Strategic fintech reforms needed to spur innovation

Graphics: TBS.

As Bangladesh navigates this period of political and economic recalibration, there has never been a better time to address the systemic inefficiencies. 

One such systemic inefficiency exists in Bangladesh's fintech landscape, as demonstrated by the Bangladesh Bank's recent suspension of the only digital banking licence it awarded, due to suspicion of irregularities in the review process. 

In light of this, the need for reform in Bangladesh's fintech sector has never been more defined - for a robust, friction-free digital payment ecosystem is in line with the aspirations of Bangladesh 2.0 and the current needs.

To that end, a task force needs to be established to unlock the potentials of a fintech landscape centred on interoperability, innovation in digital credit and a consent-based data-sharing architecture. 

Interoperability and user experience in digital payments

Accelerate Bangla QR adoption 

Bangladesh Bank must accelerate the adoption of Bangla QR and mandate all financial institutions to replace their existing QR codes with Bangla QR by 2025.  

This will be a transformative step towards achieving true payment interoperability while simplifying consumer and merchant transactions with a universal QR-based payment system. 

This universality will reduce friction, streamline transactions and ensure seamless payments across platforms.  

More importantly, it will remove a significant barrier to entry for new players in the market, fostering a competitive environment that spurs innovation and improves services.

Invest in NPSB as the interoperability platform

To truly revolutionise digital payments in Bangladesh, integrating all banks, financial institutions (FI), mobile financial service providers (MFS) and payment systems providers (PSP) into the National Payment Switch Bangladesh (NPSB) is critical. 

In 2022, evidently, out of political considerations, Binimoy was put out -- and it derailed our path to interoperability. It was an unnecessarily complex, ineffective and redundant platform by all measures. 

NPSB is key to a unified and interoperable digital payments system in Bangladesh and the time to act for Bangladesh Bank is now. 

With some modest investment into the NPSB and a mandate that all banks, FI, MFS and PSP be connected, we can achieve full interoperability by 2025, if not sooner. 

Merge the dual licensing framework for digital payment wallets

There are currently two types of regulated digital payment wallets: MFS and PSP.  

Functionally, an MFS and a PSP can provide the same type of services to end-users but for one significant exception: an MFS can allow users to cash in and cash out through a physical agent network, while a PSP is barred from doing so, whether directly through its own agents or even indirectly through agent banking partners.   

True interoperability would mean that the university student living in Dhaka can use the digital payment wallet that he loves (perhaps for its brand, functionality or UX/UI) to access cash using his preferred digital wallet from an agent in a village in Panchagarh, when he visits his grandmother during the Eid holiday.

Establishment of a consent-based data sharing and exchange ecosystem

Build a data exchange platform and robust data sharing guidelines

Another element that inhibits fintech innovation is the lack of a well-structured data exchange platform and comprehensive data sharing guidelines-- both of which are essential for enhancing transparency and security in digital transactions. 

Countries like Indonesia, which has a personal data protection law, have set examples of balancing user privacy with effective data-sharing practices. 

Similarly, the PSD2 regulation in Europe has driven innovation by ensuring authorised third-party access to customer data, fostering competition and improving services. 

Adopting similar frameworks in Bangladesh will establish a clear, secure and efficient data-sharing environment, which will improve decision-making and service delivery across sectors.

Develop a centralised trade license system

A central trade license system is crucial for building a comprehensive SME data-sharing ecosystem. 

Currently, many proprietors operate without proper licensing due to the cumbersome and complex trade licensing process. 

If the interim government is serious about fostering an entrepreneur-led economy, as emphasised by Chief Adviser Muhammad Yunus, this process must be simplified. 

Centralising trade licences will streamline business registration and regulatory compliance, making it possible to establish a fully digitised licensing process within one business day. 

Implementing this through APIs will allow private developers to build solutions that enable seamless, rapid business registration, empowering small entrepreneurs.

Innovation and expansion of digital credit facilities

Create sandbox for credit products

The fintech ecosystem needs a regulatory sandbox to improve access to capital for consumers and SMEs alike. 

This framework would allow fintechs to test new lending products with close oversight from the central bank, encouraging innovation while ensuring protection. 

By employing alternative underwriting methods -- leveraging personal, transactional, and behavioural data -- fintechs can create more inclusive credit solutions. 

This alternative approach to drive financial inclusion and economic growth is not new for Bangladesh - it mirrors the practices of microcredit lenders who have successfully leveraged social collateral and unconventional assessments to extend credit. 

Alternative lending has the potential to revolutionise SME lending in Bangladesh, who often lack the paper trails and financial reporting required to access credit with traditional banks. 

Many operate as sole proprietors or lack formal licensing and structure, creating additional barriers to accessing conventional credit. 

The sandbox would facilitate the development of credit-building tools tailored to these businesses, helping them establish credit profiles and gain access to capital. 

Insights gained from these trials could be leveraged to shape comprehensive fintech lending regulations and foster collaboration between fintechs, banks and regulators, driving credit innovation and expanding financial inclusion in Bangladesh.

Establish robust private credit information bureaus

Bangladesh's credit market needs modern private credit bureaus to fuel digital credit growth. 

Drawing from India's example, where bureaus like CIBIL and Experian streamline credit underwriting processes with extensive data, Bangladesh needs a similar system to address delays and limited access in the current CIB setup. 

Unlike the CIB, which offers only a snapshot of credit status and fails to distinguish between intentional and unintentional defaults, the new credit bureaus should provide real-time credit histories and comprehensive risk assessments. 

Adopting a credit score-based model similar to those in developed countries would enhance risk management, improve creditworthiness evaluations and foster competition. 

This will accelerate the growth of digital lending and financial inclusion.

Overhaul the digital banking guidelines and licensing process

In 2023, the Digital Banking Guidelines were created and approvals issued with such unprecedented speed and alacrity that it would put to shame even the briskest start-ups in Silicon Valley -- let alone regulators around the world.  

The entire process of preparing and publishing the guidelines and evaluating the licence applications, lacked a semblance of transparency, public engagement or technical input from stakeholders - as the recent suspension of the only digital banking licence awarded indicates.  

Within a week of issuing the guidelines, the central bank invited applications for the digital bank licence. A six-week timeframe was given to make the application, which was not a straightforward process. 

Only when the entity that ultimately was awarded the licence failed to gather all documentation within the timeline did the central bank extend the deadline by another two weeks.

The letters of intent (LoIs) were issued seven weeks later to two applicants out of 52 and the stakeholders are none the wiser as to why they were selected from the draw.

The fact that neither of the two recipients of the LoIs was unable to roll out their services despite getting extensions raises the question of whether they were the right candidates at all.

To prevent a repeat of this episode, the digital banking guidelines must be reviewed and a new process initiated to appraise credible applicants.

Bangladesh Bank should consider forming a task force on fintech to prioritise these reforms that can catalyse the financial technology sector with relatively low effort. 

With decisive action, these reforms can not only drive the digital economy but also fuel broader economic growth.

Sketch: TBS.

Fahim Ahmed is the CEO of Pathao. 

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.