The discourse on innovation and regulation

The world is awash in paper currency as major countries' central banks are pumping out hundreds of billions of dollars worth each year mainly in very large denomination notes such as the $100 bill. And, most economists around the world have been arguing for two decades that all this cash is facilitating growth mainly in the underground economy, not the legal one. So, most countries have started a journey from cash-only transactions to less cash and thereafter, if possible, moving to cashless or digital money society. Central bankers of countries like Indonesia and Bangladesh believe that a less cash society is feasible and desirable for them immediately to become a cashless society in the longer term. Indonesia has already chalked out a mega plan to build a less cash society.

Cash may seem like a small, unimportant thing in today's high-tech financial world, but the benefits of phasing out most paper currency are a lot more. And it can be anonymous and untraceable, allowing it to play a large role in crime, including bribery, tax evasion, money counterfeiting, corruption and terror financing. However, a debate has been going on regarding the cashless economy or less cash economy among economists around the world. But most experts believe that the fairer and safer place for the economy would be a less-cash society or a cashless society for many reasons. With technologies such as voice and face-recognition, digital transactions are traceable, more secure than ever before, while payments can also be protected by end-to-end encryption and fraud-preventing technology.

The cost of using cash handling is one of the main reasons that encourages the people to dump cash in digital wallets. On the other hand, it is considerably cheaper to process card payments than to handle and manage cash. With physical cash, people choose convenience over other safe assets offering higher yields. During economic downturns, governments face challenges stimulating the economy by lowering interest rates, since people are likely to hoard their cash instead. With digital payments and no cash, people are unable to withdraw money from the financial system and governments and banks can leverage greater control of the economy stimulating more lending from banks and increased investment by businesses, as well as encouraging people to invest, lend and spend instead of amassing money.

Reducing use of cash saves employees' time and payroll costs by eliminating cash registers and visits to the bank. There is no need of guards for armoured cars. Across the globe, the study shows factories that pay workers digitally are five times more likely to follow exemplary social and labour practices than those that pay with cash or checks. There are also significant discrepancies between the countries. So, Bangladesh has taken a stand to reduce cash and building a less cash society and is moving ahead with full speed with its robust mobile financial service (MFS) industry, which had experienced an astronomical 120 per cent growth a year since 2011. Introduction of QR technology has already added fuel to the process and is helping Bangladesh move faster on the road to a cashless society.

To examine the possibility of a cashless society, the government has formed a committee headed by an Additional Secretary of the Ministry of Finance along with two members from Bangladesh Bank. According to a report published in a leading daily, the committee has suggested that the government move ahead towards a cashless society with an immediate target to build a less cash society.

Bangladesh's economy is moving ahead at a rocket speed with a mission to make Bangladesh a developed nation by 2030. Digital money can make it harder to evade tax and stop the capital outflow to a large extent. As a major part of real estate transactions consists of black money, ensuring cash-less transaction will be a good way for Bangladesh to curb black money. This kind of digital economy may help the government in financial inclusion and push up the banking penetration services.

Besides, the government generally spent a huge amount of money annually in issuance of a currency and its management. This amount may help the economy reduce deficit. There will also be a reduction in transaction cost for the citizens. The issues like counterfeit notes can be controlled by the mean of going cashless. So, transforming itself into a less cash society, Bangladesh can stimulate its economic growth reducing tax avoidance, cost of transactions and black money growth.

Industry experts say Bangladesh can leverage the advantages of a cashless society with MFS innovation as in China where without mobile phone nobody can think of buying anything from any market, shopping malls or store. A total of 18 commercial banks are rendering MFS services to more than 50 million people who are using this innovation not only for fund transfer but also for buying goods and services from shopping malls, restaurants and even on open footpaths. The big advantage for the nation is that its people are accustomed to innovations and they are quick learners - receiving benefit the soonest with all the people following the suit.

But there's still a long way to go for Bangladesh to replace paper money or coins with digital solutions. Powerful players are coming to invade the fast-growing payment landscape at a time when consumer rights protection, incidences of money laundering and fraudulence are the big concern for all. For example, Nagad, a digital financial service innovation of Bangladesh Post Office, is running its business under a different rule that confronts the central bank's regulations for other MFS innovations like bkash, Rocket, U-Cash and others. According to reports published in leading dailies, this new player allows its customers a higher amount of money- nine times greater than the existing MFS operators set by the financial regulator-Bangladesh Bank. This runs the risk of money laundering. This has created anarchy among MFS players and millions of customers who see it as a blow to the journey towards a less cash society.

Technology is changing the way we live. Technologies like NFC (near field communications) are already allowing shoppers to make even small purchases using ubiquitous smartphones and other portable devices. With the introduction of new point of sale (POS) technologies, businesses of all sorts - from a neighbourhood smoothie stand to a nearby farmer's market - can adapt to the cashless society. In payment landscape, many innovations have stood out and payment transactions have evolved from simple cash payments to bank cards and are now transforming again to encompass contactless capabilities. For countries like Bangladesh, China and Indonesia that have huge population in rural areas, the most effective innovation in payment is mobile financial service (MFS), which has had a profound effect on the poor's lives.

Disruptive innovators have entered the market to provide products and services which not only increase consumer welfare, and drive financial inclusion, but also force their competition to up their game. But an uneven playing field in the era of globalisation can create innovation winners or losers. The new book Innovation and Growth: Chasing a Moving Frontier, published jointly by the Organisation for Economic Cooperation and Development (OECD) and the World Bank, describes how innovation puts developing countries on an uneven playing field compared to the developed countries. In the book, experts show how the more open and global nature of innovation makes innovation policies more difficult to design, implement and monitor on the national scale alone.

To realise the promise of greater economic growth, incumbent businesses, challengers and the policymakers who regulate them need to find a balance that encourages fairness without either stifling entrepreneurialism or compromising the public interest. Finding this balance has proven difficult for businesses and industry regulators alike. An enabling environment and strict adherence to policy by innovation players are urgent to realise the promise of greater economic growth. Supporting innovation can also help regulators meet their objectives such as promoting competition and making markets work well for consumers.

Regulation should be risk-based and technologically neutral-i.e., 'same risk - same regulation'-for everybody. The same regulatory conditions and supervision should apply to all actors who seek to innovate and compete in the digital financial system. And all innovations require the most robust security and compliance capabilities to meet regulatory obligations, protect themselves from threat actors and instill confidence in their stakeholders. Regulators themselves also require secure and agile technology to support their own oversight activities and continue to ensure the stability of the financial system.

Regulators should not only be responsive but also be proactive so that the players can balance new product development with stability and consumer protection. They have to provide a level playing field for all participants (banks and non-banks alike), while at the same time fostering an innovative, secure and competitive financial market. So, innovation and regulation should go hand in hand.

The writer is a senior financial journalist and chairman of BJFCI  [email protected]. [email protected]