Towards a cashless society with digital banking
Mir Mahmudul Haque Chowdhury :
Digital Banking is a virtual banking system that operates exclusively online without traditional physical branch networks. It is the application of technology to ensure seamless end-to-end electronic processing of banking operations. Digital banking is a part of the broader context for the move to online banking, where banking services are delivered via the Internet. The major difference is digital banks will have only headquarters, and no other physical presence while conventional banks have physical presence across the country.
This new business model of digital banking is getting very popular throughout the world especially at retail level. Traditional banks understand the growing customer demand for digital access and convenience and aware of the emergence of new competition within and outside the banking industry. Bank also recognizes adoption of various existing and emerging technologies will optimize their workflow and lower operational costs. On the other side, the Fintech companies successfully address the gaps left by traditional financial institutions along with new product development and innovating existing products and services.
Digital banks are extremely popular around the world and have already gathered hundreds of millions of users. Some of the largest and most well-known digital banks are Revolut and Wise from London, UK, Cash App, Chime, SoFi, MoneyLion from the United States and Nubank from Brazil, Argentina and Mexico. From the experience of other countries, it is found that collaboration between traditional banks and Fintech firms often resulted in the best form of digital bank. Australia, Brazil, Singapore, Hongkong, Malaysia, UAE, KSA have already implemented digital banking successfully to meet the ever growing customer demand.
According to the guideline of Bangladesh Bank, fintech companies, tech firms, microfinance institutions, mobile financial service-providers, banks and financial institutions encouraged to come into joint ventures for setting up digital banks. It will be governed by the Banking Company Act. A digital bank is allowed to use the agents of conventional banks or MFS providers complying with the regulations of the Bangladesh Bank from time to time. But a digital bank shall not have any agent of its own.
Bangladesh Bank has set the minimum capital requirement for a digital bank at Tk. 125 crore, where a conventional bank requires Tk. 500 crore to get the licence. The minimum shareholding of each sponsor will be Tk. 50 lakh (maximum 10 per cent or Tk. 12.5 crore), the guideline says. Digital bank must go for an initial public offering (IPO) within five years from the date of the licence issuance by the central bank and the IPO amount should be minimum to the sponsor’s initial contribution. The less capital requirement makes it easier for sponsors to get a stake in digital banks than conventional banks.
The prospect of such digital banking services in Bangladesh has already been partially demonstrated by the Mobile Financial Services (MFS) providers in the country like bKash, Nagad, Rocket,SureCash and others. At present, around 15 banks are providing mobile financial services. MFS can offer all kinds of key services except lending and deposits. Such lending and deposits can also be done in partnership with one or more of the scheduled banks.
The banking sector of Bangladesh is oversaturated with 61 scheduled banks and 5 non-scheduled banks. At this situation the central bank is going to introduce digital banks in Bangladesh when new generation banks across the globe are turning away from traditional banks to digital banking. India and Pakistan introduced digital banks in 2022 among the South Asian countries. ‘Nagad’ second largest MFS provider of Bangladesh is planning to set up a digital bank. Nagad approached to Bangladesh Bank for a digital bank licence in 2020 for the first ever in Bangladesh. Then Bangladesh Bank moved to formulate guidelines for digital banking.
According to the concept, digital bank will offer efficient, low cost and innovative digital financial products and services through an online end-to-end tech-based digital ecosystem using AI, machine learning, blockchain and other advance technologies of the 4th Industrial Revolution (4IR) to serve customer needs and reach unserved, underserved and hard-to-reach (hill districts, islands, etc) market segments for promoting financial inclusion. It will not provide any over-the-counter (OTC) service, and will not have any branch or sub-branch, ATM/CDM/CRM of its own.
Digital Bank may issue a virtual card, QR Code and any other advanced technology-based product for facilitating their customer transactions. But it is not allowed to issue any physical instruments for transactions. Digital banks will not be allowed to transact in foreign currency or involve in trade finance except collecting wage earners’ remittances. It has to comply with Corporate Social Responsibility (CSR) activities guided by the CSR policy of the Bangladesh Bank or as per instructions given time to time.
Digital Bank will have to maintain the minimum Cash Reserve Ratio (CRR) and Statutory Liquidity Ratio (SLR) prescribed by the Bangladesh Bank from time to time as per the Bank Company Act. A digital bank will have to maintain the Advance-to-Deposit Ratio (ADR) to the percentage as determined by the central bank from time to time. It will also have to maintain at all times a Capital to Risk-Weighted Assets Ratio (CRAR) and liquidity ratios (Liquidity Coverage Ratio and Net Stable Funding Ratio) as per BASEL III guidelines and instructions given by the Bangladesh Bank time to time.
It is important to remember that every benefit has some inherent risk. High proliferation of digital banking also fight with certain associated risk, i.e Security Risks, Beach of Privacy, Disparity in services, Cybercrime, Systemic risks etc. Against the backdrops, the banking sector of Bangladesh is now on the way of a new wave of technological innovation which will lead to a deeper level of financial inclusion through digital banking. It’s time to equip the people with a cashless society that enable economic activities with digital way.
(The writer is a banker).
