to achieve any meaningful success.
Originally published on 11 August, updated on 22 August.