How to motivate people to use digital payments at local stores

Illustration: TBS

Over the past decade, mobile financial services (MFS) have gained immense popularity in Bangladesh, with 70 million active users conducting transactions worth 40 billion taka daily. MFS is widely used for local money transfers, salary and government disbursements, utility bills, and mobile phone top-ups. 

Notably, it is absent in retail payments at stores for everyday necessities. Card payment adoption in Bangladesh is also very low, primarily due to the low penetration of POS devices among shops and a lack of customer awareness. There are 35 million plastic cards in circulation, with 85% being debit cards, and the rest being credit cards. 

It's commendable that the Bangladesh Bank has initiated steps to tackle this gap in the market. Their introduction of the Bangla QR standard represents a pivotal shift in retail payment methods, promising to redefine in-store transactions in the coming years. 

In June 2023, the Governor of Bangladesh Bank launched the Cashless Bangladesh initiative across 64 districts, including Dhaka City. Major MFS players like bKash and Rocket, 30 banks, and the PSP TallyPay have already rolled out their QR code-based services. 

Now, a bKash app customer can easily pay at a shop using an Islami Bank QR code, and a DBBL NexusPay user can pay at a store using a TallyPay QR code.

Bangladesh Bank has set an ambitious target: achieving 75% digital payments in stores by 2027. Given the international successes with interoperable QR payments, we believe this goal is attainable with coordinated efforts between Bangladesh Bank, other banks, and payment service providers. 

We witness an influx of 10 billion taka daily into mobile financial services. The 40% of the population who own smartphones, approximately 30 million MFS users, plus a comparable number of bank app users, are all prospective QR payment clients.

There is a key difference between popular MFS use cases and shop payments. When urban workers send money home, money traverses significant distances. Also, MFS bill payment saves time and hassle, compared to going to a bank branch. 

The challenge is how can we motivate individuals to use digital payments for everyday purchases at local stores? This needs a shift towards "proximity payments," where transactions are made digitally on the spot.

The current pricing structure presents a major challenge to the growth of digital payments at shops. For a digital transaction, there are typically four parties involved in addition to the payment intermediary: the customer, the merchant, the customer's service provider (issuer), and the merchant's service provider (acquirer). 

As per the existing Bangla QR pricing regulation for regular merchants, the merchant discount rate (MDR) stands at a minimum of 1.6%. 

In comparison, the interchange reimbursable fee (IRF) is set at 1.1%, whereby the acquirer deducts MDR from the merchant and the acquirer pays IRF to the issuer. 

For this discussion, we assume a popular MFS service, xCash, and another digital-savvy bank, yBank, support digital payments. Suppose a customer using xCash spends 1000 taka at a shop that uses a QR code from yBank. 

While the merchant sees a 1000 taka balance in their QR account, transferring it to their regular bank account results in only 984 taka after 1.6% MDR deductions. 

Of the 16 taka MDR, xCash receives 11 taka IRF as the issuing provider, and yBank gets 5 taka as the acquiring provider. For the merchant, this 16 taka deduction appears excessive, especially when the customer is around for a cash payment.

Price and IRF disparities also pose complications in the market. 

For regular merchants, Bangladesh Bank deducts 1.1% IRF for xCash customers making payments at Bangla QR. Suppose yBank offers Shwapno Super Shop its Bangla QR code product at 1.5% MDR to cover this cost, only to find that the merchant already uses xCash's proprietary QR code at 1% MDR. 

How can yBank's Bangla QR offering possibly compete with xCash's price in this scenario?

For the vision of a cashless Bangladesh to materialise, the requirements of three primary stakeholders must be met:

For Customers: Digital payments should be straightforward and not exceed the cost of using cash.

For merchants: It must be economical for stores and businesses to accept these digital payments, and they should be able to utilise the digital funds effortlessly.

For Service Providers: The service must be profitable for the issuers and the acquirers at scale, or its sustainability is at risk.

For retailers to embrace QR payments, the transaction costs must be minimal and tolerable. Given that this pertains to proximity payments, retailers don't necessarily perceive significant value in digital transactions, except in sporadic cases where eager buyers have insufficient cash but possess a loaded smartphone wallet. 

Person-to-person transfers in Bangladesh are currently priced around 1.5%, typically involving one deposit and one withdrawal. For in-store QR payments, our market understanding advises that the MDR should be roughly half of P2P, perhaps around 0.7%.

Practices in some other countries also support this pricing. 

Both Alipay and WeChat Pay levy a 0.6% MDR for merchant payments in China. In Thailand, the interoperable QR code system PromptPay, operates with an MDR of 0.5% for merchants and an IRF of 0.1%. 

The Philippines has set the MDR and IRF for QR code payments at 1.0% and 0.3%, respectively. Interestingly, our neighbouring country, India, has aggressively opposed digital retail payments. 

The QR code MDR is zero for most transactions using bank accounts and digital wallets (0%). This is achieved due to India's widespread financial inclusion efforts over the past decade, resulting in a bank account penetration of over 80%.

However, implementing a reasonable MDR for Bangla QR payments faces a unique challenge in Bangladesh. The region's most successful mobile financial services carry significant deposit costs as a hidden sunk expense behind customer wallet balances. 

Take xCash, for instance. For a customer deposit of 1000 taka at an agent point, xCash incurs costs amounting to about 6 taka, payable to the agent, distributor, and mobile network operator. This cost becomes the biggest barrier against reducing MDR and IRF for QR payments.

So, how can we accommodate this in the QR pricing design? Presently, attempts to rectify this have involved setting the IRF at 1.1% and a minimum MDR of 1.6% for regular merchants. 

While these figures are undeniably steep and will act as a major deterrent for Bangla QR adoption, it is possible to address the underlying issue at its root: the high hidden costs associated with MFS wallet balances. This cost should ideally be contained within 0.1% of the transaction value.

When xCash was initially launched, the strategy was to attract users; hence, they refrained from charging for cash-in services. Yet, as cash-in and cash-out services have gained traction and people have grown accustomed to paying for mobile financial services, the pricing model may now be changed to address the elevated hidden costs. Fortunately, some countries have already implemented this. 

M-Pesa introduced a 1% deposit fee for transactions exceeding KES 10,000 (approximately USD 10) in 2018. Similar fees have been established in the Philippines by GCash in 2019 and by JazzCash in Pakistan in 2022. Also, in Bangladesh, it is interesting to note that when MFS was first launched by Dutch Bangla Bank in 2010, the service charge for cash-in or cash-out was 1%.

It is important to note that implementing a fee for some deposits isn't straightforward for such a popular service in the country. Ideally, prices would be updated such that the total cost of local remittances does not increase, even if a part of the cost is applied to cash-in services. 

It might initially lead to a temporary dip in transaction volumes, but we anticipate transaction numbers to rebound within weeks. As previously mentioned, nations like the Philippines have already navigated similar transitions.

By introducing the Bangla QR scheme and launching the Cashless Bangladesh campaign, Bangladesh Bank has set the wheels in motion. Establishing an appropriate pricing mechanism for MDR and IRF is critical for the success of Bangla QR payments. 

Assuming we can sidestep the hefty hidden costs borne by MFS providers, we propose that the MDR for merchants be set at 0.7% and the IRF at 0.4%. Revisiting our initial scenario where an xCash user pays a yBank retailer 1000 taka, the retailer would now receive 993 taka. 

The 7 taka payment service commission would be divided, with 4 taka going to xCash and 3 taka going to yBank.

Bangladesh stands on the cusp of a digital revolution. Ensuring the right pricing, cooperation, and inclusivity are paramount as we inch closer to realising a cashless Bangladesh. 

With stakeholders working hand-in-hand, the promise of a digitally empowered Bangladesh is on the horizon.

Dr Shahadat Khan, a fintech enthusiast and practitioner, is the Founder and CEO of TallyKhata and TallyPay and serves as the Co-chairman of the BASIS Standing Committee on Fintech & Digital Payment. 

Note: This article reflects the personal opinion of the writer and not necessarily the views of TallyKhata, TallyPay, or BASIS. The examples are for illustrative purposes, and more consultation is needed for detailed pricing design.

Disclaimer: The views and opinions expressed in this article are those of the author and do not necessarily reflect the opinions and views of The Business Standard