Recently, The Daily Star organised an opinion sharing session on 'Regulatory Guidelines for Mobile Financial Services (MFS) in Bangladesh'. Here we publish a summary of the discussions -Editor
Brig.(Rtd) Shahedul Anam Khan, Editor, Oped and Strategic Affairs, The Daily Star
We are the medium to let the public know about the guidelines and the shortcomings of Mobile Financial Services (MFS). Since it's a very new concept, it needs to involve every stakeholder, both from the banks and the MNOs. We also need to discuss how we will go about meeting the objectives of Bangladesh Bank and one of the objectives is to prevent terrorist funding and money laundering. We also need to determine how can the system provide better security to a staff providing service at the ground level? I believe security in MFS money transactions is a pressing issue for Bangladesh.
Pial Islam, Managing Partner, Pi Strategy Consultancy
Right now in Bangladesh about 25 million customers are using mobile banking, of which a certain portion is registered customers and others are not. We have noticed that the number of customers and agents have been growing exponentially. Despite the rapid development of mobile finance services, complete financial inclusion via mobile banking is yet to be reached. From the report, we could see that 37 percent has been financially included, among that only five percent is coming from mobile financial services, but maybe we could look at the opportunities to expand significantly at that stage.
The first revolution that happened in MFS was back in 2011 when Bangladesh Bank issued MFS guidelines and later updated this in December 2011 that works mostly as the basis of the whole system. These guidelines gave two ownership structures-related model. MFS could work as a wing of the bank and the guideline also allowed the MFS to act as a subsidiary to bank where at least 51 percent is owned by a single bank. And the most predominant model here today is bKash.
From the new guidelines, I could find three major straightforward shifts- ownership restructure, MNO participations and interoperability. As we are neither the bank nor the Telco, from our independent perspective we could say that globally over 200 plus mobile financial services that are out there, 70 percent of them are MNO centric. In many cases, these MNO centric models have proved themselves more successful as the MNOs can deal with issues like distribution networks and high volume low transactions better.
First, the new draft guidelines allow no more than 15 percent of the ownership by a single entity (bank or non-bank) which means a mobile banking operation needs to have about seven different equity partners. Even if you leave out the coordination costs associated with this proposal, getting seven organisations, some of whom will be direct competitors in their traditional businesses, to agree on things will not only be difficult, but it will be an ineffective governance structure. Moreover, with limited equal shares, the incentive for one organisation to take the lead on anything will be almost non-existent. Again it will raise the issue of free riding and as everyone has roughly similar share but the question remains who is going to lead. This has the risk of running an operation only half-heartedly.
Second point that I want to raise is that to be a partner or the equity owner, they need to have two preconditions.
One is, it needs to have telecommunication access to all licensed MFS platforms at the same effective standard of ease of access and pricing. If we look at the first part of it, I totally agree with it and I believe it's a good thing that the guideline puts forward.
But the second dimension from a classic economic theory perspective seems a little confusing. Because if I own a certain percent of it, then it would be a natural tendency of an organisation to want to do things to improve the opportunity out of that investment. But expecting a firm to offer the same pricing to its competitors, as it offers an organisation it partially owns, is counterintuitive to the principles of competitiveness. If your organisation owns shares of a firm, it is only natural that you would take steps to maximise its return on investment.
The third issue is with interoperability. The new draft guidelines indicate that this multi-player approach is intended for encouraging interoperability in mobile banking. This is truly confusing. While it is true that interoperability would help the mobile banking ecosystem to grow further, restructuring the ownership structure to do so is befuddling. We have interoperability in the banking sector today – if you write a check from one bank and deposit it into another bank, the check clears within 24 hours. We have a national payment switch for this. We also have interoperability in the telecom sector today – you can call your sister with a Robi number from your GP number. That connection is made in seconds. Do you really need to change the ownership structure to ensure interoperability? A much simpler and far more efficient way to ensure interoperability in the mobile banking sector would be to have them connected to the national payment switch.
In conclusion, this guideline is a very new thing in a significant way. This guideline fully recognises the challenges that the market has. I also like the fact that the guidelines are uploaded on the website and its openness to share and see by the whole industry. It's a positive thing that we have new guidelines, however it needs some more in depth analysis.
Dr. Rokonuzzaman, Professor, North South University
Unless there is significant benefit of economies of scale, an operator should not be allowed to enter in more than one vertical segment so that monopolistic market power accumulation to exercise vertical foreclosure strategy is being limited, preferably excluded, to minimise deadweight loss. For this reason, mobile operators are not allowed to be transmission service providers—although they have significantly deployed physical facilities. Thus, there is no strong rational for allowing MNOs in the service segment. The entry of MNOs, having no relevant specialisation, in financial service delivery appears to violate such basic principles of market based reform of the telecom industry.
Net Neutrality is another concern. By allowing MNOs in MFS, the door of anti-competitive strategy such as throttling rivals' mobile financial services, so that services in which MNOs have ownership is more attractive, will be exercised through measures such as non-uniform access time and security features. There could be argument of using regulation to address such issues, but due to information asymmetry, it is likely that policy of minimising conflict of interest will be more effective than monitoring unauthorised behaviours and taking punitive actions.
The competition as well as performance issues faced by the sector should be dealt with by strengthening market forces and making sure that telecom service providers offer dependable, secured services in a non-discriminatory manner to support the growth of this service to exploit its full potential. The telecom sector should be given clear policy and regulatory guidelines, so that they can compete in a profitable manner to provide neutral as well as a dependable platform to support the growth of competitive markets of diverse mobile centric services, such as health, financial, insurance, education, etc.
Within the context of socio-economic situation, both the cost and coverage of mobile data services are yet to make substantial improvement to deliver envisioned digital dividends to grassroots level of the society. Instead of investing capital in some other services, MNOs should use their limited capital to expand high speed mobile data services, particularly 3G and 4G, and subsidise the take off at the early stage to profit from economy of scale at later stage.
Policy issues such as the set of regulations imposed by Bangladesh Bank and the slow facilitaion of 4G services in this imperfect and dynamic market are also intellectually challenging. I would thus urge BTRC, MoPT and other regulatory institutions like the Bangladesh Bank, and service providers to invest in basic as well as applied research to bring timely insights to stakeholders to facilitate smart investment decisions, so that both consumer and producer surpluses are maximised.
Shahadat Khan, CEO, Progoti Systems
Within 4 years, Bangladesh could attain the number 2 position, which I consider a significant achievement for us. Kenya is number 1 at this moment, but we have all the potential to replace it. Our population is 4 times bigger and the GDP is five times bigger than that of Kenya- this already paves our way of becoming the number one. However, the regulatory framework needs to focus on three things.
Firstly, in terms of regulation we need to encourage more players to join. Right now, in Bangladesh 28 banks have obtained license where only two of these enjoy a significant share. Among these two, one bank holds 80 percent share, the other one holds 15 percent and the rest of them all together hold 5 percent. Here our objective will be to increase participation of organisations other than these two operators, otherwise it won't be good for the competition and the general people.
Secondly, if we think of this in the perspective of Bangladesh, we will face a low cost fund of around $20 billion. The issue of having a low cost fund of this much amount will arise whichever way we approach the issue. However, instead of it getting at one place with one company, we could think of more banks getting involved for deposit collection like India did. If instead of a limited number of banks, at least 20 banks were involved here, we could hope that the deposit will be safer.
For MFS we need a certain telecom connectivity. Having any kind of Telco's involvement is an essential part. Now we can see that 28 banks have taken license, but many other banks could be involved as well if we could solve the USSD problem. It is true that it will require a larger involvement and consultancy of BTRC, Telcos and Bangladesh Bank. Given that telecom companies want to participate in the MFS, having a known price access is necessary as a precondition of that. We have to make sure that the price has to be independent, despite the fact investors want to control using their monopolistic position. Also regulators would ask the telecom operators to ensure telecom access first so that everyone can operate. In a nutshell, telecom access and the pricing need to work separately.
Mamunur Rashid, Chairman, Financial Excellence Limited
Incidentally, I wrote an article in The Daily Star on MFS whether it should be bank led or Telco led. Later, Ibarahim Khaled and Muhammad Zafar Iqbal both agreed to the fact that it should a bank led system to keep it stable from the control and comprise perspective. Back when the caretaker government assumed power, it investigated all the incidents of demanding ransoms over phone and most of the incidents occurred using a particular mobile operator. The concern is selling SIM cards without proper registration and any proof of valid identity cards. Just now we saw from the presentation that at present in Bangladesh 85 percent over the counter transactions are happening where neither receiver nor sender use their own wallets. Such transactions have raised concerns for money laundering, fraudulence and encouraged different terrorist activities. The RAB led investigation further informed that many of the accounts have not adhered to Know Your Customer (KYC) norms.
Recently, BRAC Bank and Dutch-Bangla Bank signed an agreement with the Election Commission to verify National ID of all customers for transparency and accountability in account opening and banking services. It will help prevent identity frauds and ensure authenticity of KYC forms. Thus, it will also facilitate smooth operations of mobile banking services. However, different problems like over the counter transactions, absence of a vertical approach in getting a license remain there. Now we need to see whether Bangladesh Bank wants to be a low entry barrier industry and the present operators who are controlling 95 percent of the entire market need to be concerned regarding the operational risk management. Bangladesh Bank and BRAC Bank are attempting to handle it. Bangladesh Bank is also encouraging multi-stakeholder approach which also complies with the recent guideline. We want to encourage competition, financial inclusion and more involvement of the rural side of the country. We would like to welcome Bangladesh Bank to learn from the experience of nine banks that have been approved. Instead of focusing only on selling more mobile connections, they need to be concerned with their customer's transaction proof to control micro level terrorist financing so that our total population can enjoy the sustainable benefits of the sector. We need technological intervention for continuous solution building.
Abul Kashem Md. Shirin, DMD , Dutch-Bangla Bank Limited
We need a level playing field for MFS businesses. There is a real problem in getting USSD connection from telecoms. Many banks have the license to run MFS but cannot start operations due to this problem of connection.
Over the counter (OTC) transactions is a recurrent problem in MFS. It is often used in financing criminal activities. But in a real bank-led MFS model, there is no scope of OTC transaction because banks are very compliant.
Our MFS is a wing of our bank and not a subsidiary organisation. To popularise this service, we have invested heavily in advertisement and created a brand for it. We have also invested in manpower, hardware and software. We have developed distribution channels all over the country. Apart from these investments, we have incurred a loss of Tk 100 crore in the last four and a half years. We have seen it as an investment. But now after doing all these investments when we are asked to hold only 15 percent of the total shares then where will we go? With 15 percent shares, our bank cannot have much control on the business for which the bank has endured so many hassles. How will we recover our investment? Many say that this is like an investment in a grocery shop. That means if we suffer a loss then it is our fault. If we suffer a loss due to our operational failure then that's fine, but if we have to incur losses due to new regulations then the onus is on the regulators.
It is said that the proposed regulation is aimed at creating inclusiveness in the MFS business. But I think in the existing mono-bank-led model, the scope is already there. The lead bank, retaining 51 percent shares of its own can share the rest 49 percent with other entities. It is already an inclusive structure.
So it is my recommendation that the existing mono-bank-led MFS where it operates as a wing of the bank should be allowed to run as it is. But if they want to go for a subsidiary model they should be allowed to do that. For new MFS entities, the government can make the provision of establishing a subsidiary organisation for MFS. But there also a bank should lead the whole process, holding at least 51 percent shares of the business and the rest 49 percent shares can be distributed amongst other organisations, including non-bank entities. Here again there is no clear definition of a non-bank entity.
It should be clearly mentioned in the guideline who can be the non-bank partners in MFS.
In the proposed outline, it is not clear whether an organisation can participate in more than one MFS. I think a participant should be restricted only to a single MFS.
Mohammed Nurul Amin, MD & CEO, Meghna Bank Limited
When we are talking about 15 percent shares of a bank in MFS business, it is no more a bank-led model. It is also not a subsidiary of the bank. So why are we naming it a bank-led MFS model? In the proposed model, the main problem is that without having a major share who will call home other partners? Who will lead the business? In the proposed guideline, a Telco can be the lead agency. But I prefer the bank-led model because a bank is a legal entity for conducting financial operations.
To prevent criminal use of MFS, we need to focus more on security aspects of the service. If we make it mandatory to have detailed KYC for every MFS users, we will be able to track every transaction. The use of the national identity card (NID) is still voluntary in our country. Thus, criminals can easily manipulate the system with fake NIDs.
M. Shamsuzzaman, DMD, Islami Bank Bangladesh Ltd.
Though we have been recently upgraded from gray to green zone in APG standard, we are still lacking behind the global compliance standard in banking. Our banks are trying hard to reach there. In this situation, inviting MNOs and non-financial organisations in financial services will make the compliance situation worse because they are not trained in financial transaction services. I fear it will invite more vulnerability to our financial system.
Mobile transactions are no less important than bank transactions. But in the proposed guideline, it is said that for bank accounts we have to keep a record from the termination of the account up to the next five years, while for mobile accounts, we have to keep a record from the date of origin up to the next six years. I do not understand the logic behind this different time periods for mobile transactions.
According to the proposed guideline, MFS will start as a company with Tk. 100 crore as paid up capital and it will reach Tk. 200 crore over the next 10 years. It requires Tk. 200 crore for starting a bank. I wonder whether the MFS companies will end up in forming another bank. I think it will only create more complications.
We are running our mobile banking with our own software, trained manpower and other infrastructures. So when I have to share my platform with other stakeholders with equal shares, what will be my benefit? On the other hand, if any partner does anything wrong who will shoulder the burden? It seems the platform bank will be the worst sufferer.
We have also heard about interoperationality. We can easily call from one mobile network to another network. We can make transactions across the banks through our central clearing service. Here the issue of capital sharing among the participant banks or organisations does not arise. So why is it required for MFS?
Nazmus Salehin, MD & CEO, Standard Bank Limited
We got the MFS license but could not get the USSD connectivity. That's why we have not been able to start our business. In the proposed guideline, there is a provision of giving share to MNOs. But if there are 10 MFSs, our few MNOs may not join all the services. So there can be an issue of conflict of interest where MNOs will give extra advantage to their own companies. That's why I think MNOs should not be included in the MFS as partner.
In the market, there are many banks who do not have the license for MFS. In the subsidiary company model, other banks can join the lead bank. It is not necessary to open a separate company for each bank.
Raihan ul Ameen, DMD, IFIC Bank Limited
From our bank we are going a bit slow in introducing MFS. One of the major reasons is the compliance issue. We are concerned about the verification process regarding cash transactions. Getting cooperation from MNOs is also another important issue. The cost of getting USSD service from them is slow and very costly.
The guideline is talking about creating competitiveness. But I think it should be left to the market.
The guideline does not have much to say about tracking illegal transactions. To do that, I would strongly suggest that Bangladesh Bank should focus on the Payment System Act. There is section in the Act on setting up of a payment system platform.
Taher Ahmed Chowdhury, EVP & First security Islami Bank
Many of us are not getting the USSD connection from Telcos. Without the assistance of Telcos, we cannot run the MFS service. I think the guideline should have some specific regulation regarding this issue.
Mirza Mahmud Rafiqur Rahman, Additional Managing Director, UCB
The proposed guideline is not well composed. MNO's inclusion is new to the proposed guideline. I welcome this decision. Though MFS is a bank-led model, it is not a banking business, because there are some technical issues which are related to mobile network. Officially recognising MNOs is a welcome initiative. They have distribution channels.
I prefer the system where a bank will have 51 percent shares and the rest 49 percent can be shared with MNOs. Another positive issue in the guideline is highlighting the KYC issue. I just want to say that MNOs' KYC is not very reliable. Bangladesh Bank should focus on this issue.
Syed Mohammad Kamal, Country Manager, MasterCard
We started card business in 1997. At present, 35 banks are providing card services. For that reason, banks are not obliged to make Master Card a shareholder of the business. Still banks are well connected with their 9000 unique merchants. Right now, we have 15,000 ATMs and pause acceptance point in the country. On the other hand, MFS has more than 120,000 acceptance points. It means the business has already scaled up. Now we have to look into the KYC issue. And of course the regulators have helped MFS to grow domestically. I think the regulators are aware about the KYC issue and bringing in new rules and regulations to improve it. I believe it will support MFS to strengthen its business in the country.
If MFS is a bank led model then the lead bank should have 51 percent shares in the business. So if bank wants to let go 49 percent of his total shares then I think Bangladesh Bank should give them the scope to do it.
Globally, Bangladesh is in an excellent position and for that reason alone, it wouldn't be wise to restrict its growth at this point. I will request to review the stakeholder part of the guideline. I believe it is a kind of restriction that will surely hinder the grown of MFS.
Kamal Quadir, CEO, bKash Limited
Fundamentally, bKash is not a banking system. We don't do business the way bankers do their business, which is taking deposits and giving loans. MFS does not provide any credit. It is a service provider system. And in return of our services, we take payment. Usually people use Bkash for fund transfer. I think we should recognise the service oriented responsibility bKash has undertaken. Among many achievements, we can proudly say that today 15,000 agents all over the country are trained as financial agents of bkash.
Mobile money is a very abstract concept. Making people understand the concept, how it really works, and the fact that digits mean cash, is a huge challenge. So I think it is important to recognise the challenges we have to face.
Bkash has four shareholders today. And all the four shareholders are known globally for this inclusive initiative. It took five years to bring all four shareholders together. So now if the draft guideline asks for seven shareholders from the beginning, I believe, it is not going to work that way. As I said, it takes five years to bring together four shareholders; this means it is not easy to find likeminded people overnight. I believe that the Bangladesh Bank should review this matter.
Major General Monir (Retired), Additional Managing Director UCB Bank
A pressing issue regarding MFS transactions is fraudulent activities that take place while using this system and another issue is financial crimes. We know that these sorts of crimes have happened before as well. MFS is an easy way of transferring money. So, even criminals use it. The aspect of anti-money laundering and combating financing terrorism has also been discussed here. The primary reason is the lack of access in verifying KYC. It is difficult for the law enforcement agency to really apprehend a criminal if they only have access to demographic information. We don't have access to verify the national identity card.
We really have little scope to challenge people coming at the registration booth with a NID as we can't check whether the identity card is genuine or fake. Thus, if we have access to verify NIDs, that particular demographic information provided by the customer can help us to identify a criminal someday.
We are trying to make people aware so that they don't get involved in this kind of fraudulent activity. It is a question of how many can be reached. We have a central compliance unit. All banks have that. We are conducting training for our employees, agents, distributors, as well as our customers. We have attempted to take a strong holistic approach in this regard and I believe in the coming days things will definitely improve.
TIM Nurul Kabir, Secretary General, AMTOB
Two important stakeholders are working together in Bangladesh's mobile banking sector – banks and the telecommunication companies. Unfortunately, we do not see any representative from the regulators, which is the BTRC or the ministry. I think the telecommunications ministry and BTRC should participate in discussions on this issue to make them productive.
I would like to emphasise on two things. First of all, I think we should take lessons from the recent policy guideline, as through mobile phones we are able to provide financial services to the grassroots. This unique system helps Bangladesh to get recognition globally. But over time, we have faced a lot of challenges. And we are trying to mitigate all those challenges with the support of Bangladesh Bank.
A big challenge is dealing with KYC. Mobile operators strictly follow the rules and regulations of BTRC before registering a SIM card. It is very difficult to verify the legality of the card or identify a criminal just through a photocopy of a customer's NID. We discussed about this problem with the ministry. We asked for an online verifying NID access in 2009. Till date, we have been consistently pursuing to get this facility. If we don't get the support of online verification, I think it would be very difficult to stop fraudulence in MFS.
For the last seven months, we have been working with BTRC to develop a new system. The system will help us to verify NIDs and will help law enforcing agencies as well. We have already handed over our part of the responsibility to BTRC last February. Now BTRC is working on it. If we can finish it then I believe we can keep a check on the fraudulence and security issue.
Globally, 70 percent of financial services are led by mobile companies and only 30 percent by banks. Shareholders should have a certain level of confidence while doing business together. So it's not wise to have seven mandatory stakeholders in MFS. This seems like a complicated proposition.
Mobile connectivity has played a vital role in the last 18 years. The issues we are talking about have become possible for mobile networks that are spread all across the country. Since the Bangladesh Bank gives us recognition as a stakeholder through their guidelines, I sincerely thank them for their initiative.
The average per customer revenue of MFS is one of the lowest in the world. We have to give a lot of money as subsidy. SIM tax is a barrier for new entries to the market; we have to pay the tax at our inception stage. This is not the case anywhere in the world. Thankfully Mobile Network Operators (MNO) is not pushing the burden of tax on the shoulders of their customers. Instead, they are increasing their amount of subsidy. I think the Bangladesh Bank should look for a win-win situation for every stakeholder of MFS.
Khondkar Ibrahim Khaled, Former Deputy Governor, Bangladesh Bank
If we accept the proposed guideline of Bangladesh Bank, I believe it will have a huge impact not only on the banking sector but also on consumers. So it is a critically important issue. There are two parts in the Bangladesh Bank's proposition – the first being three years after the regulation comes into existence, the entire existing model will be closed down. At present we have a home grown model, which is sanctioned by the Bangladesh Bank. Interestingly, this model has been acknowledged even by the US President Barack Obama. People from all around the globe are appreciating our existing model. So I don't think it is an ineffective model. I also don't see any point in criticising the model or following a foreign model here in Bangladesh.
Since the existing model is home grown, many stakeholders invested a lot of money here. They don't expect profit from the very beginning of the business. Despite huge loss, many of them are still sustaining in the market. They hope that in the next five to ten years they will be able to generate profit out of the business. Bangladesh Bank encouraged them to invest money with an assurance of guarantee. Thus, without assigning any reason, Bangladesh Bank cannot withdraw any bank from the market. If they do so, I believe it will be arbitrary, unethical and probably illegal.
Bangladesh Bank can provide a framework on this matter. But what they provide is a kind of business model. And by monopolising the new framework, they would destroy other existing models. They can bring new models in the light of the old ones. I believe the new model should accommodate older models and only then can it succeed in achieving its goal. Thus, I believe Bangladesh Bank should review the new model.
Right now, we are following Barclay's banking model in Bangladesh. Bangladesh Bank has the power to shut down any bank they want. But other stakeholders like the telecommunication sector are not under Bangladesh Bank. They are operating under BTRC, which has no business in the financial market. So unless and until the BTRC changes its rule, they cannot do anything about the telecommunication sector that is running MFS. For that reason, it becomes an area where none of the government bodies can control their business models. In absence of good governance and financial discipline in the country, this situation is bound to create a mess. We should not abandon Barclay's model because to this day the success we've achieved has been through this model.
According to Barclay's model, one principle shareholder or partner can have the majority of the shares, for example, 51 or 55 percent of the total share; the rest of the shares will be open to different companies. Any other bank can join and even non-financial institutes and telecommunication companies can join as a shareholder. Bangladesh Bank should not decide the percentage of the partnership here. It might create a problem in the sector.
Moynul Islam, Joint Director, Bangladesh Bank
This is actually a pre-draft and we will review it from the recommendations we are getting from experts here. Till date, we have received comments from two stakeholders. But we expect to get more feedback and recommendations. We have postponed the date of collecting more comments from the stakeholders. I want to thank The Daily Star, because from this roundtable we have come to hear many arguments and comments about the pre-draft that we didn't know before. Please write to us about your questions and complaints, as I believe it will help us to review the pre-draft.