Breaking new ground: Why Bangladesh should adopt digital financial services
With the evolving time, banks have made some progress with regard to their technology and are trying to provide faster and better services to customers. However, these services are comparatively beneficial to a certain percentage of people from the urban areas. Most people in Bangladesh, especially the rural areas, find commercial banking services to be complicated. To fill this gap, Mobile Financial Services (MFS) had been introduced in 2010.
MFS, as the term suggests, involves the use of a mobile phone to access financial services and execute financial transactions. It includes mobile banking, mobile payments, mobile money, mobile insurance, mobile credit, and mobile savings. It has proved to be the finest integration of finance and technology in Bangladesh. It has significantly contributed to the rural-urban fund flow as efforts are being made to popularise mobile money as a viable alternative to physical and plastic money.
However, MFS in Bangladesh is yet to become a channel for formal banking products such as savings and credit products. Most of the users use it for payments-related services. Cash-in and cash-out transactions are dominant, followed by P2P (person to person) transactions. Even with MFS and the regular banking system, 50 percent of the population in the country is still unbanked. MFS has been a parallel platform to the banks. So, there is an opportunity now for an extended platform to be introduced in the economy which will work as an enhanced and parallel service to both MFS and banks. Such a platform can be the Digital Financial Services (DFS).
DFS encompasses all products, services, technology and/or infrastructure that enable individuals and companies to have access to payments, savings, and credit facilities via the Internet (online) without the need to visit a physical bank or any direct interaction with financial service providers. Bringing together the agents and the networks of other third-party intermediaries, DFS expands the delivery of traditional banking services to their customers through Internet banking, mobile-phone-enabled solutions, electronic money models and digital payment platforms, and lowers the overall service delivery cost. It has already been introduced in other parts of the world and it is helping the economies to be developed at a fast pace.
A major percentage of adults around the world are using digital payments. This represents a major growth as, since 2014, the number of adults making or receiving digital payments rose 10 percent or more in countries like China, Indonesia, Kenya, Malaysia, the Russian Federation, Thailand, and Turkey.
Traders and small businesses can greatly benefit from DFS, particularly in countries where account owners are more likely to have mobile phones than debit cards. In India, according to a report by Forbes, 240 million adults have a mobile phone but do not use their bank account. "Expanding accessibility of financial services by enabling transactions using a mobile phone, coupled with expanding acceptance networks leveraging retail outlets, can help to increase usage," the report said.
The ability to influence technology is driving usage in many countries around the world. The Global Findex database confirms China's development as a fintech innovator, in large part due to highly scalable DFS. Banks in China have also increasingly digitised their processes in order to drive adoption and usage. In Brazil, Internet payments are low but growing as new DFS entrants mount a challenge to the small group of officials that dominate retail banking.
Since 2014, the share of account owners using the Internet to pay bills or buy things has nearly doubled. According to the 2017 Global Findex database, the share of adults who have an account through a mobile money service rose globally from 62 percent to 69 percent between 2014 and 2017. In developing economies, the share rose from 54 percent to 63 percent. Also, 1.2 billion adults have obtained an account since 2011, including 515 million since 2014, which is certainly progress, but the fact that almost 2 billion adults remain unbanked also means that expanding access to finance remains a challenge. However, these trends suggest potential growth opportunities that are still unexplored, leading to predictions of massive increases in the number of DFS users.
These are just a few examples of how DFS is impacting economies around the world. Now the question is: how can we as a nation reap the benefits of digital financial services? We can draw on the lessons from the success stories we have witnessed around the world such as China, Brazil, India, etc.
From the global examples we can see that with the low cost of DFS, the unbanked population of Bangladesh can also have access to formal financial services. This will lead to greater financial inclusion. Moreover, DFS has the potential to provide affordable, convenient and secure banking service to poor individuals in the country. The recent improvement in the accessibility and affordability of digital financial services can help millions of poor customers to move from the cash-based transactions to a formal digital financial platform. DFS can also boost the country's GDP by providing convenient access to a diverse range of financial products and services to individuals as well as to various kinds of businesses.
It can also lead to greater economic stability and increased financial intermediation, both for its customers and for the overall economy. Additionally, innovation in digital finance can have long-term positive effects on the banking performance. Furthermore, DFS will benefit the government by providing a platform to facilitate the increase in aggregate expenditure which subsequently generates higher tax revenue arising in the volume of financial transactions. The government has already made great strides by transforming the banking services of Bangladesh Post Office to digital financial services under the brand moniker Nagad.
To sum up, DFS will help individuals and businesses to have greater control over their personal finance, financial decision making, and it will enable them to make and receive payments within seconds. The DFS can also add new layers to the physical cultures of financial inclusion and provide innovative forms of "profiling" poor households into generators of financial assets. It will strengthen the digital sector and help the country's economy to achieve Vision 2021.
Dr Fahad Ibrahim is a Teaching Fellow, University of Birmingham, the United Kingdom.