In a significant stride towards financial innovation, the Bangladesh Bank (BB) has paved the way for the expansion of digital banking within the country. This initiative aims to capitalize on the successes of mobile financial services (MFS) and internet banking, setting the stage for a fully branchless banking system in Bangladesh.
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Digital banks, also known as neo-banks, have made waves globally and in neighboring countries. While the concept is relatively new to Bangladesh, the country seems poised to embrace this financial evolution, propelled by substantial progress in mobile phone subscriptions, MFS, agent banking, and internet banking. The burgeoning number of digital-first customers signifies a readiness for the next phase of financial services.
Regulatory Guidelines and Market Response
In June, the Bangladesh Bank (BB) issued a comprehensive guideline for the establishment of digital banks, triggering a substantial response. A total of 52 applications were submitted by around 500 companies, spanning banks, non-bank financial institutions, MFS providers, mobile phone operators, IT firms, startups, pharmaceuticals, and cement manufacturers.
From these applications, Nagad Digital Bank and Kori Digital Bank received letters of intent (LoI) in October. Notably, the BB has extended approval to three bank-led applicants—Bank Asia-led Digital, BRAC Bank-led bKash Digital Bank, and Digi10, a consortium of 10 private banks—who can now launch digital banks, having already secured full-fledged banking licenses.
The regulator is also in the process of issuing LoI to three additional candidates:
- Smart Digital Bank
- Japan Bangla Digital Bank and
- North East Digital Bank
Potential Impact on Financial Inclusion
Chairman of Kori Digital Bank, Habibullah N Karim, emphasizes the significant potential of digital banking in enhancing financial inclusion in Bangladesh. Fintech, particularly digital banks, has the potential to expedite the adoption of financial services, marking a crucial step forward.
Nagad, a pioneer in digital banking, envisions digital banks playing a vital role in accelerating cashless transactions and fulfilling the government’s financial inclusion agenda. Tanvir A Mishuk, Managing Director of Nagad, underscores that digital banks can bridge the gap in reaching millions of unbanked individuals, especially in areas where traditional financial institutions lack coverage.
Global Digital Banking Trend
Globally, the digital banking sector is experiencing rapid growth. A 2021 analysis by mobile bank N26 and IT firm Accenture reveals that millions of customers are embracing digital banking for its convenience, a trend amplified by the Covid-19 pandemic.
Already, one in four customers worldwide relies on digital-only banks. In 28 surveyed countries, approximately 23 percent of the population, equivalent to an estimated 450 million customers, holds a digital bank account.
Digital banks globally offer a diverse range of financial products and services, leveraging technology such as mobile apps and artificial intelligence. This enhances the banking experience, making it more convenient, accessible, and user-friendly.
According to statista.com, the projected net interest income in the global digital banking market is expected to reach $822 billion by 2024, with an annual growth rate of 10.34 percent between 2024 and 2028. This growth trajectory is set to lead to a market volume of $1.22 trillion by 2028.
The success of digital banks on a global scale is attributed to their low-cost structure, sans traditional brick-and-mortar branches. This enables them to offer services and products at reduced rates, contributing to their widespread popularity.
Challenges on Horizon for Digital Banks
According to the N26-Accenture analysis, the ascent of digital banking is undeniable and is poised to further strengthen in the coming years. However, several challenges persist in this dynamic landscape.
Building Trust:
Earning trust remains a challenge as digital banking gains traction. Overcoming unfamiliarity with digital offerings is crucial for widespread acceptance, even as the appeal of simplicity, convenience, value, and safety drives substantial conversions.
Low Internet and Smartphone Penetration:
Fahim Mashroor highlights that the penetration of internet and smartphones in Bangladesh is still relatively low, posing a hurdle for the widespread adoption of digital banking.
Cybersecurity and IT Infrastructure:
Habib from Bangladesh Institute of Bank Management (BIBM) emphasizes that ensuring cybersecurity, developing robust IT infrastructure, and enhancing digital literacy are critical factors for the success of digital banking ventures.
Digital Literacy Gap:
The challenge of a low level of digital literacy is identified, particularly as the usage of mobile phones grows. A significant portion of the population using mobile phones may not be adequately digitally literate.
Preparations for Implementation:
The Bangladesh Association of Software and Information Services (BASIS), in a June meeting, outlined key preparations required for the successful implementation of digital banks in the country. This includes measures like personal identity authentication, real-time interoperable payments, and the establishment of a comprehensive credit bureau encompassing data from all lending institutions.
Untested Territory:
Zahid Hussain, an economist, notes that digital banks represent uncharted territory for Bangladesh. The successful introduction of digital banks will depend on the innovation of products and services that complement existing banking offerings.
As Bangladesh ventures into the realm of digital banking, these challenges underscore the need for a comprehensive and proactive approach to ensure the successful integration of digital financial services into the country’s financial landscape.
How will digital banks protect customer data and money?
As Bangladesh takes decisive steps towards embracing digital banking, the financial landscape is poised for a transformation. The advent of digital banks holds the promise of greater financial inclusion, accessibility, and convenience for the people of Bangladesh. With the support of regulatory frameworks and the enthusiastic response from market players, the country is set to embark on a journey into the future of banking—one that is branchless, digital, and designed to meet the evolving needs of its tech-savvy population.
Ensuring the security of customer data holds paramount importance for digital banks. Similar to any online financial institution, they face the risk of cybersecurity threats and must adopt multiple measures to safeguard customer information.
To address these challenges, digital banks can incorporate state-of-the-art security protocols, including robust encryption techniques, for both data in transit and at rest. This guarantees the confidentiality of customer data, making it inaccessible to unauthorized parties. Moreover, the deployment of strong firewalls and intrusion detection systems aids in monitoring network traffic and promptly identifying and mitigating potential security breaches.
Smart Bangladesh Initiative
The Smart Bangladesh initiative is a visionary plan aimed at propelling the nation into a technologically advanced and sustainable society. Building upon the foundations laid by the Digital Bangladesh initiative in 2009, this project further amplifies the accessibility of information and communication technology (ICT) for the people of Bangladesh.
Conclusion
As Bangladesh takes decisive steps towards embracing digital banking, the financial landscape is set for a transformation. The advent of digital banks holds the promise of greater financial inclusion, accessibility, and convenience for the people of Bangladesh. With the support of regulatory frameworks and the enthusiastic response from market players, the country is poised to embark on a journey into the future of banking—one that is branchless, digital, and designed to meet the evolving needs of its tech-savvy population.
