There's more to mobile banking than meets the eye
There are a number of systemic challenges in the mobile banking sector in Bangladesh that exist today. In this article, I will enumerate what I think are the top-5 systemic challenges. To be sure, there are more than five systemic challenges in this sector. But, the five challenges I identify here may be considered binding constraints – overcoming these will pave the path forward for addressing many of the other challenges.
1. Lack of Healthy Competition. Bangladesh has adopted a bank-led model for MFS. There are 28 banks with MFS licenses. 19banks have launched MFS services to date. One single player dominates the market with 80 to 90 percent of the market. The remaining 18banks own 10 – 20 percent of the market collectively. A healthy competitive environment is largely absent. We do not need to remind ourselves of the negative impact of having an uncompetitive market environment. Since firms operating in a market economy will strive to maximize their economic returns, it would be unfair to hold any specific firm accountable for an uncompetitive market condition. At the end of the day, it is the responsibility of the regulator to keep a close watch and take measures to ensure competitiveness.
2. Agent Network Conundrum. The agent network is at the heart of the MFS business. In order to ensure that the agents perform well, their incentive structures need to be well aligned. Given the cash-out transaction volume, number of agents, and what percentage of the service fee an agent receives, an agent earns about 1,500 Taka per month on average. Yet, they face pressure from MFS deployments to further reduce their share of the service fee. This might eat away at their already low incentive structures. More importantly, the agents are the new face of the bank for MFS. For many customers who were previously unbanked, their first point of interaction with a financial institution is going to be through an agent. Given their inadequate academic qualifications, limited knowledge of financial sector products, and time constraints, agents are not well equipped to meet the needs of the unbanked who require more handholding from a more knowledgeable representative to help build trust in the banking system.
3. Lack of Interoperability. I can place a call from my Grameenphone number to a friend who has a Robi number. I can transfer funds from my City Bank account to a friend who has an account with Dhaka Bank. But I cannot transfer funds from my bKash mobile wallet to a friend who has a mCash mobile wallet. This is because the mobile banking systems are not interoperable yet in Bangladesh. Making systems interoperable significantly enhances the network effect, accentuates the choices a consumer has, and improves the overall competitiveness of a market.
4. Poor Enforcement of Published Guidelines. Bangladesh benefits from having a progressive and well-intentioned regulator, the Bangladesh Bank. It has put in place a number of pragmatic and well thought out guidelines for the MFS sector. In September 2013, it introduced a number of guidelines that sought to discourage Over-the-counter (OTC) transactions and encourage wallet transactions. For example, this guideline prohibits the transaction/transfer of funds by an agent on behalf of a customer without first validating that the customer has a mobile wallet; it also prohibits cash-out or P2P transactions from a newly opened wallet before the identity of the account holder is validated by a bank person (through KYC verification). These guidelines are rarely followed. And yet, there is very little that has been done to ensure enforcement of such guidelines.
5. Limited Contribution to Financial Inclusion. Despite the fact that mobile banking holds a lot of promise to positively impact financial inclusion, Bangladesh is yet to experience the full value.
A large part of the MFS transactions (85% by some estimates) are OTC today. OTC transactions are not that different from money transfer services such as those through courier services or Post Office. Their contribution to financial inclusion is debatable at best. Wallet usage, on the other hand, can make meaningful contributions since it opens up a whole array of possible financial services such as savings, credit, etc. While opening a mobile wallet is a necessary first step towards wallet usage, it is by no means a sufficient condition. Opening a bank account and never using that account for any transactions does not really help the consumer or the bank, or financial inclusion. It is the appropriate use of an account that enhances financial inclusion. We may have 14 million registered accounts in mobile banking today, but how many of those are active end-users of mobile wallets? Two recent independent studies on mobile banking in Bangladesh estimate that the number of active end-users of mobile wallets is less than 5%. We have a long way to go still for financial inclusion through mobile banking.
When a market experiences significant growth within a short timeframe, some of the fundamental constructs that underpin the market can sometimes be overshadowed. And yet, if some of these systemic challenges are not addressed early on, it can become quite costly, if at all possible, to address these challenges down the road. Bangladesh's garments sector, which developed very rapidly in the 80's without proper attention to deeper systemic challenges in the early days received a 'rude awakening' (coincidentally exactly a year ago today) at the cost of many lives and business losses, tell a chilling story.
We need to learn from our mistakes. The time is ripe to address some of the systemic challenges in the MFS market while it is still in the early stages of development.
The writer is Managing Partner at pi Strategy Consulting.