'Gaining customer confidence will be major challenge for digital banks'

On 14 June, the Bangladesh Bank endorsed digital bank guidelines, allowing branchless operations with no in-person transactions. At digital banks, services will solely rely on mobile and digital devices. 

According to Abul Kashem Md Shirin, managing director of Dutch-Bangla Bank (DBBL), gaining trust will be one of the major challenges for a digital bank as people will see no physical presence of a bank where they are depositing money. 

He said conventional banks will have to invest at least Tk500 crore in five years in addition to the paid-up capital of Tk125 crore. Investors will also have to think in an innovative way to allure rural customers to park their money and avail services from a digital bank.

The Business Standard recently had an insightful conversation with him in this regard, where Shirin shared his thoughts on the challenges and prospects associated with the concept of digital banks.

There are currently 61 commercial banks in Bangladesh, numerous active MFS providers, and agent banking initiatives. What is the rationale behind setting up digital banks at this moment?

Conventional banks engage in a wide array of activities, including lending, credit cards, and various traditional banking services. Approximately 90% of their workforce is dedicated to these conventional banking activities. However, digital banking services require a bank's full commitment, which is often challenging to provide within existing conventional banks.

With a dedicated digital bank, you will find that the CEO is entirely focused on digital strategies. The top management, including the CEO, will prioritise digital promotion, campaign strategies, customer attraction, and service enhancement.

For instance, we have a mobile banking division called 'Rocket' within Dutch-Bangla Bank, while bKash operates as a separate subsidiary solely dedicated to mobile banking services. This separation of focus has enabled dedicated management for bKash.

How can digital banks and MFS providers collaborate effectively?

Existing conventional banks and MFS that already offer banking services using agents have an easy path to establishing digital banks, as they already have agent points that can be seamlessly used as cash-in and cash-out points for digital banks. 

A digital bank may only require a central office while leveraging the branches, ATM/CRM, POS terminals and agent points of other banks. In this scenario, banks will need to grant each other access for the digital bank to function efficiently. Establishing entirely new agent networks for a new digital bank operation would be prohibitively expensive.

Bangladesh Bank, as the regulatory authority, plays a crucial role in facilitating access to branches of all banks and their agent points, similar to how ATMs are shared by all banks. Banks can earn commissions by permitting access to their branches, sub-branches, and agents for digital banks, creating a mutually beneficial partnership.

Given that banks are struggling to turn a profit from their MFS wings — Nagad and bKash are still making losses — how can digital banks expect to be profitable?

We have observed two distinct models for MFS in the market. Some entities aim for immediate profitability in their operations, while others are willing to incur initial losses with the anticipation of achieving substantial transaction volumes. This latter approach is known as the balance sheet expansion model, where companies create value for the organisation and eventually take dividends in an alternative manner.

In a market with two competing business models, it is possible that one will eventually fail. However, digital banks will have to come into IPO (Initial Public Offering) in five years. This is good as banks will go for a profit-making model instead of balance sheet expansion. Digital banks must have to make profit to go for an IPO. 

Digital banks will require significant investments in IT security, software applications, and AI technologies. Over the next five years, they should anticipate an additional investment of Tk500 crore with a paid-up capital of Tk125 crore. Furthermore, it is reasonable to expect that digital banks may take at least five years to achieve profitability. 

To alleviate the financial burden of this investment, we have formed a consortium with 10 banks, allowing for a more distributed and manageable approach to resource allocation.

How challenging will it be for digital banks to attract deposits?

Building trust for a digital bank is indeed a formidable challenge. As per our experiences with MFS in the country, the majority of deposits come from agents and their personal accounts. And customers predominantly use MFS for transactions rather than trusting it as a repository for their money.

When you look at MFS outlets, you will often find shopkeepers engaged in various businesses, from selling goods to distributing cigarettes and tea, in addition to working as agents for MFS providers. People often harbour doubts about entrusting significant sums, like Tk1 lakh, to a stranger and whether these funds will be securely and transparently deposited into his MFS account. 

With digital banks lacking a physical presence, the trust challenge intensifies. Customers are left wondering to whom they are entrusting their money. They may think, 'If any issues arise, whom can I contact? Where is the head office in Dhaka? How can I lodge a complaint from a rural area?'

Therefore, new, innovative ideas with good intentions are necessary to instil trust, especially considering that banks operate under regulatory oversight.

The impact of digital banks on our society and the financial sector could be significant. Digital banks can help reduce informal money transfer systems like "hundi" by discouraging cash transactions. The fundamental concept of digital banking is to receive money digitally and spend it digitally — whether for various fees, bills, or shopping in the market — while minimising the reliance on physical cash transactions.

In rural areas, where people are not yet well-versed in using digital channels, what role can a digital bank play?

Digital banks rely on several infrastructures, with mobile apps being a primary tool. This means individuals need to download and use these apps, which may not be accessible to those with basic mobile phones. As a result, those who do not possess smartphones are initially excluded from these services.

Additionally, users need to have the knowledge and skills to navigate digital banking apps. To improve this knowledge base, awareness campaigns and training programs are essential. Digital banks committed to serving these communities will have to organise various training sessions and seminars.

Marketing also plays a crucial role. Since digital banks lack physical branches and personnel, creating a market presence is vital. Effective marketing campaigns spanning television, mainstream media, and social media are necessary to reach and convince potential customers that the digital bank can provide secure and reliable services.

Operating expenses for digital banks are considerably lower compared to traditional banks. This is because they do not require physical branches or ATMs. Consequently, digital banks can often offer more competitive interest rates on deposits due to their reduced operating costs. Additionally, lower operating costs can lead to reduced lending costs, making digital banks an attractive option for borrowers.