Insights from Exploring Mobile Financing Industry of Bangladesh

Prepared for Sheikh Morshed Jahan Course Instructor: Business Strategy

Prepared by
Saif Bin Rashid Tasnima Iqbal Kazi Noman Ahmed Tasnima Haque Orin Abdullah Al Rezwan Nur Hasan Arko Mazharul Islam Bin Towhid Radiyah M. Salim Ahnaf Mohsin Maleeha Tarannum ZR-62 RH-65 ZR-74 RH-75 ZR- 80 ZR- 83 ZR- 89 RH- 92 ZR-99 RH- 106

September 24, 2013

Table of Contents
1. Macro-Economic View of Mobile Financing in Bangladesh ............................................................ 1 1.1. 2. 3. Regulations of Mobile Financing ............................................................................................. 2

Mobile Financial Services and Service Providers: The Status Quo ................................................. 3 Exploring M-Financing in Bangladesh ............................................................................................. 5 3.1. 3.2. 3.3. 3.4. 3.5. Stakeholder Analysis of M-Financing ...................................................................................... 5 Industry Life Cycle ................................................................................................................... 6 PESTEL Analysis of M-Financing in Bangladesh....................................................................... 7 Porters Five Forces Model for Mobile Financing ................................................................... 7 Dynamics of Competition........................................................................................................ 8

Number of Operators...................................................................................................................... 8 Service Charges ............................................................................................................................... 9 Accessibility of Service Outlets ....................................................................................................... 9 Services ........................................................................................................................................... 9 3.6. 4. Porters Competitive Diamond Model .................................................................................... 9

Challenges and Opportunities Ahead for M-Financing ................................................................. 10 4.1. 4.2. Challenges for M-Financing .................................................................................................. 10 Potentials for M-Financing .................................................................................................... 10

Works Cited ........................................................................................................................................... 11

1. Macro-Economic View of Mobile Financing in Bangladesh

In Bangladesh, about half of the adult population is unbanked (48.49 percent) in terms of deposit accounts in the banks (Islam &Mamun, 2011). Though Bangladesh is not a very big geographical country to reach, in 2010, there were only 2.221 Banking Branches and 1.443 ATM Booths in per 100 square kilometre (Bangladesh Bank, 2011). That also reflects in the fact that there are only 5.28 Banking Branches and 1.28 ATM Booths for per 100,000 people in Bangladesh (Bangladesh Bank, 2011). This results in lower Financial Inclusion of Bangladesh. Financial inclusion or inclusive financing is the delivery of financial services, at affordable costs, to sections of disadvantaged and low income segments of society. However, it is very inefficient for Banks to expand its operation by rapidly increasing its branch network as it involves high cost and very low return (Chowdhury, 2010). Globally, e banking services usage is at a sharp rise due to responsive and convenient nature. In order to reach the unbanked population and give the customers a more convenient experience, the mobile financial services have been playing a major role. (BTRC, 2012)Of them, Mobile Banking, popularly known as M-banking has become extremely popular in emerging markets, especially in developing countries (Khan, 2012). To provide banking and financial services, such as cash-in, cash out, merchant payment, utility payment, salary disbursement, foreign remittance, government allowance disbursement, ATM money withdrawal through mobile technology devices, i.e. Mobile Phone, is called Mobile Banking (Wikimedia Foundation, 2012).
Figure 1 Mobile Banking Statistics of Bangladesh Source: (Islam I. , 2011)

Mobile Banking Insights of Bangladesh

Population: 150 Million Urban/rural split: Urban: 28%, Rural: 72% GDP (PPP): $305 billion GDP per capita (PPP): $2000 Literacy rate: 56.8% Remittance (% of GDPP): 11.4%

Banking penetration: 36% Mobile phone penetration: 65.77%

Agriculture generates over 17% of GDP, and has become increasingly important as policy makers grapple with climate change and spikes in global and domestic food prices. There is a shift underway to transition from subsistence to commercial agriculture.

The Banking Sector has responded to the agricultural needs, with increased products (notably cards and green financing) to support development of agriculture (and sustainable agriculture). Opportunity to examine mobile channel applications.

The MFI sector continues to grow, but with slower uptake amongst women entrepreneurs and increasing uptake with SMEs demonstrating market saturation in one area, and market diversification in another.

In 2011, the Central Bank issued Mobile Financial Service Guidelines which both clarified mobile banking opportunities for banks, defined clear roles, and signalled support for banking innovation. 1

Through these guidelines, mobile banking will be bank-led. Since 2011, two clear leaders have emerged BRAC/bKash and Dutch Bangla Bank/ DBBL. Both have extensive partnerships with the MNOs. BRAC/bKash alone has access to 98% of mobile subscribers, and a vast agent network an agent in almost every other Bangladesh village. Some more recent estimates note that bKash has over 2 million subscribers (IFC, 2013), a notable leader in this field. Despite these early advances a number of key issues still remain as it relates to access, usage, and diversification. A number of surveys indicated that awareness of the service is still relatively low , and trust/credibility of the service is preventing adoption. Those who do register for an account are using the service only once, and not deepening their usage or diversification of services.

1.1.

Regulations of Mobile Financing

Bangladesh Bank is the central bank in Bangladesh, overseeing all monetary policies and regulation of the financial sector. Banking, payment, and identification rules and guidelines have been updated in the last 10 years. Consumer protection laws do not apply to the financial sector, though are touched upon in the Payment and Settlement System Guidelines, and the Mobile Financial Service Guidelines. (Bangladesh Bank, 2011) Mobile Financial Service Guidelines were released in September 2011 (Boakye, Scott, & Smyth, 2011) (and updated in December 2011). Through these guidelines, mobile financial services are to be bank-led through licensed banks. Banks leverage a network of agents, and are accountable for ensuring that mobile accounts are indeed set up, and compliance with KYC protocol.

The three main regulatory bodies are: Central Bank, Home Ministry and BTRC.

Central Bank

Regulatory Bodies

Sets monetary policy and regulates the financial sector. Regulates banks and non-bank financial institutions. Regulates and oversees payment systems. License issuing authority, providing licenses operators who require a license in order to carry out their services. Oversight of internet services, VSAT, call centers, IP Telephone Services, mobile telephone services, vehicle tracking services. Creates and manages a national registration database. ID cards are mandatory and used for a variety of purposes, e.g. driving, tax, mobile, and cable.

BTRC

Home Ministry

Figure 2 Regulatory Bodies for M-Financing, Source (IFC, 2013)

Areas
Mobile Money Issuers Deposit Taking

Regulations
Guidelines for Mobile Financial Services for Banks, 2011 Banking Companies Act, 1991 Bangladesh Payment and Settlement Systems Regulations, 2009 Bangladesh Payment and Settlement Systems, 2009 Operating Rules and Procedures of Bangladesh, Automated Cheque Processing Systems Bangladesh Electronic Fund Transfer Network (BEFTN) Rules BEFTN Risk Management Guideline Guidelines for Mobile Financial Services forBanks, 2011 Money Laundering Prevention Act, 2002 Guidance Notes on the Prevention of Money Laundering Guidelines for Mobile Financial Services for Banks, 2011

Retail Agents

Customer Acquisition KYC/ AML Requirements

Table 1 Regulations of M-Financing in Bangladesh Source (Islam I. , 2011)

The law which directs mobile financing services in Banlgadesh primarily is Guidelines for Mobile Financial Services for Banks, 2011.

2. Mobile Financial Services and Service Providers: The Status Quo

Banks have been providing mobile financial services to 5 million people through around 117,000 agents across the country and the number of transaction every day is around 4.5 lac. Around BDT 112 Crore (Boakye, Scott, & Smyth, 2011) is being transacted through mobile banking services in the country every day on an average, helping the economy grow further by transferring money from urban to rural areas. (Islam & Mamun, 2011) Following are the names of the companies who were granted permission to provide mobile banking services by Bangladesh Bank:
Table 2: Mobile Financial Service Permission Granted by Bangladesh Bank Full Mobile Financial Services Permission Bangladesh Commerce Bank Bank Asia bKash (BRAC Bank) Dutch Bangla Bank First Security Islami Bank IFIC Bank Islami Bank Janata Bank Mercantile Bank International Remittance Only AB Bank Citi N.A Dhaka Bank Eastern Bank Jamuna Bank NCCBL Premier Bank Southeast Bank Standard Bank

One Bank Prime Bank Sonali Bank Trust Bank UCBL

(Karim, Islam, & Alam, 2012) The following authorized banks have started mobile financial service delivery: Service Provider bKash (BRAC Bank) DBBL Service Name bKash DBBL Mobile Banking EasyCash M Pay mCash Service Model Non-bank led Bank led Telecom Partners Number of Customers (in million) 3.5 1.38 Number of Agents (in 000s) 71 26

Robi, GrameenPhone, Banglalink, Airtel All operator except Teletalk

Prime Bank Mercantile Bank Islami Bank Bangladesh Ltd Bank Asia

N/A N/A N/A

Airtel, Citycell All operator

0.1 .032 N/A

13 6.5 N/A

iPay

N/A

Trust Bank

Trust Bank Mobile Banking

Bank led

iPay platform works on Smartphones only over the internet independent of telecom operator Any Operator

N/A

N/A

N/A

N/A

Table 3 M-Financing Service Providers and their specifications

Services offered and Tariffs charged by service providers: Service Provider bKash (BRAC Bank) DBBL Mobile Banking Charges (other than 2.0 % for cash-in & cash-out set by BRTC) 1.85 per cent for remitting money 2.0 per cent for remitting money

Services Provided Money Transfer, cash in & out, bill payment, international remittance Cash-in & out, merchant payment, utility payment, salary disbursement, foreign remittance, government allowance disbursement, ATM money withdrawal Cash deposit, withdrawal, fund transfer, utility bill payment, merchant payment, inward foreign remittance & salary disbursement Depositing and withdrawing money, payment of utility bills, reaching remittance to the

Prime Bank Mercantile Bank

Service Provider

Services Provided recipient, salary, fund transfer, product buying Cash in, Cash out, P2P fund transfer, IBBL a/c to mobile a/c fund transfer and vice versa, Merchant payment, Mobile topup, Foreign remittance Foreign and Domestic Remittance, Ektee Bari EkteeKhamar Project Cash Deposit & Withdraw Account to Account Money Transfer(P2P) Person to Business Payment(P2B) Business to person payments(B2P)

Charges (other than 2.0 % for cash-in & cash-out set by BRTC)

Islami Bank Bangladesh Ltd (mCash) Bank Asia

1.5% for Cash out; Send money from mCash

Trust Bank

Account Registration Fee at Accredited Pay Point Tk. 20; Tk. 10.00 up to Tk. 2000 and Tk. 5 Per Thousand above 2000.(In case of cash deposit & withdrawal at Pay-Point)

Table 4 Services provided by various M-Financing Financial Institutions

Following is the market structure of MFS providers:

Figure 3 Market Structure of the M-Financing Services

3. Exploring M-Financing in Bangladesh

To better understand the opportunities that lie ahead for M-Financing Industry of Bangladesh, we need to understand the environment in which M-financing is working in. We have done a Stakeholder Analysis, a PESTEL analysis for better understanding the operating environment, Porters Five Forces Model to see how much more the industry has to offer as well as identifying the Key Questions that need to be answered for this industry.

3.1.

Stakeholder Analysis of M-Financing

In Mobile Financing, the financers, customers taking the services, agents, dealers and employees providing the services as well as the telecom partners are Primary Stakeholders while the other players in the market, Bankers Association, Local Communities, Home Ministry would be the 5

Secondary Stakeholders. Finally, NGOs, International Development partners and media would be the tertiary stakeholders for M-Financing organizations.
Table 5 Primary, Secondary and Tertiary Stakeholders in Mobile Financing Services

Primary Financers,
Customers, Agents and Dealers and Telecom Partners, Central Bank, BTRC, Bangladesh Bank

Secondary
Competitors, Bankers Association of Bangladesh, Local Communities, Government's Home Ministry

Tertiary NGOs in
Debelopment Sector, Media, National and International Development agencies

3.2.

Industry Life Cycle

Till the end of 2012 Bangladesh bank permitted 14 banks t provide full mobile financial services and gave 9 more banks permission to provide international remittance services. (Mobile Financial Services in Bangladesh:An Overview of Market Development, 2012) Currently 17 banks are operating mobile banking activities, while the central bank has given permission to 26 banks in this regard.With the rising popularity and government support of
Figure 4 Industry Life Cycle for Mobile Financial Services Bangladesh

the service this sector is growing and getting more customers as well as competitors day by day. So, we can clearly see the industry is in the growth stage of industry life cycle model with a relatively new product, increasing numbers of customers and competitors.

3.3.

PESTEL Analysis of M-Financing in Bangladesh

Figure 5 PESTLE Analysis

3.4.

Porters Five Forces Model for Mobile Financing

Five forces model

Porters five forces are helpful to have a general perception of the challenges faced by a particular industry. The threat of new entrants in this industry is pretty high. So far ten banks have launched M-banking in Bangladesh. Being the pioneer in the industry, BRAC/Bkash and DBBL are currently enjoying firstmovers advantage. Six others banks have already gathered the license but yet to launch its services. It is fair to assume that in the coming days many other banks will come and try to tap into the huge potential of unbanked population.

Threat of new entry: HIGH

Threat of Substitution: LOW

Supplier power: MODERATE

The threat of substitution is low. Most of the banks, with a notable exception of Bank Asia, are actually targeting the unbanked population, especially the rural population. M-banking services have hardly any alternative in that target market. The bargaining power of supplier is moderate in this industry. Suppliers in traditional sense refer to providers of raw materials. Due

Competitive rivalry: HIGH

Buyer power
HIGH

to the different nature of banking services, the depositors are actually the suppliers. Individual suppliers have little power to impact the decision of the institution. The investors can also be termed as suppliers of the funds and big investors may have more influence in banks decision. (Karim, Islam, & Alam, 2012)
Figure 6: Five Forces Model

The bargaining power of buyer is also high. Because there are number of m-banking service providers in the industry and the switching cost is negligible, customers can easily make their choices and choose their preferred institutions services. As it has already been mentioned, 17 institutions have already got license from Bangladesh Bank for M-banking services. Therefore, there is no doubt that competition among the banks will be fierce in the coming days. It has to be noted that due to first movers advantage, BRAC and DBBL are currently enjoying higher growth within the industry. Overall, the competition rivalry is intense.

3.5.

Dynamics of Competition
Number of Operators The number of operators direct effect on the market the services are exposed to. For example Mercantile Bank is providing its M Pay service through Airtel and Citycell, limiting there total market size into around 90,000 mobile phone subscribers of Airtel and Citycell. (Ahmed, Iqbal , & Rahman, 2013)

Service Charges

Accessibility of Service Outlets

Number of Telecom Operators

Competition in Mobile Financial Service

Services

Figure 7: Dynamics of Competition in Mobile Financial Services

Service Charges High service charge of mobile financial service is one of the main factors affecting customer satisfaction where the service providers are not performing well. (Bari, 2013)The service providers charging less fees becomes attractive option to service users as cost of switching service is very low. Hence service charge becomes an element of competition. Accessibility of Service Outlets Accessibility is one of the key issues affecting customer satisfaction in mobile financial service market. Naturally, with the highest number of service outlets (71,000) (Islam & Mamun, 2011), bKash is the most accessible service provider across the country. The higher the number of service outlets and the more dispersed they are geographical and based on key locations, the more accessible it will become to the population. Along with accessibility, visibility is also important. (Bari, 2013) Services Another factor affecting competition is the services provided. The service providing able to provide more advanced services becomes more competitive. However, this factor erodes quickly as competitors catch up with the new service. For example, DBBL provided mobile top-up service and then bKash also recently started providing this service. (DBBL, 2012)

3.6.

Porters Competitive Diamond Model

Factor Conditions: High Tele-density, widespread human resource Status: Good Demand Conditions: Large untapped rural & urban market Status: High Supporting Industries: 6 MNOs, high area coverage Status: Good Stucture, Strategy, Rivalry: Negative attitude towards innovation and creativity Status: Unfavorable Government: Easy Licensing, Recognized by regulatory bodies Status: Favorable
Figure 8: Porter's Competitive Diamond Model

4. Challenges and Opportunities Ahead for M-Financing

In short, the Mobile Financing sector of Bangladesh looks promising if the companies can evaluate the environment and deliver their value in that manner. Some of the challenges and opportunities ahead have been identified:

4.1.

Challenges for M-Financing

1. Channelling the Services through the agents and the telecom partners gives them power and banks are highly dependent on them. Since banks are highly dependent upon these other parties, their cost remains higher and the profit margin lower. 2. Through the non-bank led approach, customer identification and transaction monitoring is in the hands of the agents. This poses a safety threat, because there is hardly any way of determining who the wrongdoer is should there be any crime such as money laundering or terrorist financing committed with this service. 3. The profits have to be shared between the bank, the agents and the telecommunication partners. The agents receive 50%, the banks 25% and the telecommunication partners 25%. (Bari, 2013) 4. Infrastructural Development issues for some organizations like DBBL, who alone invested around BDT 10 crore in mobile banking technology. 5. Bangladesh Bank Regulations limiting transactions up to BDT 25,000 can be transferred each day by a single mobile-banking account.

4.2.

Potentials for M-Financing

1. There is an untapped banking market of more than 9 crore to be reached through mobile banking. (Islam & Mamun, 2011) 2. Mobile banking can be a development tool for NGOs. 3. Mobile financing is very convenient, affordable, secure and speedy access to financial services across the country. 4. The average customer growth rate of the industry is on average 15%. (Huq, 2013) 5. The operators can come up with more value added services keeping the convenience of customers in mind for example DPS, insurance, bill payment, insurance, micro-loan etc. 6. Carrying Foreign Remittance through mobile financing 7. The RMG sector workers present a huge potential group of customers. 86% of the garments workers do not use mobile banking, which can be an effective market. 8. Promotes entrepreneurship, as m-financing has become a profitable source of income to the agents. Each of these operators earns at least BDT 18,000 month, encouraging SME businesses.

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Works Cited
Ahmed, A., Iqbal , T., & Rahman, M. (2013). Study on Mobile Financing Services: Problems and Prospects. Dhaka. Bangladesh Bank. (2011). Amendment of Guidelines on Mobile Financial Services for the Banks. Bangladesh Bank. Bari, A. S. (2013, June 4). Mobile Banking Scenario in Bangladesh. (K. N. Ahmed, & A. Ahmed, Interviewers) Boakye, K., Scott, N., & Smyth, C. (2011). Mobile For Development. United Nations. BTRC. (2012, Sep 18). Mobile Money Transfer. Retrieved Sep 21, 2013, from BTRC: www.btrc.gov.bd/index.php?option=com_content&view=article&id=285&Itemid=745 DBBL. (2012, June 12). Mobile Banking Agents and Merchants. Retrieved June 9, 2013, from Dutch Bangla Bank Limited: http://www.dutchbanglabank.com/DBBLWeb/mobileagents.jsp Huq, M. M. (2013, June 5). Head of Mobile Banking, DBBL. (T. Iqbal, Interviewer) IFC. (2013). IFC Mobile Money Scoping Report . Dhaka: International Finance Corporation. Islam, D. M., & Mamun, M. S. (2011). Working Paper Series: WP1101, Financial Inclusion: The Role of Bangladesh Bank. Dhaka: Research Department, Bangladesh Bank. Islam, I. (2011). The Bangladesh Telecoms Sector: Challenges and Opportunitites. Dhaka: Asian Tiger Capital Partners. Islam, M. S., & Chowdhury, I. A. (2012). An Evaluation of the Trade Relations of Bangladesh with ASEAN: Justification of Being a future member. European Journal of Business and Management . Karim, A., Islam, S., & Alam, R. (2012). Mobile Financial Services in Bangladesh:An Overview of Market Development. (2012). Mobile Financial Services in Bangladesh:An Overview of Market Development. Dhaka: Bangladesh Bank. Page, M. (2013). The Mobile Economy. GSMA.

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