Restriction on credit card: Bangladesh Bank takes yet another step backwards

Bangladesh Bank has further restricted the online use of cards for settling transactions abroad.  BB instructed commercial banks on November 14 to take online transaction authorization form (OTAF) from clients for every foreign payment, irrespective of its size, in order to tackle illegitimate online transaction.  International credit cardholders will have to submit OTAF to their banks mentioning their name, card number, beneficiary name, amount of foreign currency and details of products and services to be purchased.

The banks will then activate the card after due diligence and the foreign payment option will be deactivated immediately after completion of the transaction. 

I could not find any country in the world that follows such a rule.

What motivated such a strange move? BB wants banks to strengthen monitoring payment through international cards to bar illegal transaction for playing online casino and gambling, forex trading, purchase of financial instruments issued in foreign stock markets, cryptocurrency and lottery ticket. BB reportedly believes the banks would not face any problem if they install artificial intelligence-based software to verify OTAF. However, such a software is not used by any local bank because merchant code for products or service mentioned by the BB can be used to identify the illegitimate online transactions.

Controlling illegal transactions doesn't necessarily mean you shackle everyone. While there should be vigilance exercised over unscrupulous transactions, it doesn't mean that everyone is brought down to the same level of restrictions.

This restriction came just before the launching of National Strategy for Prevention of Money Laundering and Combating Finance of Terrorism 2019 on November 17th.  The strategy identified trade-based money laundering, hundi/hawla, bulk cash smuggling, and transfer pricing as mechanisms used most commonly for transferring funds illegally. Online payments using international cards do not figure in this list even as a footnote.

Basic economics does not vindicate laissez-faire. Market failures abound and that fact offers substantial scope for improvement through sensible policy intervention. But policy interventions must be grounded in a rigorous answer to several questions: What is the exact market failure and is it sizeable? Does the regulator have the information and the instruments to correct the failure? Will the remedy's costs be offset by sufficient benefits? Such questions must be satisfactorily investigated before enacting new regulations. The BB is no exception to this rule. 

Bangladesh reportedly has about 1.5 million international cards. This very low compared to the size of the population and the number of banks. The most uniform and established mode of digital payments in Bangladesh is banking card, introduced in late 90's. The card market has not peaked yet although the dynamics has started to change in recent years. 

The e-Commerce sector has grown dramatically since the early 2000's when Bangladesh lacked widespread internet access or a reliable online transaction system.  In 2009, the BB began permitting online transactions. In 2013, the BB permitted the purchase and sale of goods and services online using international credit cards. 

The eCommerce Association of Bangladesh (e-Cab) estimates there are 700 eCommerce sites and around 8,000 eCommerce pages on Facebook.  The online business has developed into an annual market of around Tk 20 billion and is growing exponentially every year, according to the e-CAB. Cross-border eCommerce remains largely inhibited by a viable online transaction system and capital controls that prevent most outward flows of foreign currency for consumer purposes.  In addition, weak logistics infrastructure and irregular customs practices hinder the growth of cross-border eCommerce.  

Since 2011, there have been important developments in financial transaction regulation (mobile payments, digital wallets, and smart cards) as well as transaction infrastructure (e.g., electronic funds transfer payment gateways).  The creation of the Bangladesh Electronic Funds Transfer Network was a significant a step towards developing a modern payment system infrastructure.  This area of electronic payment processing services has already attracted local and foreign investment.  

Notwithstanding the US-China trade war, cross-border trade is growing rapidly as more and more companies source goods and services globally. While volume continues to grow, pressure is building on both banks and payment systems to improve the cross-border payment process. Cross-border payments are intrinsically problematic because of the lack of a single ubiquitous global payment system. Most payment systems are based on local laws and practices within existing domestic banking and financial structures; there is lack of a common global standard and variations between systems have reduced the ability of both bank and corporate systems to seamlessly pass data between each other; and government regulations are changing how payments are made. 

Domestic regulations such as the one just introduced by the BB will only compound the challenges of cross-border payments. Increase in global trade and improvements in physical supply chain efficiencies are creating demand for process improvements. The latest BB regulation regrettably will contribute significantly to process complication.  It is projected that 70 percent of business across the globe would be conducted online by 2025.  

In such a context, it is impossible to fathom why BB came up with such a strangulating requirement without waiting for the results of the government's decision to study to what extent the relaxed exchange controls are responsible for illicit flows of funds from Bangladesh.  We already know over 80 percent of the illicit financial flows are done through trade mis-invoicing.  

If anyone had doubts about whether BB is suffering from the "elephant in the room' syndrome, this latest move surely will dispel it.       

The author is an economist.