Digitization of the payment ecosystem is an ongoing practice in economies across the world, as it has the potential to make an economy more efficient and accountable, while ensuring transparency and plugging leaks. According to an IMF report Bangladesh’s economy is the second fastest growing major economy of 2016; ranking 32nd among the largest economies of the world by purchasing power parity. This rapid economic growth entails an added emphasis on efficiency and demands a closer look into concepts such as Digital Payment System. This system has an impact on other broad areas of the economy. Before exploring these areas, however, it is important to understand the basic concepts relating to the domain of payment ecosystem.
Any monetary transaction requires at least two parties, namely, payer and payee. The system through which the exchange of value happens between the payer and payee is the payment system. Value is exchanged using payment instruments like cash, cheque, card, mobile money etc. The central bank, commercial banks, payment service providers and mobile money agents are some of the key-actors in the mechanisms. Integration of all these parties to facilitate the transaction between payer and payee forms the payment ecosystem of a country. If the instrument used for the transaction is in digital form, such as cards or mobile money, the transaction can be termed as a digital transaction. The payment ecosystem of an economy is usually never static; shifts in technology and cultural factors drive the economic and political gears that transform conventions in payment systems.
The rewards of digital payments can be reaped by people from all socioeconomic classes (SEC) and each participant of the economic process can be categorized as either a payer or a payee. In contrast to people from higher SEC who are already benefitting from digital payments by using cards or Electronic Fund Transfer, the people from lower SEC classes are gradually adopting mobile money for transferring international and domestic remittances and for making merchant payments. While digital payment system is well known as a tool for driving financial inclusion, its impact on the other aspects of the economy is also important. Adoption to digital payments brings higher potential tax revenue accompanied by a reduction in the grey economy due to lower unreported cash transactions for the Government, which in turn increases transparency and accountability. Businesses are benefitted from guaranteed merchant payments and individuals have to incur less cash handling cost.
Now, let’s recap Bangladesh’s foray into the realm of digital payments. In 2002, Bangladesh joined the massively popular movement towards digitization of payment system with the initiation of Q-Cash services, providing interoperability among banks, a shift facilitated by introduction of the first payment switch in Bangladesh. Major developments in the core banking system include the launch of Bangladesh Electronic Funds Transfer Network (BEFTN) in 2011 that enabled inter-bank fund transfer and National Payment Switch Bangladesh (NPSB) in 2012 that started interoperability outside the Q-Cash network. Mobile money was introduced in this market by bKash (a subsidiary of BRAC bank), while Mobicash (a GrameenPhone initiative) eventually followed suit. These are remarkable milestones for Bangladesh on the road to digitizing payments.
While the concept of digital payment is relatively new, the effects of these initiatives are already visible. Government entities, businesses, individuals and donors together make an estimated 367 million payments per month and 4.4 billion payments per year in Bangladesh, which translates to approximately USD368 billion annually. 6.24% of the total volume of transactions and 11.83% of the money in the economy are flowing through digital channels. An estimated 68.97% of the payments in terms of monetary value originating from the government are made using electronic means. This constitutes around 1.17% of the number of transactions on an annual basis.
In terms of value of payments, only 3.29% of the payments from businesses and 2.61% of the payments from the individuals are done electronically at the moment which presents a tremendous opportunity for the payment service providers and banks. Considering these empirical evidences, it can be concluded that digital payment ecosystem in Bangladesh is still at the nascent stage, while in developed countries like Canada, the percentage of digital transactions is well above 50% of the total payment ecosystem. The payment ecosystem of Bangladesh is illustrated in Figure 2.
Payments in an economy can be categorized into three broad categories, i.e. Few-to-Many, Many-to-Many and Many-to-Few payments. Few-to-Many payments refer to the disbursement of funds from one entity to multiple individuals or firms through a single payment transaction. When a firm disburses salary to its employees, it is an instance of one-to-many payment. When many payers pay one single or a few entities, it’s called Many-to-Few payments (e.g. Utility payments, Tax Payments etc.). Many-to-Many payments happen among individuals (Person to person payments, i.e. Remittance) and between individuals and businesses (Merchant Payments).
The shift is most apparent in Few-to-Many payments, as adoption from only a few parties are needed. Hence, in Bangladesh and almost every country in the world, the shift is observed first in Few-to-Many payments where 9.48% of the Few-to-Many payments transactions are made electronically which is 17.25% of the total Few-to-Many payments by volume.
On the other hand, only a fraction of the Many-to-Few payments are made electronically that amounts to USD1 billion or 5.45% of the total value. Hardly any payments to Government (Taxes, fees etc.) are made electronically by individuals or businesses and only 8.36% of all utility bills are paid electronically. However, this low percentage is not due to lack of infrastructural support. There are avenues to make numerous types of Many-to-Few payments electronically. Low percentages in terms of reach of the system and end-user adoption rate only attest to the huge room for improvement.
Bangladesh has seen a significant shift to electronic consumer spending and electronic remittances after the initiation of mobile money. The increase in migration from rural to urban areas in search of livelihoods causes continuous flows of money from breadwinners in urban environments to their families living rurally. A considerable chunk of this large volume of domestic remittances are being transacted through mobile money. This shift has been very evident in the last 3 years, after MFS became mainstream. Debit card payment usage has grown by 24% year on year from 2013 to 2015. While the shift to electronic payments is notable, it should be noted that all of these digital transactions, comprise of only 73 million transactions and just under 10% of all many-to-many payments per annum.
While each of the shifts may occur independently in theory, in reality, one shift is seen to influence the other. For example: the shift starts with Few-to-Many payments with people and businesses getting paid in bulk via digital means. If the income is then transferred to digital means, it is more likely that the spending can be done digitally and if someone is paid in cash, they are more likely to spend in cash.
With the increasing usage of MFS for domestic remittance in Bangladesh, people are becoming financially included, and can now receive and pay money using their mobile wallets. Here, the increase of digitization in Many-to-Many payments is influencing the other two shifts.
Bangladesh has already made progress in the way of making payments more digital and less cash. There has been a lot of direct and indirect initiatives that the Government is undertaking. The implementation of NID system linked to the Biometric SIM registration is a step towards ensuring security and privacy of the payers. While regulatory holes, ongoing OTC usage and absence of interoperability can be seen as obstacles for digital payments, if we consider the incremental nature of any efficient mass deployment, Bangladesh is progressing on a constant basis.
This article was written in 2018.
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