What is MFS?
Mobile Financial Service (MFS) is a digital approach that offers financial services using the combination of banking and mobile networks. It allows users to execute banking transactions without going through traditional hassle. This enables users to make deposit, withdraw and send/receive money from a mobile account. These services are generally carried out by bank agents. These agents allow bank account holders to transact money at independent agent locations without the need of going to bank. It only involves a connection between a mobile phone and personal/merchant bank account. It is a great opportunity to bring our unbanked population’s savings under our banking system and increase the amount of investment in the market.
Competition in financial markets and the drive for achieving higher market share are the major drivers in the expansion of financial services. This heavily impacts growth and financial development in countries like Bangladesh. Innovation in finance, either as a new product or a new process, has contributed to such competition and expansion of financial services. Technology and innovation have positive impacts on production and efficiency of institutional performance at the firm level and enables growth at the macro level. Two key factors that are perceived as major determinants of acceptance of technology by users are usefulness and ease of use. Low transaction cost, thorough security, convenience and low transaction risk made financial services easy and useful to its users. Mobile financial services have brought major changes in financial products and institutional structure. It has even reached the low-income citizens and small enterprises which eventually impacts economic growth positively and helps alleviate poverty.
Mobile financial service has the capacity to unlock the potential to acquire and serve new clients from the growing middle-class segment. Mobile banking is distinctive for its inclusive market structure and service offerings that gives a cost-efficient access to the lower income unbanked clients which is generally beyond the reach of mainstream banks.
MFS is imperative to build a cashless society. Companies like Alipay, Paytm have already become a household name in their countries and contributed to the dream of cashless society. Bangladesh is not lagging behind in this sector. The wind of change has begun and MFS is becoming popular in Bangladesh at an incredible speed. More and more Bangladeshis are becoming part of the service every day. The service is aimed at the large unbanked population of the country who still remain outside the domain of conventional banking as it is not possible to have bank branches in nearly 68,000 villages.
Overview of the local market
The mobile financial service market is at an early stage of development as providers are working to stabilize their technology, build agent networks and acquire new customers. This involves recruiting and training agents, marketing, getting customers accustomed to the process and acquiring customers by using know‐your‐customer (KYC) and account opening processes. A survey conducted by Bangladesh’s central bank found that the new services are reaching multiple parts of Bangladesh and that most clients and agents express cautious optimism about mobile financial services being valuable to them. Three quarters of the clients said their main purpose to use this service is to send or receive money, while the remaining one‐quarter highlighted safekeeping as the main purpose. Rural users specifically mentioned the benefits of receiving payments.
Initially it was hoped that international remittances would drive the mobile financial services but it has not been materialized yet. Similarly, earlier efforts to allow cash-out via mobile phones has not generated much volumes. It seems that Bangladesh is like many other markets where international remittances are more likely to follow rather than lead.
These developments offer promising signs regarding improvements in mobile financial services in future. However, big questions still remain unanswered. There is a significant upfront investment required to build momentum and none of the providers are yet covering their running costs. The rapid uptake by customers still needs to be proved. Bangladesh has a large population in a small geography. It is also home to one of the most deeply penetrated microfinance markets. Bangladesh’s overall access to accounts of adults is nearly 40% which is higher than South Asia’s average of 33% and the global low‐income country average of 27%. Nevertheless, most banks, mobile operators and microfinance institutions agree that mobile financial services are likely to focus initially on domestic person-to-person transfers that are very scarce among formal providers.
Although more than half of the Banks in Bangladesh are running MFS services, only two players – Dutch-Bangla Bank Limited (DBBL) and bKash of BRAC Bank are active in the market. Both of them have 100% coverage in terms of area of the country. However, some banks are focused on ‘banking’, while others are at ‘Money Transfer’. Only ‘Money Transfer’ can’t help financial inclusion. As a bank-led model, the MFS should focus more on savings and credit schemes, and provide various services on a single wallet (account). More attention should be provided to develop banking habit among the rural people. This will bring a huge amount of money into banking channel, and contribute to real financial inclusion and economic growth of the country. There are millions of shops in the rural area- sale proceeds of which is kept at shop or home. There is a huge amount of idle money lying around. Money at home or shop is not secured or safe. The habit of the rural people and small/micro enterprises can be changed by a joint ‘right’ drive of all the banks working in MFS arena.
Major industry trends
Bangladesh has registered significant growth in adoption of Mobile Banking. This sector posted an average of over 60% growth in all major metric as shown through data released by Bangladesh Bank.
In terms of total and active mobile banking users, this sector has grown 77% and 83% respectively in YoY basis. As of December 2016, there were 41.08 million registered and 15.87 million active mobile banking users against 31.85 million (total user) and 13.22 million (active user) of December 2015.
This increase has also impacted overall volume of transaction and amount transacted. There is a 79% increase in total number of transactions and 67% more money was transacted on YoY basis.
More user and increased money transfers have also attracted new agents. There were 0.71 million agents in 2016 across the country against 0.56 million agents in 2015, registering a growth of 79% on YoY basis.
Bangladesh has a mobile user base of 120.73 million as of October 2016 and a registered Mobile Banking user of 41.08 million (December 2016), which means there is a huge scope of bringing more user under the net.
Besides, 60% of existing MFS users are inactive, which gives a strong case for MFS providers to launch reactivation campaign as reactivating existing customer costs less than bringing in new customer.
Inward remittance using mobile financial services have increased by 20.8% to BDT 6.62 crore in March, compared to February’s BDT 5.48 crore, according to the latest Bangladesh Bank data.
However, to target rising illegal use of MFS, from February 1, 2017, the central bank brought down the daily ceiling of mobile cash-in to BDT 15,000 from BDT 25,000, while slashing the maximum cash-out limit to BDT 10,000 from BDT 25,000.
The monthly maximum cash-in limit was slashed to BDT 100,000 from BDT 150,000, and the maximum monthly limit on cash-out was brought down to BDT 50,000 from BDT 150,000.
Porter’s five forces
Threat of Rivalry: Currently bkash and DBBL Mobile Banking dominate the market. These two are covering the market very fast, beside this they are trying to increase their market share before any new players enter the market. But recently Islami Bank Bangladesh has introduced MCash. It could be one of main competitor for those two companies. In mobile financing industry there are some banks who are offering mobile banking and those are Prime Bank, Bank Asia, Trust Bank, Dhaka Bank, Mercantile Bank, Premier Bank, Jamuna Bank. But they are not concentrating on MFS so it’s easy to bkash and DBBL for capturing the market. After coming in to the industry Islami Bank’s MCash is doing well. M cash is doing aggressive marketing in terms of other companies. The visibility of the company is quite good. So, the rivalry among existing competitors is quite high.
Threat of New Entrants: Bangladesh Bank introduced a new rule that says every Bank should have mobile banking service which makes it easier to enter the market. Besides this Bangladesh bank has some regulation for new entrees. Existing companies have created brand positioning and economies of scale in coverage which acts as entry barriers. In addition, the price battle exists between the competitors in terms of service charge. So potential direct entry to the industry is relatively restricted at the moment, due to control over licenses. However, companies are finding other ways to enter the industry, i.e. through merging with existing operator’s mobile financing services.
Threat of Substitute Products: Mobile Banking is a high-tech industry and the substitutes that would replace the services of today are strongly related to the factor of innovation. Currently, bkash is the only company in the country who provides services in height agents point and ATM booth. However, the substitute services are not strong enough to compete with the existing offerings. So, the threat from substitutes is weak in Bangladesh.
Threat of Buyers Growing Bargaining Power: There are mainly 3 mobile banking operators in Bangladesh and they offer almost homogenous services which have low switching costs between operators and thus it has provided buyers with extremely high bargaining power. The bargaining power of buyers in this industry is moderate. With the exception of remote-area customers who have no alternative service available in their vicinity.
Bargaining Power of Suppliers: The bargaining power of suppliers in the mobile industry varies depending on the brand name and strategic importance of the network as well as the size of the company, such as Grameen phone, Banglalink, Robi, Citycell, Teletalk. In the mobile banking industry these types of suppliers have strong power in the industry. On the other hand, there are many potential suppliers and vendors in mobile banking industry e.g. various agents, merchants such as aarong, agora, bata.
Success story: bKash
bkash started its operation as a subsidiary of BRAC Bank on 21st July 2011 as a joint venture established between BRAC Bank Limited, Bangladesh and Money in Motion LLC, USA. Bkash users can deposit money into their mobile accounts and then access a range of services, in particular transferring and receiving money domestically, making payments and buying airtime top-up. The company has been operating in Bangladesh with the objective to ensure the access towards a broader range of financial services for the general people of Bangladesh. It focuses on the lower income group people of Bangladesh who hardly have access to banking and other financial services. More than 70 people among each 100 of the population of the country live in rural areas where access of the formal financial services is difficult. But these are the people mostly in need of such services, either for receiving funds from family members in distant
locations, or to access financial tools in order to improve their economic condition. Less than 15% of Bangladeshis are connected to the formal bankingsystem whereas over 68% have mobile phones. These phones are not only devices for talking, but can be and should be used for more useful and sophisticated processing tasks. bkash started utilizing these devices and telecom networks to extend financial services in a secure manner to the remote general masses of Bangladesh. International Finance Corporation (IFC) became an equity partner who is a member of the World Bank Group. Bill & Melinda Gates Foundation became the investor of the company in April 2014. Alipay, the Chinese mobile payment giant owned by Alibaba Group, purchased 20% of the shares of bkash. its technological capabilities.
The Role of Government
Mobile financial services are at the different levels in different countries. Government should play a role in creating an environment for developing a financial system that is largely mobile based which ensures flexibility for the operators and the banks. We consider that the government role can be elucidated based on the seven pillars of developing mobile financial services. The seven pillars can be broadly classified into four groups. The World Economic Forum in 2011 identified the seven pillars for developing MFSs.
Consumer literacy and awareness play an important role in mobile internet or money adoption. In Bangladesh around 56 percent of the households do not have any idea about mobile banking or mobile financial services. Even in the USA, more than fifty percent of the adult populations have ‘safety’ concern about using mobile money. These findings do clearly suggest that there is need for consumer literacy and awareness. Security and efficiency are another area of challenge. Mobile financial services should not be developed because it helps consumers and because everybody is talking about it. Individual approach will be required for selecting clients or subscribers. National identity smart card should be the basis for selecting clients. This will reduce risk of financing terrorism or informal use of money in informal inter-country border trade or business. For controlling criminal activities, the central bank has recently set a limit for transaction numbers, cash-in and cash-out of mobile banking in Bangladesh (Bangladesh Bank, 2015). Savings and credit through mobile technology need to be clearly perceived. Bangladesh is yet to enter into ‘mobile wallet’. But it is used in India and Pakistan, for example. There are other countries that are mobilizing savings and offering credit. Security of money or savings needs to be clearly examined. This has to be examined from the perspective of safety, institutional accountability and guarantee. Government as well as the central bank should ensure that infrastructures are developed and competition exists. This will help institutions to expand services with scale economy and offer the services at low cost.
Over-the-Counter (OTC) versus Mobile Money Usage
According to the 2015 InterMedia FII Bangladesh Wave Report, about 33 percent adults have access to MFS but only 9 percent have account ownership because customers are mostly OTC users. This is due to the lack of understanding on the difference between having an MFS account and making an OTC transaction.
As a result of this, there is no actual identification of those customers who are sending and receiving funds via OTC. MFS providers have yet to come up with innovative products or services that can make MFS a daily need for the customers.
Awareness versus Understanding
Awareness of MFS among adults is very high (92 percent), but only one-third of those are using MFS. They often argue that using an MFS account is difficult.
Mobile Phone Ownership and Technology Limitations
It is estimated that more than 90 percent of Bangladeshi adults have access to a mobile phone, although only around 64 percent are actually phone owners. Despite significant access, mobile phone usage is still fairly basic among most Bangladeshis. Only around a quarter (26 percent) have reported using a phone for advanced functions, such as using the internet or sending picture messages.
Furthermore, only 30 percent of adults have reported being able to send a SMS. Considering the fact that the most- used service access channel by the MFS providers is USSD and that most menus are in English, this represents a real barrier to increasing MFS adoption.
Limited Competition in MFS
Bangladesh Bank has issued 29 MFS licenses to banks, although only two providers (bKash and ROCKET) have greater than double-digit market share. While some of the smaller providers are attempting to drive innovation, such as through the introduction of Deposit Pension Scheme (DPS) accounts, they are impeded by lower investment and limited penetration.
The success of the main player, bKash, as a domestic remittance service, has also contributed to the perception among some Bangladeshis that MFS can only be used for P2P transfers, and not for other functions such as savings or bill pay.
Although MFS as a channel is generally more secure than cash. Bangladesh has recently seen a string of high-profile thefts perpetrated against customers, agents, and distributors. Increasing security of accounts and agent networks is a high priority for MFS providers, but as long as incidents continue to occur, they may negatively impact consumer confidence in MFS.
Growing mobile network in Bangladesh has brought forth new possibilities, which comprises of greater usage of cell-phones, smart-phones and internet service. The increase in technology usage in the urban areas is influencing consumer behavior, payment techniques and purchasing habits. Making the mechanism faster, hassle free and more customer friendly will surely ensure greater success in this sector. The silent revolution of mobile financial services will take a greater shape in years to come and promises incredible potential in turning the dream of cashless society into reality.
Ishrat Jahan Ikra, a Junior consulting associate of bKG, has prepared the write-up.