Payment Ecosystem in Bangladesh Challenges and Opportunities
Syed Mahbubur Rahman, MD & CEO, Dhaka Bank
Payment system is basically transaction of money between payer and payee. Bank is the core of a payment system, even if they are not always required to move money. For example, in cash-to-cash transaction, though a bank is not involved, still it is the source of the cash and could very well be the destination of the cash as well, when it gets deposited. There are different channels of payment such as traditional financial system, alternative delivery channels, remittance and other intermediaries.
In the traditional financial system there are 56 scheduled banks and 35 non-bank financial institutions in Bangladesh. In the last four years, Bangladesh Bank has introduced various electronic transfer mechanisms such as VHS, BFTN and RTGS. The government has also established NPSB (National Payment Switch Bangladesh) to accelerate inter-bank electronic payments. If we look at the current trend in our payment ecosystem, almost 8 Lac transactions happen through EFT (Electronic Fund Transfer) per month, amounting to Tk. 5,780 Cr. RTGS went live on October 29, 2015. It is an especial fund transfer system where the transfer of money takes place from one bank to another on a `real time' and on `gross' basis. A cheque worth Tk 1 lakh or more will be cleared within a minute as opposed to a day under the previous system. As of now, 5,000 branches out of 9,000 have come under the system. There are around 7000 ATMs around the country, and the number of daily transactions is 338,123 amounting to Tk.2.4bn daily. The number of POS is about 30,000 of which 16,000 have joined NPSB. The number of daily transactions through POS is 35,547 and daily transacted amount is Tk.28 Cr. But here we need to keep in mind that most of the ATMs and POS are located in urban and semi-urban areas.
For all latest news, follow The Daily Star's Google News channel. In Bangladesh, cards came into being in late 80s and credit card was launched in 1997. The total number of debit card in Bangladesh is 8.3 million whereas the number of account holders is 40m. So there is a huge opportunity for cards to prosper if we issue a card against every savings account. Currently the card industry is growing about 2%. Total number of daily card transactions is around 3.8 Lac which amounts to Tk. 274 Crore. Internet banking is another recent phenomenon in the payment ecosystem. As on October 31, 2015, number of internet banking customers was 1,550,101and the number of daily transaction stood at more than 19,000 amounting to Tk. 59 crore. As per BTCL data the total number of mobile subscribers has exceeded the figure of 10 crore, which is almost 70% of the total population. Now, the total number of internet users in Bangladesh stands at around 4 Crore. So the internet banking has a huge expansion opportunity. Mobile banking has also made a good starting. Many banks have introduced mobile apps. Mobile transactions have been increasing rapidly. E-commerce is another important addition to this digital transaction ecosystem. Four banks have got payment gateway. Currently our e-commerce volume is Tk 200 crore per year. But transactions in e-commerce are happening mostly on cash on delivery basis.
Each year, Bangladesh receives a huge amount of remittance from its citizens living abroad. The volume has now reached USD 15bn. Here most transactions happen on bank to bank basis. There is little use of cards in this transaction system. Some banks have introduced remittance card but it is yet to get popularity. We are yet to make any headway in introducing PayPal in Bangladesh.
Everyday, the government does a huge amount of transaction. If we can introduce e-transaction in this process it will be a great boost for the payment ecosystem. MFS is also emerging in our country. In December, 2015, average value of MFS transaction per day was about 5.35bn. But it is mostly used for top up and money transfer service.
Now, if we look at the challenges we see, though NPSB is a good initiative it restricts the bank's choice of networks, thus limiting competition and innovation. Security continues to be an issue, as PCI-SSS and EMV are not widely adopted. POS and ATM deployment in rural areas is still low. There is a lack of dispute resolution and fraud management system in the NPSB. Participation in NPSB is mandatory for banks for ATM/POS/Internet /mobile transactions. But it has some drawbacks also. Single platform dependency creates concentrated single-point-of-failure risk. Again it limits the banks' ability to innovate by engaging with other stakeholders. In NPSB, ATM fee structure obligies Banks to subsidize customers' transactions. Last but the not the least, flat POS interchange fee prevents Banks to address customer risk issues. Another challenge is that internet Bandwidth is still slow and relatively expensive, particularly in rural areas.
We want a modern and advanced financial payment system with sufficient ATM, POS, Debit/Credit/Prepaid cards that reduces cash carrying burden. We need to invest in non-traditional fund transferring channels to make the ecosystem more efficient. We also need to accelerate growth of electronic payments by launching innovative products and meeting risk and security standards. These initiatives would strengthen the payments ecosystem and contribute to the country's economic growth. The government needs to create a level playing field for all schemes. The NPSB has to bring innovation to the overall payment ecosystem with interoperability. We need to incentivize digital transaction and make it mandatory to issue a card against every savings account. Finally, there should be efforts to build acceptance of e-payment system among all the stakeholders.
Jeremy King, International Director , PCI Security Standards Council ( PCI-SSC)
The challenge you are facing in Bangladesh is also a global challenge. In Europe and America, they have switched to chip card which prevents face to face fraud. The challenge is to protect customers' data. If the criminals can obtain the data contained in a card with magnetic stripe, the can copy the card and withdraw money from the ATMs. We have adopted EMV and encryption techniques to improve in this area. In Bangladesh all the merchants are using a single switch to transact their data. Criminals are very well organised. They know about the payment systems as much as we do. That is why they will know where the greatest aggregation of cardholder data is. It poses the greatest threat to the payment system as Bangladesh is still in an era of using magnetic stripe data and growing e-commerce data. That's why we need to ensure the best level of security throughout the payment system and adopt PCI SSC's data security standard as well as EMV.
Ali Reza Iftekhar, CEO, Eastern Bank Ltd.
The opportunities are limitless in payment solutions. The gap between the number of mobile phone subscribers and people making payments electronically gives a rough idea of the potential. But to realise this potential, we need better regulation mechanism from the regulatory bodies. Regulator cannot be the operator. They should prepare the framework and let others operate it. If they themselves run operations it will create conflict of interest and hamper the ecosystem. There is a communication gap between the regulators and operators. We have been urging them to review their NPSB policy but they seem little interested to pay heed to our demands. Bangladesh Bank itself is not PCI SSC compliant. I do not see any justification why they are taking hurried steps to launch NPSB. So, all the operators are running a huge risk including the central bank. If something goes wrong the whole system will be paralyzed and the reputation of the country will be dented.
Vikas Varma, Executive Director, South Asia, MasterCard
In payment system there are two big drivers: ways to pay and places to pay. The growth of payment system depends on innovating more ways to pay which may be electronic access devices such as debit card, credit card, mobile applications and so on. Points of transactions such as merchants, e-com websites, P2P are equally important for accelerating the growth. Government and regulators have a great role in establishing the foundational elements of a payment system. They can do that by two ways: policy framing and incentivizing participants. Banks and financial institutions will follow this framework and use the incentives to roll out their operations and grow ways to pay and places to pay. Then they would use the services and networks like us who bring certain capability to the system to grow that ubiquity and scale. Growth can be challenging if there are situations in markets such as Bangladesh where the regulator also becomes a player in the payment ecosystem.
In Bangladesh, there is a significant room to grow. Eight million out of 109 million, less than 10 percent of the adults, can transact electronically today. Besides, less than 1 percent of everyday purchase happens electronically in Bangladesh, whereas the global average is 16 percent, and it is more than 60 percent in developed markets such as the US and South Korea. So we need to exploit this huge untapped potential.
Cost of cash and servicing of cash are other important areas. Cash at the teller is 4 to 6 times more expensive that it is at ATMs. ATM converts electronic cash to physical cash where as it is desirable that cash stay in electronic form as cash has its own challenges. It is costly to store, manage and move. We have studies that show that cost of cash is around 2 percent of the GDP.
The final aim of a good payment system is to ensure that cash flows are electronic and the way to do that is to ensure the growth of more ways to pay and more places to pay electronically.
Sanjay M Nazareth, Head of Client Support Services in India and South Asia for VISA
When we talk about Digital Bangladesh we are talking about the growth of electronic payments. The entire payment ecosystem needs to be tuned with the objective of digital Bangladesh. Innovation, safety and security are the keys to the growth of the electronic payment system. At the end of the day, it is the customers who have to have the confidence in the payment system to pull out the cards and use. Safety and security should never be compromised. We hope that the regulator would come up with decisions that would help build the customers' confidence. They should not take any regressive step.
The core of innovation is allowing competition to come in. When you have multiple players in the market you will see innovation in their products. For example, in the early 80's and 90's India's automobile industry was limited to few players. It was when they open FDI and brought global players in India the industry boomed. Today, India exports vehicles globally. Competition also helps to grow and cut cost.
In Bangladesh, 95 percent transaction in e-commerce happens on cash on delivery basis. We need to innovative ways to grow acceptance. MPOS and P2M are such innovative solutions that can be introduced in Bangladesh as mobile and smart phone penetration have been growing rapidly in the country. These innovations help to grow acceptance of the ecosystem.
Abul Kashem Md Shirin, Deputy Managing Director, Dutch-Bangla Bank
Our payment ecosystem is moving from card to other electronic transaction mechanism such as mobile wallet. In garment industries they are paying the workers through mobile wallet. The government is also using MFS to disburse different allowances such as freedom fighters' allowance and scholarship for female students.
We need to maintain co-existence of various payment methods so that we do not become heavily dependent on a single platform. Our customers should have all the options available and they will choose the suitable one.
In Bangladesh, we see some banks’ cards are EMV protected but some banks do not have that mechanism. So when a card holder of a protected bank will use the card in a non-protected bank's ATM there is a scope of fraudulence. In that case, who will take the responsibility? NPSB does not have a clear guidance in this regard. Again the NPSB itself is not EMV and PCI-SSC compliant. So we all are in a grave risk.
Another important issue is inter-change fee for ATM transactions. If one of my customers goes to another bank's ATM then I have to pay TK 20 to that bank but I can charge my customer TK 15 for that transaction. So the bank has to pay Tk 5 for each transaction from its own pocket. Banks want that the customer should foot the total charge. If the customers are willing to do that Bangladesh Bank should allow it. Again fixed fee of Tk 20 is not adequate. Every transaction cost the bank Tk 40. If the customer goes to another bank's ATM then the cost comes down to Tk 20. Then it is better for the banks not to open their own ATM, instead drive people to other Bank's ATM service. This will ultimately results in decline of ATM card users. Bangladesh Bank should look into this issue seriously.
E-commerce sites are not keen to accept payments through cards because they have to pay 3-4 percent charge to banks, that does not happen in case of cash-on-delivery. We need to bring the e-commerce transactions to e-payment system.
Bangladesh Bank has introduced the two-factor authentication system. It is secured. But in practice we see that banks don't allow its card holders to do internet transaction though the bank is authenticated by two factors. A customer has to call the bank to open the internet and then the bank keeps it open for certain time. It restrains the e-payment system. We need to change this practice and allow customers to transact a certain amount of money whenever they want both locally and internationally.
There should be a standard EMV system for all the cards. Otherwise various types of EMV system will hamper inter-operability of cards. Bangladesh Bank should issue a guideline in this regard.
Omar Faruque Bhuiyan, Senior Executive Vice President, Premier Bank
As all the banks are not EMV protected some post-terminals cannot read the EMV protected cards. It creates opportunity for fraudulent activities. We should address this security gap.
We welcome the NPSB mechanism. If the Central Bank can provide service in line with the standards of VISA and MasterCard and maintain security features and settle disputes then Bangladesh Bank can act as a service provider. But, NPSB should not be a mandatory platform.
Mohammad Anwar Hossain, Head of Cards, Mutual Trust Bank Ltd.
Though MFS started just four years ago it has achieved more coverage than cards. It happened because MFS is more convenient to the customers. It is also more secured. MFS providers have invested a lot in creating awareness and acceptance of this service to the users. We need similar investment and awareness building campaign to popularise card.
We appreciate Bangladesh Bank's decision to launch NPSB. But there are loopholes in this system that need to be addressed to make it effective. For example, though the Central Bank has made it mandatory for all the banks to join the NPSB system still there are some banks who are not complying with this regulation. It is creating hassles for both of our banks and customers because those banks are not accepting our cards. We should streamline the whole e-payment system and create level playing field for all the operators.
Mohammed Shaukat Ali, Vice President, Islami Bank
We need to make our MFS interoperable. My agent should be capable of transacting with another bank's MFS account. It is not affordable for the agents to register separately for all the different MFS.
Only a few Banks do the acquiring part of internet banking. Here we have VISA and MasterCard. I would request them to provide our bankers adequate technical training so that we can provide this service. We need to focus more on this educating part. Banks can also educate their customers about safe internet banking that will ultimately help grow the whole e-payment ecosystem.
M. Nazeem A. Choudhury, Head of Consumer Banking, Eastern Bank
When we talk about payment ecosystem we mainly focus on inside issues. We are not focusing on building enough merchants. Few years ago, NBR made it mandatory for all the merchants to have ECR machine and thus the merchants got involved in electronic cash transaction system. Bangladesh Bank can take similar initiative through NBR or other regulatory bodies to ensure that all the merchants accept electronic payment.
Government as a merchant also do huge amount of transactions. If Bangladesh Bank make the government understand that if it play the role of a strong merchant then it will help us more to expand our e-payment services. The whole revenue collection system of the government needs to be brought into e-payment system.
Bangladesh Bank is the regulator and policy maker for all the banks and financial institutions of the country. Unfortunately, they do not invite these institutions in preparing any policy. We are in direct contact with customers and we know better about the field. I would request the Central Bank authority to involve us in all the policy making mechanisms that have impact on our business.
Syed Mohammad Kamal, Country Manager, MasterCard
People are willing to pay extra cost for the services when the system is convenient. We have learnt it from the MFS experience. I think we can build a similar ecosystem in cooperation with the banks.
Last year, we launched a campaign to popularise use of debit cards at POS. We received quite a good response from the users. We need to create more acceptance points. We should make our service more convenient for the customers. We also need to incentivize card users at the merchant level or bank level. It will be an effective step to issue a card against every savings account. It will help popularize cards.
Subhankar Saha, Executive Director, Payment System Department, Bangladesh Bank
Evolution of the payment system would never stop and it is an unending process. Bangladesh has made progress in electronic payment system in the last five years. We have parted away with the manual traditional method. Automated cheque processing system, electronic fund transfer network, mobile financial service, national payment switch and real time gross settlement system were brought in its place.
NPSB has been introduced to facilitate interoperability among the different payment systems. It also aims to reduce the transaction cost and settlement time. The national switch may have some limitations but the Central Bank can sit with the banks to sort out those issues. It will boost our ATM payment system. Now we have only 7000 ATM booths in the country. Some banks have limited number of ATM booths. In some districts they have branch but no ATM booth. We encourage all our banks to come under one umbrella, and that is NPSB. Now almost all the banks and their ATM booths have come under this system. And 95% of the ATM booths are inter-operable.
An issue has been raised that a bank is required to pay Tk 5 for every cash withdrawal by its customer from another bank. The system is meant to drive the banks to open their own booths in more places. We have also simplified the ATM installation process. Now they do not need NOC or license to establish a new ATM booth. They have to just inform the Central Bank about the new setup.
We need to create public awareness and improve financial literacy to popularise card business. Bangladesh Bank, with the help of some banks, has taken an initiative to hold public awareness campaign in different districts. Other stakeholders should also join this initiative.
Some discussants have proposed that our MFS should be inter-operable. There is a provision in NPSB facilitating inter-operability among MFS. I hope it will happen soon.
Bangladesh bank provides NPSB services without charging any cost. So we are not doing any business, we are just facilitating the ecosystem.
To improve our compliance and security system, Bangladesh Bank has already formed a committee to see how it can move to chip-based cards and comply with the PSI-SSC.
Shah Zia-Ul Haque, Deputy Director, Payment System Department, Bangladesh Bank
We are aware about the fact that some consortiums of banks are still operating outside NPSB. We are looking into it and will soon bring them under the umbrella.
In making any policy we are always in touch with commercial banks. For example, some of the discussants present in today's roundtable were also involved in the consultation process of NPSB from the very beginning.
We are working with NBR to introduce e-payment option in government's revenue collection and payment system. We are also working with MFS providers on how we can provide all the banking services through MFS. In recent times, if you look at the advertisements in print and electronic media you will see more promotion of cash transfer services than top up and remittance services.
We urged commercial banks to set up ATM booth in rural areas but we are yet to receive adequate response from their side. Very few banks care about the two-factor authentication system. Without accommodating two-factor authentication system we cannot grow our e-commerce. I will request all the banks to accommodate this security system at the earliest possible time.
Vikas Varma
I just want a clarification from the Central Bank whether there is a mandate on switching to NPSB or not for domestic transaction. We have also written to the Governor regarding this issue. We need to know the answer as it is linked with our long term strategy.
Shah Zia- Ul Haque
We are working on it. Soon we will give you a response.
Subhankar Saha
We are rethinking this issue. In my last meeting with the concerned department, I advised them to go through your letter. We will be accommodative from our side. We would also request you to be accommodative so that things go smoothly.
Sanjay M Nazareth
It is very important to educate our customers. In the card system there are merchants on the one hand and card holders on the other hand. We need to inform merchants about what benefits it brings to them in using e-payment and what benefits card holders get by using cards. We need to drive this message forward with the help of media.
One speaker has mentioned that merchants are skeptical about e-payment. But there is a big cost of cash which always goes hidden. Cash management and cash collection come at a huge cost. We pass on the cost to the merchant but he does not see it. That is the education we need to pass on to merchants that if they do everything electronically, the money directly goes to his account and his current account flow increases. It is also beneficial for the overall ecosystem. It is the education that drives adoption. Again if we can electronify the entire channel it will also help eliminate scope of pilferage. In India, one in every two debit card transaction is an e-commerce transaction. It is the fastest growing channel. Customers are comfortable with using cards online because of the second factor mandate that the regulator has given and increased awareness of the users. Secondly, merchants are also adopting mPOS. Insurance companies also do premium collections adopting mPOs. In India, mPOS has been deployed aggressively to grow the ecosystem.
P2M is another option. Apart from just doing cash in and cash out, we will be happy to work with the entire ecosystem to pilot and bring in P2M solution where you can use mobile to do your day to day purchases. We need to leap frog from ATM to electronic channel; from cash to electronic form of payment. ATM is just another form of cash.
Jeremy King
Globally the payment ecosystem is changing faster than ever. Within the PCI Standard Council we do have a process of ensuring that the new mPOS devices can be used in a secured fashion. In the USA all are migrating to EMV to help drive new payment method. To have a payment ecosystem that is fast, efficient, simple and secured is going to be critical in moving forward. And adoption of EMV and PCI is going to be critical for ensuring that it can happen in a fast and secured manner.
Subhankar Saha
We will take an initiative to detect the hidden types of fraudulent activities after consulting with business people. You can submit your complaints to us even without mentioning your name. We will look into these issues seriously.
All the banks have urged to raise the amount of the local transaction limit. Yes, we will go for that.
We should not think that there are too many frauds in our card based system. It is negligible. But we should not allow even a single fraud case.
Arun Devnath, Business Editor, The Daily Star
Today's discussion was very helpful for me as a business journalist. We heard a lot about the concern over too much dependence on NPSB. There is also a concern over the cost of business and security issues. These issues cannot be discussed and explained in a single roundtable. We should continue such discussions. I am very pleased to hear that the regulators are very keen to protect customers' interest.
Bangladesh Bank has drafted a guideline for MFS. That is available on the website. I think we need to discuss it further.
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