Insights of the Mobile Financial Services

Regulatory Approval for Mobile Financial Services (MFS) in Bangladesh:
Depending on the operation, responsibility and relationship(s) among MFS SolutionProvider and customers mainly two types of mobile financial services (Bank-led and Non-Bank-led) are followed worldwide.
Bank-led model - Every customer has a direct contractual relationship with a licensed Bank even though the customer may deal exclusively with an agent who is equipped to communicate directly with the bank server (typically using a mobile phone). The Bank keeps track of deposit of individual customers, not the aggregated deposit of all the customers.
Non-bank-led model- Customers have no direct contractual relationship with a licensed Bank. Bank works behind the screen to manage the total fund.
There is a debate worldwide that which model to be followed for Mobile Banking - Bank-led or Non-Bank model. While Bank-led models are winning overwhelmingly in almost all countries, the non-bank led model exists in few undeveloped countries. Bank-led models allow a more prudent, regulated and mature approach to banking.
In Bangladesh, theCentral Bank has concluded this debate for Mobile Financial Services. The central bank in its "Guidelines on Mobile Financial Services for the Banks" clearly states that "From legal and regulatory perspective, only the bank-led model will be allowed to operate". However applied regulation in Bangladesh may be termed as 'light-touch' as there are subsidiary and third party hosted model (which is being shared by 2 or more banks) in place.
Focuses of MFS in Bangladesh – Banking or Send Money:
Although more than half of the Banks in Bangladesh are running MFS services, only two players – Dutch-Bangla Bank Limited (DBBL) and bKash of BRAC Bank are active in the market. Both of them have 100% coverage in terms of area of the country. However some banks are focused on 'banking', while others are at 'MoneyTransfer'.
Only 'MoneyTransfer' can't help financial inclusion. As a bank-led model, the MFS services should be more focused on savings and credit schemes, and providing various services on a single wallet (account). More attention should be provided to develop banking habit among the rural people. This will bring a huge amount of money into banking channel, and contribute to real financial inclusion and economic growth of the country. There are millions of shops in the rural area, sale proceeds of which is kept at shop or home. There is a huge amount of money remain idle. Money at home or shop is not secured or safe. The habit of the rural people and small/micro enterprises can be changed by a joint 'right' drive of all the banks working in MFS arena.
Needs for real growth of MFS and financial inclusion:
For real growth of the MFS and financial inclusion, some important measures need to be taken by banks, government and regulators. These are briefly outlined below.
Discouraging OTC and encouraging P2P
OTC stands for 'Over-The-Counter' and refers to sending money using two agents' personal MFS accounts. Here both real sender and real receiver are unknown to bank. These transactions are illegal by the AML (anti-money laundering) rule of the central bank as there are scopes for corruption in this system. Taking advantage of this, a large number of fraudulent &extortion activities are happening in Bangladesh as reported by many national daily news papers for last two years.
Even with existing regulation, some players in the market are allowing the registration of fake accounts without proper checking to increase their business. This also leads to '1 agent having registered with as many as 200 SIM as personal account' in order to facilitate fraudulent and extortion activities as OTC.
P2P stands for person-to-person transfer. In this case both the sender and receiver are registered MFS users. The sender first cash-in money to his own MFS account either from a bank-branch or agent point, and then transfer to another MFS account sitting at his home or office in a free time. The recipient gets a message and then goes to ATM, bank-branch or agent point for cash-out. He can cash-out in full or part.
Another form of sending money is called 'partial OTC', in which case sender does not have MFS account, but the received has one. Sender goes to a bank-branch or agent point and cash-in money directly to a registered MFS account.
Both the P2P and 'partial OTC' are secured and traceable if KYC of the registered MFS accountholder is maintained properly. Regulator should be very tough on OTC transfers by imposing penalty and if needed by canceling MFS license.
Ensuring proper KYC to arrest corruptions using MFS& access to NID database
Speed and rule can't run together. If a bank wants to be KYC compliant for all the MFS accounts opened by it, it has to be slow in opening MFS account. If a bank compromise with KYC, corruption using its MFS account can't be checked.Currently many banks enforce strict KYC compliance while others do not to gain better market share and business.
Proper KYC needs that the bank people check the genuineness of the information, photograph and NID (National Identity Card) for each customer.
We have never heard that an extortionist asked the victim to deposit money to a bank account. But thousands of incidents have been reported that the extortionist has taken money at his MFS account and law enforcing agencies failed to arrest him as all of his information in the MFS database are found false.And almost always this is from the MFS providers that are not KYC compliant,and are abiding by it on paper and not in practice.
However, checking the KYC manually is time consuming and costly. To ease this, like some other countries, Banks may be allowed to access the NID database online (like CIB database of the BB). In this way, submitted NID and KYC information may be checked for genuineness from the NID database easily.
Corruption by SIM replacement
Like a report of the Daily ProthomAlo published on 27 February, 2014 at page-20 many news papers have reported that fraudsters are hacking money from agents' and customers' account by SIM replacement. Fraudsters come to know the PIN and other information (including balance) of the MFS accounts – may be by dodging the call center agents or the MFS accountholder or directly from the MFS database. Then he either uses the collected information or 'manage' to obtain a replacement SIM from the service center of the respective Mobile Company. Using the PIN and the new SIM, he either transfer the money to another non-KYC (or false KYC) account or cash-out from an agent point.
BTRC and/or BB can instruct banks to inform the respective mobile companies on daily basis the SIM numbers on which a MFS account is opened. Mobile Companies will immediately inform (online) the respective banks if any of these SIM is replaced. Banks will block money on these accounts. Then after proper verification if the SIM replacement is found genuine, bank may unblock the money on the MFS account.
Disbursing government salary through MFS
Union Parishad (UP) is a local government body located in the rural area and constituted by a few villages. There are elected Chairman and Members and appointed secretary, Chowkidars and Dofadhars in each of the UP. The respective district offices are responsible for disbursing their salary on bi-monthly basis. On the date of salary the UP staffs need to spend one or two working days travelling up to 100 km to collect their salary. A large part of their salary was spent in travelling, accommodation and food during collection of their salary from the district head quarter. There was involvement of risk also while they were travelling with cash. The process makes the UP staffs to spend their office time and hard-earned money, and also invites risks of loss of money to the UP staffs.
DBBL's MFS has removed all these barriers for the UP staffs in Sylhet, Sunamgonj and Jamalpur districts. The district authorities disburse the UP staff salary through DBBL mobile banking every month and the UP staffs withdraw their money from their nearest DBBL mobile banking agents. DBBL has more than 70,000 agents all over the country. The UP staffs now get monthly salary instead of bi-monthly, they don't need to travel up to 100 Km, and spend lot of time and money. They can now utilize more time in their office.
Government can utilize the convenience of the MFS services for disbursing salary of the government employees including that of Primary Teachers.
USSD policy and Bank's freedom in changing customer fee
USSD stands for Unstructured Supplementary Service Data and used by MFS for data communication between bank server and an accountholder. USSD channel is secured, cheap and can be activated for all types of mobile phones – from smart phone to low-cost basic phone. This is why USSD is the prepared communication channel for MFS throughout the world. However due to lack of an USSD policy, individual banks need to bargain with different Mobile Companies for obtaining USSD channel. Some banks are getting connections and some are not. Those who are lucky of getting connections are paying different amount of charges. Many banks have found that this is the main barrier for expansion of MFS.
In this region, Bangladesh is the first country of having own MFS guideline.India, although formulated a MFS guideline later, is now much ahead of us in terms of USSD policy. Telecom Regulatory Authority of India (TRAI) has understand the importance of an USSD policy, and thus formulated a clear guideline with Rs.1.50 per USSD session charge, making it mandatory for the mobile companies to provide connection to banks, agents and customers, and to support up to 5 stages to complete a mobile banking transaction.
In Bangladesh, Banks have entered into agreement with the mobile companies with a commitment of certain share of the customer fee and a predefined customer charge for a service. Due to this, it is not possible for banks to reduce the customer charge without consulting the mobile companies as this has direct impact on the income of the mobile companies.
USSD policy will make the banks independent in deciding the customer fee.
Customer's Fee and charges:
In a CGAP study conducted recently (BANGLADESH: Consumer Insights – 6 Feb, 2014), it has been found that average monthly income of 1,88,000 agents in Bangladesh is Tk.8,000/- which is 1.2 times of average national income and 2.7 times of the poverty line. In addition every agent has their own business income. Agents normally get a share of 50-60% and distributors get 15-25% of the customer's fee. The customer fee for cash-in plus cash-out varies from 1.5% to 2.0% of the transaction volume.
Therefore there are two propositions:
1) If all the MFS players agree or Bangladesh Bank (BB) mandates, the agents' and distributors' share can be reduced and the Banks can become profitable. Mentionable that with almost Taka 6,500 crore of transactions in February, 2014 and running the MFS business for last 3 years in a row, all the banks are at loss for MFS. If this continues, existing banks looking for ROI will lose intereston MFS, new players will not join in this endeavor and real financial inclusion will not take place in Bangladesh. The business policy of some players may be different, not making profit by business, but by capital gain. If such players don't participate, other players will not be able to reduce the agent share as this will swipe them out from the market (as the whole MFS business is agent & distributor driven).
In this proposition, the banks and financial inclusion program will be benefited.
2) If all the banks agree or BB mandates for a maximum ceiling of customer fee (say at 1%), USSD policy comes into force, and agents' & distributors' share is tuned slightly, banks ROI can be maintained at present level but will soon increase with the increase of the MFS market.
In this proposition, the customers will be benefited at large.
Tax & VAT holiday and disbursement of safety net allowances
The MFS is a new ICT-based service in Bangladesh and till in its infant stage. All the MFS providers are counting loss. From the beginning, Banks (MFS providers) are liable to pay 15% VAT and 10% AIT on the customer service charge. The existing banks are fighting for survival and the new banks are very much shaky in launching MFS in Bangladesh due to projected loss burden. The future of financial inclusion is hazy.
To support this nascent initiative, Tax and Vat holiday on MFS services may be allowed for at least 10 years.
On the other hand, government is disbursing a huge amount of allowances under the safety net program to the rural people. To support the financial inclusion program, the allowances may be disbursed through MFS. It may be found that many of the recipients do not have a mobile phone and as such unable to open a mobile account. However we can start somewhere. May be 25% of the people will be receiving their allowances through their mobile accounts. At least life of 25% people will become hassle-free and MFS in Bangladesh will get its momentum.    
Mobile Financial Services (MFS) is a very good initiative of the Central Bank of Bangladesh. All the central banks in the world are looking for a way out from cash and achieve a universal banking solution. MFS can present us a cashless and boundless society. Bangladesh is pioneer in the world for Bank-led model. The start is fantastic. However the pathway is becoming clumsy and hazy day by day. We must review the MFS very carefully and undertake measures from all the stakeholders, be it Bangladesh Bank, commercial banks, NBR (National Board of Revenue), BTRC or mobile phone companies. A high level task force with participation of all the stakeholders for a limited period may help grow MFS in a right track in Bangladesh.
 

The writer is DMD, Dutch-Bangla Bank.