Digital banks: Dawn of a new era

In the last two decades or so, banks in Bangladesh have digitised many of their services and products. Its primarily cash-based economy has already made advancements toward a world of online transactions with the banks' rapid adoption of financial technology, expansion of the internet and the growing number of smartphone users.

Digital banking or digitally-enabled banking has already taken shape in Bangladesh's financial landscape with institutions offering their services online thus relieving customers of long queues and tedious paperwork for transactions. With increased transparency, user-friendly features and cost-efficiency, digital banking has made financial transactions easier, safer and faster for both financial institutions and customers. 

Now it is time for banks to go digital-only — a concept gaining ground worldwide. Digital banks offer all sorts of banking services and products through digital channels, without the need for physical branches. Many countries have already put the concept into practice and Bangladesh has also jumped on the bandwagon, preparing guidelines and collecting letters of intent from those willing to become the first in this new world of financial services. 

A total of 52 entities, including firms other than conventional banks and financial service providers, have applied for licences to set up digital banks, which will run under the Bank Company Act. 

In June this year, Bangladesh Bank approved the guidelines setting a minimum capital requirement for a digital bank at Tk125 crore, which is Tk500 crore for a conventional bank. 

The minimum shareholding of each sponsor will be Tk50 lakh (maximum 10% or Tk12.5 crore) when a sponsor of a conventional bank needs to invest a minimum of Tk10 crore to hold a minimum 2% share.

The requirement of less paid-up capital is one of the factors that encouraged diverse businesses like fintech and tech firms, insurance, telecom, microfinance institutions and mobile financial service providers on top of banks and financial institutions to set up digital banks, individually or as joint ventures.

The minimum threshold of sponsor shareholding, initially set at 10% of the total capital requirement, may be relaxed in a joint venture or special cases, the guideline says. A digital bank must go for an initial public offering (IPO) within five years of obtaining a licence.

Digital banks have no branches

Though users are now used to online banking services through mobile phones or desktops without visiting bank branches physically, the image of a typical bank branch with glass counters, desks and workstations with bank staff serving customers is still vivid in their minds.

A digital bank will serve customers using the internet from headquarters. Bangladesh is going to launch digital banks at a time when new-generation banks, which are globally viewed as a potential alternative to traditional brick-and-mortar banks, are being set up. 

In South Asia, Bangladesh initiated the process only a year after India and Pakistan formally launched digital banks in 2022.

Finance Minister AHM Mustafa Kamal announced in his budget speech in June that a digital bank will be launched in the current fiscal year. Accordingly, the central bank has prepared the grounds to set up digital banks.

At present, 61 conventional banks are operating in Bangladesh. There is an old debate on whether Bangladesh's economy needs so many commercial banks and suggestions for banking mergers are rife. So bearing that, is there any need for digital banks? 

Why digital banks?

Industry insiders believe digital banks will start from where conventional banks have stopped; they will serve the still unbanked and underbanked. Digital banks will reach those who are still out of reach of traditional branch-based banking.

Though mobile financial service has been instrumental in delivering the government's cash support straight to the beneficiaries, digital banks can support such social safety-net schemes in a more organised way as observed in India last year.

The Indian prime minister started the operation of 75 digital banking units as a vehicle to provide the government's financial support directly to the urban and rural poor. These units are, however, a bit different from digital banks, as they are set up in branches of existing banks and manned with staff to guide customers. These units are open 24/7 for use in self-service mode for banking services like cash withdrawal, deposit, fund transfer, investment, insurance, etc. 

Regulators and operators there feel the need for a 'limited human presence' at facilities to help new users in remote locations avail of bank services digitally. However, Bangladesh plans to go for a full-fledged digital bank. 

According to the guidelines, digital banks will not provide any over-the-counter (OTC) service, and will not have any branch or sub-branch, ATM/CDM/CRMs of its own.

Digital banks may issue a virtual card, QR Code and any other advanced technology-based product for facilitating customer transactions. However, it is not allowed to issue any physical instruments for transactions. Digital banks will not be allowed to transact in foreign currency or be involved in trade finance except collecting wage earners' remittances.

Though it has not yet been decided how many of the applicants will get the licence, the aspirants hold high hopes for the future of digital-only banks.   

One of the leading mobile financial service providers, Nagad, has applied for a digital bank licence. Its Managing Director Tanvir Ahmed Mishuk said mobile financial service has limitations in providing digital services and a digital bank is the only option to implement the government's vision to make 75% of banking transactions cashless by 2027. 

Mashrur Arefin, managing director and CEO of City Bank and Vice Chairman of the Association of Bankers, Bangladesh (ABB), told The Business Standard in an interview that a conventional bank can never turn into a digital bank.

Explaining the distinction between a traditional bank and a full-fledged digital bank, he said a brick-and-mortar conventional bank with its conventional mindset can at most offer a full suite of retail banking, small and micro-finance and card products through people's phone sets — which is just classical internet banking. 

"It can never turn into a digital bank. Never," he asserted. 

"Digital banks are a different thing altogether, it is essentially free of most of a conventional bank's conventions," he said, adding that it will allow customers to open bank accounts from anywhere with only an internet connection and get chat services, money transfers, deposit, loan and hundreds of other services.

The future of banks

Digital banks, though viewed as the future of the banking industry, still seem to be at an experimental level in many countries. There are a few trends that may gradually shape the digital bank landscape with the help of technology.

Digital-only banks can provide banking services at lower costs as they will not need physical branches and manpower. They will analyse customer data using AI and machine learning algorithms, and offer more customised services based on individual needs and choices, as personalised banking is set to become the norm in the future banking industry. 

Augmented reality and voice banking, which will facilitate customers' virtual interactions with banks will become new features of digital banks. 

With more and more people being comfortable with online banking services, the demand for all-digital banks is likely to grow, putting pressure on traditional banks to improve and expand their services. 

But digital banks are not going to replace physical banks altogether. 

This is more relevant for Bangladesh as we have low internet penetration, limited use of smartphones and a lack of technological literacy for the average population, other than millennials and tech-savvy youths. 

Cybersecurity is also a concern of digital banks. 

To protect customer data, and prevent cyber-attacks and frauds, these future banks will need to invest substantially in advanced cybersecurity technologies such as biometric authentication, artificial intelligence, and machine learning — the costs of which are also substantial. 

The Asian Bankers, which ranks digital-only banks globally, has found that the path to profitability is not easy for first and second-generation digital banks — like WeBank in China or Ally Bank in the US, though many of them have become successful by offering unique virtual services to customers. Just 29 of the top 100 digital banks globally are profitable, it said last year.