Rationalising high MFS charges

Bangladesh Bank, the central bank of the country, introduced mobile financial services in 2011 mainly to bring the unbanked population under financial mainstream. The move was facilitated through high penetration of phone users in the country coupled with technological development in the payment system. Initially, it had issued 28 licences but the number now reduced to 15 Mobile Financial Service (MFS) providers each having banking stake. There are only four to five MFS providers now active in the market. The others have limited activities. Some again depend on the third-party service sourcing.

It is alleged that the charges on the services rendered by the MFSs remained high in Bangladesh as many the market forces (demand and supply) are not working properly. Only a few MFS providers have market powers, e.g., easy availability, large number of agents, customers and trust. They behave in the market like oligopolistic players. Small players like the mCash of the Islami Bank, an MFS of the largest private commercial and Shariah-based bank in Bangladesh, also charges the same rate as the big players.

Bangladesh Bank now permits cash in, cash out, individual to individual, individual to business and vice versa, individual to government and vice versa transfer through the MFS platforms under the latest guidelines issued in 2018. No cross-border transaction is allowed except the local disbursement of foreign remittances sent by Bangladeshis living abroad.

There are many positive aspects of the introduction of the MFS in Bangladesh's financial market as it had included many unbanked people so far, especially the female and elderly people. Consequently, they have been contributing to the expansion of the economy. It is a digital financial services that use ICT and non-bank retail channels to extend the delivery of financial services to the unbanked.

CHARGE IS HIGH: Charges of mobile-based transactions are high in Bangladesh notwithstanding the fact that several MFS providers are enjoying the market power --- easy availability, large customer pool and customers' trust.

However, competitive pricing has begun in one of the fastest growing financial sectors as the newest service provider - Nagad -- has poured cold water on the hot tariff regime by cutting charges down drastically recently. Nagad, a government-private equity MFS (mobile financial service) launched in March in 2019, has cut fees on the mostly used service -cash-out -- by almost 50 per cent to Tk 10 for Tk 1,000 transactions each. Nagad does not charge for some of its services it renders to their clients while others do. For example, 'send money', another popular MFS by bKash charges Tk 5.0 each time. bKash has, of late, started charging at Tk 15 for utility bill payment.  Nagad and some others still do not charge for giving such services to the customers.

However, Nagad is not included in the list of the MFS maintained by the central bank. It has a list of 15 MFS providers and all are bank-sponsored.

Bangladesh Bank is the licensing authority and the country's MFS regulator. A senior official of the central bank, however, told the Financial Express (FE) that Nagad has an interim licence to operate in the market. The latest regulations concerned say that MFS must be sponsored by a commercial bank with controlling stake. The Nagad is not bank sponsored, it has ownership by the postal department of Bangladesh and private equity.

The regulations issued in 2018 also say that MFS may be a separate entity like a subsidiary or SBUs. It may even be run by a bank. In case of a separate entity with the bank's majority stake, it does require maintaining separate capital expenditures. If it functions within the bank management, it does not need to maintain paid-up capital of at least Tk 450 million. 

The bKash is a subsidiary of the privately-owned SME focused BRAC Bank and has the highest capital base of Tk 1.32 billion, up by nearly 200 per cent than the required amount.

The Rocket is not a separate entity or subsidiary. It is being operated under the direct control of the Dutch-Bangla Bank. So, it does not need to maintain separate capital.

SureCash is not MFS, it is just a fintech service provider. So it does not need to maintain a separate capital base as per the Bangladesh Bank regulations concerned.

MARKET PLAYERS: Of the total of 28 MFS licences, only 16 MFS providers including Nagad remained in operation in the local market. They are all bank-led, except Nagad.  But only three to four players are active or visible in the market.

The visible or leading players are: bKash, Rocket, Nagad and SureCash (not MFS).

bKash is the market leader by agents and customers and very much popular among the clients despite the fact that it has introduced many pay services. 

Rocket, is also popular among garment and similar workers at different industrial belts. Employees belonging to the industry prefer its services as it has a large number of bank branches and ATM booths, even in semi-urban areas.

Nagad, a postal and private equity venture, has a good presence in the urban areas and has been trying to grab a large market share by offering attractive rates.

SureCash, a fintech firm, provides services to four banks having MFS licences from the authority. They are:  state-owned Rupali Bank, privately-owned Jamuna Bank, Bangladesh Commerce Bank and Shariah-based First Security Islami Bank. The SureCash and four banks focus on the transaction of educational fees and other government collection and disbursements.

So, actually seven MFS providers out of 16 (including SureCash services to four banks) have presence in the market. The other nine bank led MFS providers, in true sense, do not have any notable presence in the market.

Of the seven active MFS providers, three -- Bkash, Rocket and Nagad, in fact, are more active and aggressive players in the market. The main reason behind is nothing but countrywide agent networking. The three have around 60 per cent agent of total agents numbering over 1.0 million. If SureCash is added with it, the four together have around 70 per cent agents.  

Of the nine bank-led MFS providers that have little presence in the market, MCash of Islami Bank, Ucash of United Commercial Bank have some outlets in the city. They have approximately 25,000-30,000 agents each on an average across the country.

However, the high tariff or 1.8 per cent charges on essential MFS services are impacting the poor people. And big fees on the MFS platform are against the spirit of introducing the system in the country.

The central bank of Bangladesh introduced the MFS or mobile financial system sometime in 2011 on back of high mobile phone penetration and improved payment system in the country through a guideline empowered as per the Bangladesh Bank order of 1972.

The main objective of introducing such a system in the country, believed to be first innovated in Kenya sometime in 2007, is to include the people who remained unbanked, at affordable cost.

Facilitating inward remittances of millions of Bangladeshi people living abroad, government-to-people payment or G2P, salary disbursements are among few of its business scopes as mentioned in the MFS regulations of 2018, issued by the central bank.

OPINIONS AND SUGGESTIONS: When contacted, leading DFS/MFS providers said the rate or charge remained high as the service is associated with some big costs -- higher agency cost and maintaining security.

Senior officials of these entities said they need to maintain the same amount of cash with the different banks which must be equivalent to the daily transactions.

They mentioned the business model they pursue in Bangladesh or the agency model has to pay between 57 per cent and 80 per cent for each transaction.

An agent gets Tk 9.0-plus for Tk 1,000 transaction while retail charge is at Tk 18. The same amount he receives at a time when the charge is at Tk 10 for the same amount transaction. i.e., agents get the same financial incentive irrespective of charges.

Such homogeneous cost, spent for agents means that the variable cost of the MFS providers is the same.

The fixed cost may vary from firm to firm but the tariff at retail level is differing widely impacting the poor and limited income bracket of people.

To solve the high charges on the MFS market, experts are suggesting a more competitive environment.

They believe that only healthy competition will help emetge a feasible fee/charge for the people, especially the poorer segment of the population.

Abul Kasem Md Shirin, managing director at the DBBL and in-charge-of the Rocket, said: "A level-playing field is now required to have a healthy competition and sustainability of the providers."

On the other hand, some CEOs involved with the MFS, experts and economists who studied the matter told the FE that the existing rates need to be reassessed.

They argued that the charges are "too high" for the poor who constitute nearly one-fourth of the population.

And the poverty rate, by many research organisations, may even be higher as many lost jobs and business opportunities due to the on-going pandemic.

Over 164 million users of mobile phones do offer huge opportunities to the MFS in the country in terms of increasing economic activity, if the platform includes the large unbanked people who are denied access to the traditional brick and mortar banking system. 

However, the experts suggested that a feasible rate considering the financial strength of the poor may be set at a single digit and at best Tk 10 for each Tk 1,000 transaction.

This scribe contacted an Australian-origin MFS consultant who worked for a brief period in Bangladesh. She said as services improve then customers become more price-sensitive and start "shopping around" to find a better deal, so to say. But she said the potential market is large (in Bangladesh), it is still untapped, so as more people start using services, and providers diversify the rates and then it will be reduced.

"It is a supply-demand issue," the MFS consultant who ran a training for the financial journalists in Dhaka on the MFS told the FE, while seeking anonymity. But this (high charges) would be short-lived and as the market penetration increases the charges would reduce, she added.

She, however, insists: "An important element here is competition - more competition drives better prices." Comparing the local market with other economies, the consultant said in OECD markets (essentially free markets) it is the market that determines the price and the MFS providers compete with products and services and cut their rates to attract customers. 

On a query relating to the prevailing high rate, she said it differs depending on business models and scale, as well as number of market players at a given market and number of subscribers (or users of DFS).

"It is a combination of these factors that will influence the rate," she added.

Abul Kasem Md Shirin, the managing director of the Dutch-Bangla Bank Limited (DBBL), said: "Charges are set up on the basis of basic costs like agent commission, distributor or super-agent commission, telco sharing and SMS cost and taxes."

He said charge for the service, availability of cash withdrawal points, availability of cash deposit points (less important as most of the money deposited electronically like salary, remittance), brand image, advertisement and publication, campaign, cashback and less prone to the hackers are important factors while fixing the charges.

MARKETING: Although bKash is the second operator as it came in market after Rocket in Bangladesh, it has a market share over 55 per cent and had once enjoyed nearly 80 per cent market share. With nearly 250,000 agents across the country and a large customer base, bKash is now synonymous with the MFS in Bangladesh. bKash and Rocket both are widely advertised MFS/DFS in the country followed by Nagad. bKash and Rocket are so widely advertised that it seems that each agent is found in every 10 shops in Dhaka. They have both adequate digital marketing.

bKash said it is providing secure, convenient and widespread mobile financial services to the unbanked and banked people of Bangladesh and playing a significant role in fulfilling the unmet demands and ensuring financial inclusion.

Currently, bKash is maintaining a network of more than 240,000 agents throughout the urban and rural areas of Bangladesh to serve 49 million registered accounts, it said in a written statement to the FE. It argued that setting service charges (rate) depends on the cost structure of the services and it depends on the ambition to attract customers also. Currently, 77 per cent of the charge is spent on the agents and distributors, bKash said adding, "In MFS, vital factors are the investment in technological infrastructure as well as maintenance of a huge distribution network."

Responding to a question on the ideal charge/fees for customers, concerned officials of bKash said each service serves a different group of people. Though it may be segmented, we don't set separate charges in our country and keep it simple and ideal considering the operating cost and price point of customers.

According to the statement, customers choose their preferred MFS provider based on service quality, variety of product range, and availability, which means they consider how robust and smooth the services are, how compliant the company is and how many banks/financial organisations are integrated in the network.

bKash has another factor that earns the reliability of the customers, e.g., it maintains compliance in all its activities as it is a joint venture of BRAC Bank, Money in Motion LLC, International Finance Corporation (IFC), Bill & Melinda Gates Foundation and Ant Group (affiliate of Alibaba Group), the official said.

Admitting lack of uniformity of charges, bKash said the rate is variable in national boundaries as it purely depends on quality, competitiveness and reliability of the MFS providers. bKash customers can enjoy up to 4.0 per cent interest (per annum) on savings on their bKash account. They can avail 1.5 per cent interest for saving BDT 1,000 - BDT 5,000.99 in account, 2.0 for BDT 5,001 - BDT 15,000.99, 3.0 per cent for BDT 15,001 - BDT 50,000.99 and 4.0 per cent for BDT 50,001 and more.

Bkash said, a customer must do minimum two financial transactions (Cash In, Cash Out, ATM Cash Out, Payment, Send Money or Mobile Recharge) in a calendar month. Customers need to maintain a minimum day end balance of BDT 1,000 throughout a calendar month. Interest will be calculated at the end of the month based on the average day end balance of that month. The interest amount will be credited after necessary government Tax/VAT deduction to the customer's bKash account. The cumulative amount of earned interest will be disbursed in two terms in a year.

The agents who work as 'lifeline' of the business said they need to be adequately incentivised as they spend a large amount of their earnings for rents and other pertaining costs.

Costs of the country's accommodation or shops differ from one city to another. The business opportunities in metros like Dhaka and Chattogram are also huge. MFS service providers guessed the expenses but the MFS providers never studied while fixing the agency cost, according to some experts.

Service provider -- SureCash, is focusing on the educational payments or "edu pay". It also provides services relating to government payments and others.

It said every MFS provider wants to keep agents happy by offering incentives.

"We have around 100,000 agents, but we mainly focused on 1,500 school/college fees," said an official at the SureCash wishing not to be named.

Nagad is a new entrant in the market recently and expanded by 62 per cent over the past two months after cutting the charges.

Other service providers alleged that authorities concerned have been favouring it and giving rise to distortion in the market. 

Refuting such types of allegations, Tanvir A Mishuk, managing director of Nagad, said: "There should be at least a level of charge. It is quite high."

Mr Mishuk said it is also true that as the authority has no directive on this particular issue so mobile financial service (MFS) carriers are reluctant to reduce the cost of transaction.

"I must say that if the authority looks into the matter seriously the cost will surely go down," he said. "We never fix charges only for making money, rather we consider it as the means to empower people."

He also said as in the case of other players they also fix charges considering costs like agent and distributors' commission, mobile operators' charges and government levies. He said most people are choosing Nagad for their transaction, especially for cash-out, because customers can enjoy the lowest cash-out charge in the country.

Nagad said  it is now charging any fee for Covid-19 diagnostic fee transaction. This humanitarian approach has become very popular.

Nagad said: "We are giving interest on the deposit at 7.5 per cent rate. If anyone has at least Tk 5,000 in a month, he/she will get interest on this rate which is much higher than offered by the banking industry."

It said anyone earns Tk 500 as interest from deposit and pays it for cash-out charges.

Economists who are familiar with the matter told the FE the rate charged by some leading players is too high for the limited income group of people urging the authorities' concern to curb it.

They said the players must gain from the business as they have invested to make money but it should be rational and justified keeping in mind the large number of unbanked population and enhancing economic activity.

Dr Manzur Hossain, a senior research fellow at the Bangladesh Institute of Development Studies (BIDS), told the FE: "To my mind, the rate should be reassessed as it is too high for the poor people."

Preferring involvement of market forces, he said there was a need for ensuring more competition among the players by adding: "The options are to allow other players including the mobile phone operators."

He said currently there are many players but banks who have licences should form a separate entity like the bKash, otherwise they will not be competitive in the market.

 "There is a need for a separate entity for the business, like bKash, running a business staying within the bank is hardly possible." Dr Hossain commented.

Dr Zahid Hussain, a former lead economist at the World Bank, told the FE that the MFS market is a perfect example of 'monopolistic competition' and product differentiation plays a role on the charges.

Dr Hussian said: "There is now a strong regulation that will allow a label playing field for all players."

On the other hand, central bank officials told the FE that the MFS providers have come to do business and they have adequately invested in the business.

They said they will sit with the MFS providers shortly to discuss the issue of reducing charges.

 "Our head (BB governor) is pressing us to reduce the charges and we will sit with MFS vendors shortly," said a high official at the central bank.

In the meantime, many MFS firms now think to revisit the agency cost.

Jasim Uddin Haroon is a special correspondent at FE.

[email protected]

[This piece is produced under Bangladesh Policy Advocacy Initiative (PAI), conducted by Policy

Research Institute of Bangladesh (PRI). To prepare the article, the writer receives valuable advises from Dr Bazlul Haque Khondker, Director, PRI.]