MFS interoperability: Factors to consider

Bangladesh Bank has decided to launch interoperability among Mobile Financial Services (MFS) providers. While this was announced last year, Bangladesh Bank, eventually, held off its implementation for some time as all the operators were not ready. 

MFS industry has been operating in Bangladesh for a decade. We have seen the benefits of MFS for customers and witnessed its impact on the overall economy of the country. And, MFS has played a significant role during the Covid-19 shutdowns.

Since 2011, 29 banks have acquired MFS licenses. Twenty eight of them were directly handled as another wing of the bank while only one had treated its MFS provider as a subsidiary. Later in the 'Bangladesh MFS Regulations 2018,' the subsidiary model was considered more successful. 

There are 13 active MFS providers in the market now. Among them, bKash has been performing best through the bank subsidiary model. 

In addition, new service providers have emerged since 2018, such as Trust Bank's Trust Axiata Pay (TAP) and Nagad, which is advertised as a Postal Department service. There is a lack of clarity in terms of actual ownership of the Bangladesh Postal Department or any other government entity for that matter. However, Nagad is yet to get Bangladesh Bank's MFS license.

Unfortunately, many of the MFS providers have failed to perform eventually. Only a few service providers are doing well – bKash, Rocket, Nagad, Upay, and TAP. Several years ago, SureCash started showing success through school stipend disbursement programmes, only to fail later on. 

This is where interoperability comes into play. So, what is interoperability? We know about the inter-financial relations among the banks – through cheques, debit and credit cards. It is a similar service we are now about to get through the Bangladesh Bank's regulatory assistance in the MFS sector.

Khondoker Shakhawat Ali. Illustration: TBS

As we head towards MFS interoperability, there are five things we need to consider – competitiveness, the capacity of the key MFS providers, customer awareness, diversification of products and the preparedness of the regulatory authority. 

From regulatory to technical aspects, we need to see the potential challenges that have been taken care of until now since the last time Bangladesh Bank had to backtrack. 

What Bangladesh needs to ensure from a regulatory perspective is that market competitiveness is maintained among the MFS operators and that all operators are bound within the regulatory framework set by Bangladesh Bank. It is also important to consider the compatibility between the central bank and the MFS operators. 

When we do something new, we go through various trials and errors. Similarly, this phase will be implemented by learning. We hope the central bank and the MFS operators will be able to approach the situation the same way any research and development department would. 

Above all, the customers' and national interests must be prioritised. Whatever we are doing, we need to make it consumer-friendly because the core tenet of MFS is inclusive financing.

Through the new phase, chances of interoperability between the bank and various financial services will be created. So, MFS rules and regulations need to be followed. If there are weaknesses in this regard already, there might be a bigger crisis sooner or later. I hope the regulatory authority will properly evaluate these issues. 

Why is competition necessary? Because we have seen that customer numbers of Nagad are on the rise. It is still not regulated by Bangladesh Bank and information about its ownership is not transparent even after two years since its inception.

In this case, we have to think about customers' confidence and security, and service quality. There is also a deficiency in fair competition. So, the alignment and adjustment of all the stakeholders are necessary.

After a decade of Bangladesh's MFS journey, we can classify them into three categories.  

First of all, the one that did well – bKash, is a bank subsidiary. In my observation, four factors earned them success: quality investments, quality technology, a robust distribution network and strong management. 

In terms of Bangladesh Bank compliance and digitisation, this bank subsidiary has reached a commendable level. Governance is also key. bKash has globally reputable shareholders like International Finance Corporation of The World Bank, the Bill and Melinda Gates Foundation and Alibaba-affiliate Ant Group and the world's largest technology investment fund, SoftBank. The leading MFS provider has also shown consistent commitment to follow Bangladesh Bank prescribed compliance, and have progressed well. 

Secondly, there are the likes of Rocket. They continued to maintain second place in the market. Being a leading bank, Rocket's parent entity has not shown a singular focus in MFS, whereas bKash is solely focused on MFS. 

In the case of Rocket, it is like a service instead of a focused business. Here we need new investment and upgraded technology – both of which are absent in Rocket so far. 

Thirdly, in the case of Nagad, it has yet to establish an ownership model. We can only hope that this model will take shape by fulfilling regulatory requirements and compliance of the Bangladesh Bank. 

Some other smaller services that took licenses are not progressing with a singular focus. So, we see a difference in their capacity as well. 

We hope Bangladesh Bank, from the perspective of capacity and technology, will create an alignment and adjustment between these different types of MFS and other types of providers to ensure uniform services at the customer level. 

Customers are at the heart of such services. If they are not confident enough and their demands are not fulfilled, this sector will struggle to extend its impacts beyond what we see today. 

Creating customer awareness about interoperability is essential. The customers' freedom to avail any service is essential too. 

In the case of the social safety net allowance disbursement, we have seen the ministries are currently selecting a certain MFS operator. It should have rather been the choice of the customers. The finance ministry has adopted this as a model but has yet to realise it. We hope to see a difference in the future where a level-playing field will be ensured.  

This interoperability will create a new lifeline in financial culture. As a result of this, the bottom of the pyramid will be benefited. 

Already certain bank services are being carried out via MFS. So, various interoperability opportunities, as well as service demands, will be created soon. But we must consider customer demand on top of everything. 

For example, we assume the services will be between the MFS operators like from bKash to Rocket, or vice versa. A large number of MFS customers use microfinance too. 

As a result, MFS can be used for instalment payment, disbursement and collection of microfinance as well. Thanks to interoperability, a creative financial landscape could emerge in our economy. 

There are challenges too. Suppose a customer comes across an issue while taking services through interoperability. What will the settlement process be like in this regard? 

Bangladesh Bank must have an arrangement for this. Besides, I hope Bangladesh Bank will set the charge of using interoperability services by keeping the customers in mind and by communicating with the MFS providers.

MFS operators have played a crucial role in investing and developing an inclusive and robust financial ecology that needs to get fair and market-driven pricing when interoperability goes live.

Otherwise, investment in this growing sector will be discouraged, and subsequently, the intended objective of interoperability will not be achieved. Rather, it might have the unintended consequence of slowing down an industry that is blossoming.

I foresee a huge impact in the financial sector thanks to interoperability that will create an interface between micro and macroeconomics. It will get integrated with our entire economic environment. The cashless society that we dream of, will soon be a reality. Interoperability will create huge opportunities for e-commerce and bigger businesses. 

However, the bigger this sector grows, the more the question of cyber security will emerge. So, the MFS operators will need to be up to the task and ensure safety in their operations and mechanism. Bangladesh Bank will also need to look after these issues. 

We hope interoperability will help in enhancing the inclusivity of the financial sector.  

The author is a sociologist and a researcher. He is an Emeritus Fellow at the Unnayan Shamannay and the Founder of the Knowledge Alliance.