LightCastle Analytics Wing May 23, 2022
Digital Banking has redefined the financial landscape in Bangladesh during the Covid-19 pandemic. Overnight, people needed to figure out how to use banking services electronically because, despite a pandemic, the demand for credit did not disappear. While residents in the cities rushed to adopt digital banking, rural communities were still hesitant to embrace the technology. Therefore, innovation is paramount to ensure customer satisfaction and improve access to finance for minorities and marginalized communities.
Dutch Bangla Bank Limited (DBBL) is responsible for the inception of mobile banking in Bangladesh. DBBL introduced Rocket in May 2011, which was stipulated to be an alternative to traditional banking that caters to even the poorest members of the society and spreads out banking services outside urban regions. It triggered the usage of mobile banking at an unprecedented rate as the number of registered mobile financial services (MFS) accounts in Bangladesh increased faster than in any other country in 2013. 
For Rocket subscribers, an account had to be created through DBBL-approved agents around the country and with a fee of BDT 10. A user must have a cell phone with a registered SIM, NID, and recent photograph to use the banking service.
In the same year, bKash was also launched with the same view of reaching a larger population to improve access to finance for minorities and marginalized communities. In addition, the platform aimed at facilitating foreign remittance, emancipating women through financial independence, enhancing the overall living standards of rural communities, and developing SMEs. Since then, it has done wonders for the financial sector of Bangladesh with incremental innovation to promote financial inclusion, income distributions, and, consequently, economic growth. In retrospect, this was the first innovation in the Mobile Finance Services (MFS) industry.
Challenges in Digital Banking Industry
Digital technology, such as MFS, can improve the financial well-being of the citizens of Bangladesh, where more than four-fifths of the workforce are informal. However, prior to COVID-19, digital platforms were not utilized to their full capacity due to adoption resistance. While the growth was steady, it did not follow the trajectory of smartphone sales which skyrocketed from 86.56 million in January 2012 to 171.85 million in January 2021.  From smallholder farmers, and SMEs to enterprise owners, a smartphone has become an inherent part of everyone’s daily lives. However, the digital divide is still prominent due to asymmetric information, high operational cost, and inconsistent services. For instance, in comparison to India, Bangladesh’s cost of mobile data is significantly higher.  Moreover, many rural areas lack 24/7 electricity resulting in long network outages and unstable connections. The aforementioned challenges discourage, to some extent, restrict citizens to be aware of the available financial services and reaping the benefits of digital banking.
State of Digital Banking in Pandemic
For urban areas, the pandemic has been the main driving force for producers and consumers to indulge in e-commerce. Since shops and restaurants were closed, people shifted to purchasing products through f-commerce and e-commerce. F-commerce is a branch of e-commerce that acts as a medium for transactions of goods and services through the Facebook platform. While f-commerce facilitates transactions and communication between users and vendors, it also poses challenges for governments and for users. For instance, governments may not have full traceability of the transactions to impose a tax on goods sold, resulting in a loss of tax revenue.
Other than e-commerce, B2P transactions also embraced MFS during the pandemic. Most readymade garment (RMG) owners required their employees to open their own mobile banking accounts in order to receive their salaries and other benefits. Therefore, the garment workers had to get familiar with digital platforms and over time, learned how to avoid paying illegal fees to banking merchants resulting in more savings and improved personal finance.  According to a recent survey of garment workers, it has been observed that embracing digital payments aided them in developing knowledge in personal finance. This study also proved that while just a small percentage of the population is linked to the country’s official banking system, those who are left out may nevertheless obtain financial services using mobile phones. The study indicates that Digital Banking will be crucial in the future in developing a resilient economy and improving the lives of the citizens of Bangladesh.
Why Digital Banking is Crucial
Digital banking — whether it is in the form of mobile banking, telebanking, or internet banking – incubates transparency in payment, ensures better cash management, and upskills finance information for consumers. Additionally, it speeds up the rate of transactions and the cash cycle as loan sizes are less so people can borrow more frequently. For instance, bKash in collaboration with City Bank shelled out BDT 500 – 20,000 loans to 2,689 customers totaling BDT 68.3 lakh with a three-month repayment period.  More importantly, bKash customers with paper-based KYC were not entitled to the nano loan due to a regulatory embargo eliminating red tapes.
In addition, digital banking can promote access to finance for marginalized communities and minorities. For example, the agriculture sector employs roughly 40.6 percent of Bangladesh’s total workforce.  Their ability to access and use formal financial services is imperative as the sector contributes to approximately 13.6 percent of the country’s GDP.  One of the main hurdles to these industries’ expansion has been a lack of access to capital. Nano loan services similar to bKash can bridge the gap to provide access to finance for these smallholders and the unbanked population. Therefore, innovation in services, delivery, and technology in the Digital Banking industry will enable new revenue streams for financial service companies while improving access to finance for the mass population.
Innovation in Digital Banking
Technology, although a fickle friend, has become ubiquitous in almost all economies around the world. Artificial intelligence (AI), data analytics, machine learning, and digital channels are projected to drive several professional services into obscurity. Fintech offers digital financial services that automate the process of borrowing and reduces loan disbursement costs, facilitate SME owners to receive collateral for bank loans, maintain financial accounts and keep track of transaction records. However, these benefits require significant technological, social, and legal innovations to trigger adoption. For example, privacy regulatory mechanisms for data ownership and preventing cyber-attacks must be ensured. The platform must be secure while highly robust to address the needs of the mass population. Integrating Blockchain technology will enhance data security and instill trust in the informal workforce.
Blockchain technology is a digital log of transactions that is copied and distributed throughout its network of computer systems in a decentralized manner. It eliminates intermediaries and ensures that all transactions are encrypted, anonymous, and immutable. Those who are unbanked face difficulties sending and receiving money as they frequently lack the necessary documents such as a passport, proof of income, access to the Internet, and a smartphone to create an account. Blockchain technology could alleviate their pain by ensuring their personal identity is safe and secure.
Additionally, innovative digital financial tools can assist low-income populations with building financial resilience. According to CPD’s former senior research associate Md Kamruzzaman, Bangladesh’s digitally delivered services (DDS) trade volume has expanded from $599 million in 2005 to $4,005 billion in 2019. This number is not very impressive when we compare Bangladesh’s DDS trade as a percentage of GDP to neighboring countries. As the textile and garment sectors account for a large portion of the country’s total exports, these industries and their workers should be equipped with digital banking tools. One way to do this is through the use of blockchain applications. For instance, “Leaf” is a Rwandan startup that allows individuals to send and receive money straight from their phone, even if it isn’t a smartphone without any need for a passport or access to the internet. In the same vein, “Kotani Pay” allows Kenyans to send and receive cryptocurrencies and then convert them to Kenyan shillings by dialing a short number on their phone. For these services, the only extra charge for international transactions is the currency conversion. Digital Banking platforms in Bangladesh should establish a way that allows customers to use their own accounts instead of depending on external agents.
Furthermore, the complexity and high operational expenses of banks left many people, especially small-scale workers, and the unemployed behind. The income of farmers and textile workers is uncertain and often erratic. When farmers confront a crisis, such as a flood, drought, or natural disaster, it threatens to overrun their savings. In the case of garment workers, they might need to withdraw small payments instantaneously in an easy and affordable way which cannot be fulfilled by traditional means of banking. One solution to such a problem has been developed in Kenya. Community Inclusion Currencies (CICs), invented by “Grassroots Economics” ensures resilience during challenging times by leveraging blockchain technology. Tokens, backed by the commodities and services in a community, such as water, food, or labor, can be issued. The villagers can then use these tokens to acquire a line of credit secured by their own assets, which they can utilize during an emergency.
While technological innovation will improve user experience, policy innovation will instill trust among users. Obstacles to creating MFS accounts should be minimized to streamline the registration process and encourage both current and potential customers to open and utilize their accounts. A simple registration process could encourage an estimated 2.73 million registered small businesses to open MFS accounts.  Security can be maintained by introducing an alternative to the orthodox PIN system such as biometric security software which recognizes the users automatically based on their behavioral or biological characteristics. Daily transactions can also be restricted to prevent money laundering and abuse of technology.
In summary, Even though 85.1% of the labor force is part of the informal sector, most of them are unfamiliar with e-skills.  They also cannot access loans from banks as they do not have the necessary documents or collateral. If they’re not saving money in a financial institution, it leads to depreciation and makes people more vulnerable to inflation which is tragic. Digital Banking Platforms and MFS can make a tremendous impact to build financial resiliency in low-income, rural and marginalized communities, and technological and policy innovation can make the impact more effective and efficient.