What's holding back growth of cashless transactions?

Digital financial transactions have increased by leaps and bounds over the past decade in Bangladesh, primarily driven by the impressive growth in the number of Mobile Financial Service (MFS) users. Estimates suggest that there are now more than 90 million active MFS users in the country, collectively conducting daily transactions worth nearly Tk 50 billion. With such rapid expansion in digital transaction, one would expect the dominance of cash to ebb gradually and the economy to move steadily towards a less-cash system.

However, the dominance of cash is showing no sign of abating. As the latest Bangladesh Payment Systems Report 2024 published by Bangladesh Bank reveals, although digital transactions - covering payments through mobile wallets, internet banking, and other electronic channels grew in volume in 2024, their share of total payments actually declined. The report shows that traditional, non-digital payments are now expanding faster than digital channels, while MFS are experiencing a drop in transactions.

According to the report, digital payments rose from 366.7 million transactions in December 2023 to 403.1 million a year later. However, their share of total payments dropped from 51 percent to 47 percent. In value terms, too, digital channels posted only marginal growth, increasing from Tk 751.4 billion to Tk 763.4 billion - a decline in share from 29 percent to 28 percent of total transaction value. In sharp contrast, non-digital payments expanded rapidly, growing 31.4 per cent in volume and capturing an even larger share of the total value.

This reversal underscores that a majority of people remain accustomed to traditional transaction systems, while it also reveals structural challenges within MFS that policymakers must address if the momentum towards a less-cash economy is to be sustained.

Bangladesh Bank attributes this trend to the increasing preference of MFS users for cash-out services over digital-to-digital transfers. This means that most users are relying on MFS primarily to send money from one place to another, rather than using their mobile wallets for day-to-day financial transactions. If users are increasingly withdrawing cash instead of keeping money within the digital ecosystem, the ambition of moving towards a cashless or less-cash economy is bound to falter.

This is particularly concerning at a time when policymakers have been emphasising the need to expand cashless systems, especially given that the country spends an estimated Tk 200 billion annually on cash management. This staggering expenditure covers the printing of currency, security, managing idle cash and operating ATM networks. Experts suggest that shifting towards a less-cash economy by expanding MFS usage and incentivising digital payments would significantly reduce these costs, and also enhance financial transparency.

In this regard, Bangladesh can take a leaf from neighbouring countries' playbooks on how they succeeded in popularising digital transactions. India's Unified Payments Interface (UPI), launched in 2016, has become one of the world's most successful real-time payment platforms, handling nearly 20 billion transactions a month with a transaction value approaching USD 290 billion. A key driver of India's success in popularising cashless transaction is that UPI offers completely free P2P transfers and most QR-based payments at zero cost, making digital payments more attractive than cash.

Sri Lanka, meanwhile, introduced its national QR standard, LankaQR, in 2018 and formally launched it in 2019 to promote interoperable, low-cost digital payments, including for feature-phone users. Pakistan's Raast platform, launched in 2022, offers free P2P transfers and has recently been supported by a government subsidy covering a portion of merchant QR transaction costs to accelerate adoption. These regional examples demonstrate the importance of cost-free transactions, interoperability, and government-supported incentives in driving mass adoption of digital payments.

Bangladesh's digital payments landscape is shaped largely by the dominance of MFS. Customers can receive funds free of cost, but cash withdrawals incur service charges. According to a study by Transparency International Bangladesh (TIB) Bangladesh has the highest MFS service charges among neighbouring countries. For instance, withdrawing Tk25,000 via bKash costs Tk372.5 to Tk462.5, compared to Tk355.7 in Pakistan (Easypaisa), Tk231.3 in Myanmar (Wave Pay), and no charge in India (Phone Pay).

Apart from high service charges, the universal Quick Response (QR) code payment system introduced by Bangladesh Bank, known as Bangla QR, is yet to gain popularity. Launched in January 2023, Bangla QR was designed to standardise QR-based payments across all banks and platforms. However, even nearly after three years, it remains absent from most storefronts. Many banks don't even have the updated mobile apps to support Bangla QR. Instead, stickers from mobile financial service providers like bKash and Nagad dominate the market, leaving the unified system struggling to gain a foothold.

The situation is similar for TakaPay, the local currency debit card introduced in late 2023 to reduce reliance on global payment networks such as Visa and Mastercard. Despite being the first of its kind, only eight banks currently offer it, and most consumers remain unaware of its existence.

Against this backdrop, experts argue that even if 5 per cent of Bangladesh's annual cash-management expenditure - estimated at around Tk 200 billion - were invested in promoting digital payments, the long-term economic gains would be substantial. Effective coordination among Bangladesh Bank, commercial banks, MFS operators and payment service providers is crucial to ensure seamless transfers from bank accounts to MFS wallets and to facilitate interoperability across all MFS platforms. Besides, Bangla QR and Taka Pay systems need to be promoted to increase digital payment system.  Bangla QR and TakaPay also need stronger promotion to expand digital payment usage.

The authorities can begin by mandating the use of Bangla QR for all merchants and shops. Obtaining or renewing a trade licence could require displaying a valid QR code. QR codes may also be issued to all bank, MFS and PSP users to enable quick person-to-person transfers. In addition, QR-based payments can be integrated into government service platforms, including electricity bills and Metro Rail ticketing. Such measures would significantly boost public awareness, increase the use of digital transactions, and accelerate the country's transition towards a modern, transparent, and efficient digital economy.

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