The future of banking or a flash in the pan?
While struggling to find the English for "Hujuge Bangali" I decided that its essence gets somewhat lost in any other language, so I gave up. In the 80s, there was a mushrooming growth of small-size textiles, followed by a boom in the garments industry.
While many made a fortune for themselves and the country, small-sized textile models seem to have vanished into thin air. Then came the rush for banks and NBFIs, giving Bangladesh probably the highest number of banks (61) and NBFIs (33).
And a similar case can be found in the insurance industry. What is taking the country by storm now is "Digital Bank", and everyone wants to have a "byte" into it. Hope we don't make a mess out of it! Let us understand the reasons behind the global craze of "Digital Bank". Customer adoption is fast for basic infrastructures like smartphones, data penetration, digital literacy, etc.
Examples are many, including, Webank (China), NuBank (Brazil), Uno Bank (Philippines), Chime (US) and Monzo, a digital bank in the UK that gained 1 million customers in just 2 years! The failure numbers are way more significant.
Digital banks can cut 20-25 per cent of their cost base by automating processes. They can realise improvements in profitability over conventional banks in about five years if implemented well.
The preference for digital banking is widespread. As per a recent survey, 89 per cent of US banking customers use mobile banking, and 89 per cent of digital banking users use mobile devices.
In Bangladesh, the biggest challenge lies in low smartphone penetration. Only 28 per cent people have smartphones, which is way lower than the average in other developing countries.
Another challenge is low credit bureau coverage. Only 5 per cent people have a credit report, which is much lower than the average in other developing countries.
This makes it difficult for digital banks to assess the creditworthiness of customers, which can lead to higher lending rates and lower approval rates.
The new "Digital Bank" (DB) guideline by Bangladesh Bank is unique in many ways -- 1. Typically, DB is founded by following the startup concept of the innovative founders supported by the investors. In this case, only wealthy organisations and individuals with "clean" money on their balance sheet can own it, which means there is little room for creators/innovators to join forces.
2. The guidelines mirror conventional banking regarding various ratios like CRR, SLR, CRAR, LCR, NSFR. It implies that no MFS can be upgraded to DB with their existing financial condition. MFS operators like bKash, Nagad, and Upay target bringing the unbanked into the bank. It may not allow DB to have the same level of success as MFS.
3. Under the new guideline, a new DB is unlikely to compete with successful MFS players in the market, who can quickly partner with other conventional banks for additional services like deposit and lending, although some are already doing it.
4. Unlike DB around the globe, the local model must play a steady growth game over valuation games, unlike the MFS or startups model.
The new guideline may be driven by conventional banks failing to make sufficient effort to be digitalised. It reminds me of a lavish party of banking big shots that I had attended where the host, an IT vendor from a non-banking background, said to a few CEO friends of the bank, "I don't know what I am selling; these CEOs don't know what they are buying, making me so successful in my business."
While the overall success rate of digital banks worldwide is relatively low, a few have succeeded to some extent, impacting the economy significantly. Our economy can achieve much more if our banks focus on customer experience, innovation, the right technology, talent and partnerships with supporting regulations.
The author is founder and managing director of BuildCon Consultancies Ltd