Brick-and-mortar banking set to get big shakeup as all rush for digital banking

Infographic: TBS

The banking landscape in Bangladesh braces for a monumental transformation, as traditional brick-and-mortar banking institutions, mobile financial service (MFS) providers, and telecommunication companies are actively pursuing licences to establish digital banks, following the central bank's opening door for applications starting from 21 June.

During the past month, approximately 60 name clearance applications have been submitted to the Registrar of Joint Stock Companies and Firms (RJSC) for digital banks. Among these applications, more than a dozen are from commercial banks, at least two are from MFS providers, and two are from mobile network operators.

Although the Bangladesh Bank has yet to receive any formal applications, the central bank is likely to extend the online application deadline, originally set to expire on 1 August, for another month in response to a request from trade bodies, officials concerned told The Business Standard.

The increasing interest in digital banking has made bankers consider various aspects of the changing future landscape of banking such as the number of licences to be awarded, the operational framework for these banks, potential impacts on employment in conventional banking, and the range of products they will offer, bankers said.

Digital banking activities are primarily carried out online through websites or mobile apps, a technology that is increasingly being embraced by many banks. This raises a significant question for both bankers and central bank officials: what differentiates traditional brick-and-mortar banks from their digital counterparts?

"The operational differences between digital banks and conventional banks are minimal," said a managing director of a private commercial bank, adding, "Yet, nearly all banks are considering entering the digital banking space by forming joint ventures."

Additionally, two major telecom operators are also exploring the possibility of establishing digital banks, according to insiders.

Taimur Rahman, chief corporate and regulatory affairs officer of Banglalink, reacted positively to the initiative, seeing it as a crucial step towards a "Smart Bangladesh".

"Banglalink is always looking for ways to better serve customers and is open to collaborations," he said. However, he pointed out that the timeline for the application process is short, which may pose a challenge for interested parties to participate.

Hossain Sadat, spokesperson for Grameenphone, stated that their company is committed to bringing more people into the digital ecosystem and contributing to the country's vision of a "Smart Bangladesh."

"Therefore, while evaluating the guideline (on digital bank), we will continue modernising our network with a focus on establishing a future-fit data network. This will enhance customer value and solidify our position as the number one network in the country," he added.

Banks mull forming joint ventures

Many banks are currently in negotiations with similar organisations to establish joint ventures as regulations stipulate that a single sponsor can only hold a maximum of 10% shares in a digital bank, according to industry insiders.

For instance, managing directors of seven private commercial banks recently convened a meeting to explore the possibility of forming a special consortium to obtain a digital bank licence. The banks involved in the discussion are Eastern Bank, City Bank, Mutual Trust Bank, Prime Bank, Trust Bank, Pubali Bank, and Dutch-Bangla Bank, according to insiders present at the meeting.

However, the final decisions have not been reached, and each of these seven banks is also exploring joint venture opportunities with other companies, as revealed by insiders.

The boards of some other banks also have stepped up to take a stake in digital banks.

Notably, Bank Asia's board has already made a decision to invest Tk12.5 crore in acquiring a stake in a digital bank, according to a bank disclosure notice.

Additionally, bKash, the country's largest mobile financial service provider, has applied for name clearance of a digital bank in collaboration with Brac Bank, as confirmed by a source from the relevant authority.

The second largest mobile financial service provider is also in the process of applying for a digital bank licence.

As of now, Bangladesh Bank has not announced the number of digital bank licences it will issue, Bangladesh Bank Spokesperson and Executive Director Mezbaul Haque has said.

He said no application was filed till Wednesday but eight applicants logged in for online application with Tk5 lakh fees. The full application will be considered when they will submit all relevant documents, he added.

The application window for digital bank licences, which lasted 41 days, was considered inadequate to complete the complex process of company formation, resulting in no applications being filed, according to a top banker.

Meanwhile, the Bangladesh Association of Software and Information Services (BASIS) and the Federation of Bangladesh Chambers of Commerce and Industry (FBCCI) have requested the Bangladesh Bank for an extension of time.

The banker noted that conventional banks now offer various digital services, reducing the need for customers to physically visit bank branches. However, downsizing the extensive branch network and managing the workforce involved requires careful planning and time, he added.

Conventional banks are gradually reducing their branch network to shift to a fully digital model, in response to the growing demand for smart services.

In light of the customers' psychology that digital banks will provide advanced services, conventional banks are considering taking stakes in digital banks, mentioned the banker, adding that conventional banks are planning to establish digital banks through consortiums with multiple banks to retain their customer base.

However, this shift to digital banking may result in significant job cuts within the banking sector, he observed.

Presently, the country's banking sector is oversaturated with 61 conventional banks, and the emergence of new digital banks will intensify the competition with similar loan and deposit products.

How digital banks threaten employment

Every bank opens new branches every year to reach out to more customers with their services.

Bangladesh Bank data show that there were 11,139 branches of 61 banks across the country as of December 2022 and they employ a total of 196,102 personnel, averaging 17.60 per branch. But, digital banks will not have any physical branches, which is why they will leave a negative impact on employment, especially for university graduates who have hardly any better jobs than banks.

The central bank has also slashed the yearly approval limit for opening bank branches to half for this year compared to last year as part of encouraging banks for digital expansion to minimise operational costs.

Banks got approval for opening nearly 100 branches this year when the number was more than 200 in the previous year, according to the central bank's data.

What differences will digital banks make?

As digital banks operate solely in the virtual world, they offer greater accessibility as customers can conduct transactions and access services anytime and anywhere through internet-connected devices.

Traditional banks have higher operating costs due to maintaining physical branches and staff, whereas digital banks often have lower overheads, which may result in more competitive fees and better interest rates.

Also, customers of digital banks can get virtual debit cards for online transactions, offering security and convenience for e-commerce purchases. Digital banks can provide instant personal loan facilities, leveraging technology to streamline the loan approval process and disbursement.

Digital banks are at the forefront of technological innovation, leveraging modern tools and analytics to deliver efficient and user-friendly banking experiences.

Requirements for a licence

The Bangladesh Bank has set the minimum capital requirement for a digital bank at Tk125 crore when a conventional bank requires Tk500 crore to get the licence.

A digital bank will be governed by the Banking Company Act, according to a guideline the Bangladesh Bank has finalised for placing in the next board meeting scheduled next week.

The minimum shareholding of each sponsor will be Tk50 lakh (maximum 10% or Tk12.5 crore), the guideline says.