Cows and elephants
It is impressive to see that there are more than 30 million subscribers of mobile financial services (MFS) in Bangladesh executing more than 3.5 million transactions per day.
I have to congratulate Bangladesh Bank for effectively guiding the ongoing evolution of the MFS industry, built by young Bangladeshi men and women, although the investment capital has mostly come from abroad. In fact, MFS industry has set a useful precedence in Bangladesh which goes beyond MFS. Young people of the country are building high-tech companies in the country, empowered by foreign and local investment. We all want to see more of this.
Bangladesh Bank has effectively nurtured a nascent industry and allowed it to grow to serve millions of beneficiaries every day. However, I have been writing for some time expressing my concerns about the way Mobile Network Operators (MNOs) are posturing to enter into this industry. This stance goes way beyond their fundamental role of providing connectivity. In my mind, MNOs should provide connectivity to MFS and other industries, just as MNOs use electrical power supplied by the utility companies. Let me start with analogy to describe my concerns.
Imagine a country deciding to produce milk for its children. It releases 20 cows in the country hoping that they all will produce milk. One of the cows does an excellent job and produces 15 litres of milk a day, another one five litres a day, and two others, one litre a day each. Seeing this new domestic production of milk and the demand that satisfies the need of the country's children, various international experts start arguing that there should be more milk production in the country. However, there are several elephants in the country that also produce milk to feed their calves. The elephants start to claim loudly that cows should not be exclusively allowed to produce milk; there should be competition for the production of milk. Some international advisors, who appreciate the importance of milk, start singing that the elephants should be allowed as well. The market fundamentalists—with blind faith in competition no matter how uneven the playing field—are joining the choir, singing loudly that elephants should compete with the cows.
Luckily, Bangladesh Bank has prudently fenced off the elephants so far and letting the “cows” do their job. So much for cows and elephants.
As far as I can see, the MFS operators (who I call cows) are doing a fantastic job and executing a billion transactions a year, already. The growth of MFS providers in the first five years has been much more spectacular than the growth of MNOs (whom I call elephants) during their first five years. Bangladesh now has the world's largest market for MFS in many ways by providing the cheapest, and most intensively available throughout the country.
The reason MNOs are comparable to elephants is that they are much larger than any other business in Bangladesh; they are certainly much larger than the MFS operators in Bangladesh. In addition to their size, they are also loud. They started to campaign to get into MFS for a while now. First, they made the argument that they can reach millions of people quickly. However, with the success of MFS in Bangladesh which is reaching millions of poor people anyhow, MNOs are now alleging that one MFS provider has significant market share. In reality, there are 27 licences given to banks to introduce MFS. In a level playing field, which Bangladesh Bank has managed to create, network-effects take place according to power laws; some become much larger than others because successful networks attract more customers. Success breeds success. This is why eBay, Amazon and Microsoft lead their respective industries. In the long run others learn from what works and emulate the successful operators. However, the MNOs have not looked at the mirror as only four companies (of which two are about to merge, therefore it will be three) have the entire market share in Bangladesh thus them coming to MFS will limit the number of providers drastically.
Moreover, MNOs sometimes may encroach into new territories because they think they can convince developing regulatory institutions to accommodate their desires. For instance, they started with voice communication, but then they have moved onto providing internet connections. Now they wish to get into MFS. The connectivity provided by MNOs—which they should and for which they are paid—gives them an advantage over those that they connect. If these MNOs are allowed to compete with the MFS providers that are much smaller and weaker, MNOs will unfairly outcompete with the MFS providers. Without thinking about what they are actually saying the so-called international advisors have been quiet about the dominant player Safaricom (owning 80 percent of market share) that owns and operates the dominant MFS provider, M-Pesa. Why have they been quiet? The reason is simple. Safaricom is a strong MNO and the same advisors do not talk about this domination because it is too powerful for the advisers to complain about. In Bangladesh, an MFS player may have a lead-market player because of network effect (i.e. genuine merit) not because of piggybacking on a dominant MNO-owner.
In such a scenario, I am reminded of the American saying, “if it ain't broke, don't fix it”. The central bank like a good farmer is husbanding the meager resources of the country in a successful way. In fact, in the field of MFS it has become a global role model with its diligent fencing off of the cows and keeping the elephants at bay.
What is needed is more competition among cows. To do this the regulator should start a dialogue of stakeholders to see how more banks can enter the fray and create greater competition. This of course is not “fixing” what is not “broke” but enabling to make it more efficient. That is what will benefit the users and the banking industry.
Fundamentally, the financial industry has to be a regulated industry by its nature. There is a need to protect the users of the financial products from market failures. It will be challenging for a financial regulator to exercise control over an entity which is at present regulated by the telecom regulator. The supervising responsibilities of the two regulators are bound to cause complexities.
Of course, Bangladesh Bank has been a good regulator. It must continue to maintain the fence. If the authorities assure us that the cows will be protected from unfair competition, investments will surely come to back them up, now that the home-grown MFS industry has earned the confidence of Bangladeshi consumers.
The author is the chief executive officer at Bangladesh International Arbitration Centre and a former deputy governor of Bangladesh Bank.
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