IDTP: Digital financial services need a level playing field

The government of Bangladesh has taken a great initiative to build a new platform (switch) that will enable the real-time transfer of money from one platform to another. The ICT Division has given the budget to build the platform for the Central Bank i.e., Bangladesh Bank.

The interoperability facility will be given to banks, MFS operators and payment service providers (PSPs), which would give a major boost to the cashless transaction in the country.

According to a central bank document, the government will provide Tk56 crore to set up the IDTP and the central bank will govern and operate it.

So far I have found that a Bangladeshi local software company named Orion Informatics Ltd is developing this platform for the central bank.

This is not the first switch for the Central Bank.  There are four active switches to carry billions of taka every day from one account to another.

1. Bangladesh Automated Cheque Processing Systems (BACPS)
2. Bangladesh Electronic Funds Transfer Network (BEFTN)
3. National Payment Switch Bangladesh (NPSB)
4. Bangladesh Real Time Gross Settlement (BD-RTGS)

NPSB and RTGS play vital roles in real-time digital transactions. NPSB routes most of the digital transactions today. Internet Banking, Cards, POS - all flow over this single switch. Consumers also have the choice to transfer a larger amount of money via RTGS in real-time. Moreover, BEFTN works mostly in the back-end to transfer money among institutions. General customers do not see that much.

Mobile Financial Service (MFS) Providers and Payment Service Providers (PSP) are not connected to NPSB. Therefore, there is no seamless money movement among those platforms. A few systems are connected directly by using APIs between them.

Say, iPay is the first PSP that is connected to Brac Bank through a real-time API in Bangladesh. But, this is not the solution for a country with a vision to go digital. We need a scalable switch that can connect all the players in the ecosystem. I am expecting IDTP (product name: Binimoy) will play that role.

I am not going to discuss the technical capabilities of IDTP here. My primary goal for this article is to set up the right pricing model for IDTP so that the industry comes to a level playing field for everyone to make this country digital, and faster.

Switching must be free

It must be ensured that IDTP is built with public money. The ICT Division has already given Tk56 crore. And, I am hearing that this project will receive more funding to increase its capabilities.

I do appreciate the ministry taking this lead. But, as the IDTP is being developed with public money, Bangladesh Bank should not charge any fee for the transaction. Bangladesh Bank does not charge any fee when we use BEFTN.

This new IDTP must operate under a similar model. If they put any fee for transactions, the whole purpose of building a national switch gets distorted. To enable a cashless society, this must be free.

The existing pricing model of the players!

Five major parties will be using this modern switch. So far, transaction fees are defined for each player.

1. Banks - there are 61 scheduled banks in the country. Transferring money from one bank to another bank (internet banking) costs you Tk10 for each transaction. It's zero if you use BEFTN (it takes 1-3 days to settle).
2. Cards - Visa, Master Card, Amex, Union, JCT and many others. All are real-time. But, transaction fees vary between 0.95% to 3.5% (Amex).
3. MFS - there are 12 providers (according to the BB website). The central bank has set both the cash-in and cash-out fee as Tk9 for each Tk1,000. It means the customer has to pay Tk9, whether you do cash-in or cash-out. But the current practice is that the operators are not taking any fees during cash-in, but taking double during cash-out (which is against the fundamentals of any transaction). And, we are seeing that some operators are charging Tk9 for cash-out (keeping the cash-in free). It means, the cost of a one-leg transaction is Tk4.5 (for Tk1,000).
4. PSP - There are five e-wallet providers (according to BB Websites). There is no defined transaction fee as of today. (That's why I am writing this piece.)
5. ATM Network - more than 10,000 ATMs nation-wide. More are coming. The defined transaction fee for any ATM is Tk10 for each transaction. (ATM networks may not be directly connected to IDTP, but they can be accessed via NPSB.)

The principle of transaction fees

A closed network (whether a Bank, MFS or PSP) can operate the way they want. In a closed network, no other party has any impact. But, once we build something interoperable, we must come to a point where everyone has to follow some rules of the game. Otherwise, it will fail for sure.

Here are the fundamentals of an interoperable platform:

1. Every channel has its own benefits and cost structure. Say, Amex card charges 3.5% of the transaction amount as a fee, whereas BEFTN charges zero (0).
2. Consumers will pay for the channel they are using, and it must be half-leg (Cash-In or Cash-Out) basis. Telecom Operators have followed this model for years: if you make a call from GP to Robi - GP carries one leg of the call, and Robi carries the other leg of the call. The current model of charging nothing for 'Cash-In' and charging double for 'Cash-Out' will not work here. This is fundamentally a flawed system, adopted by our MFS providers.
3. Consumers decide which path to use – Bank (BEFTN/RTGS etc.), Cards (Visa/MC/Amex etc.), ATM, MFS or E-Wallet. They will pay for that path. So, Amex customers will pay 3.5% as that is their rate; and BEFTN customers will pay nothing, as they are using that channel.
4. The consumer will bear the cost of that channel, not the operator (here Banks, MFS, E-wallet etc.).
5. If an operator wants to subsidise their consumers, that's their own choice. This should not impact the system or other operators.

The existing fee structure

I have created a table (A) for better understanding. This is what it is today. Now, we can improve any leg to facilitate the ecosystem of digital financial services.

The MFS pricing is based on the current cash-out price i.e., Tk14 for Tk1000. But, a few MFS are offering Tk9 for cash-out (keeping cash-in free). In that case, the fee should be 0.45% (instead of 0.7%).

Recommendations

Based on the current scenario of the multi-platforms (channel) nature of the digital financial services in Bangladesh, I have three recommendations:

Firstly, to protect every player, we have to ensure the "single leg" transaction fee. The consumers will pay the cost of the channel they are using, whatever the fee is. The regulator can set that price. We cannot follow the similar model of MFS today (Cash-in fee Zero, and Cash-out Fee Double), which will create many holes to funnel out the money, by bleeding many operators. I can create many use cases like this.

Secondly, IDTP will not add any extra fee to the system.

Finally, all digital transactions (except cash-in and cash-out components) will be free within the IDTP network. There should be no cost to send money from one platform to another.

I hope people who are working in the digital economy will understand the system and fix this model forever. I am also open to hearing if anyone has a better pricing solution for an interoperable switching system.

Zakaria Swapan. Sketch: TBS

Zakaria Swapan is the Founder & CEO of iPay (Bangladesh) and Priyo

Disclaimer: The views and opinions expressed in this article are those of the author and do not necessarily reflect the opinions and views of The Business Standard.