Digital Banking: A Way Forward Beyond Borders

 

Very recently, central bank has issued a ‘Guidelines to Establish Digital Bank'. This is a new initiative on the part of central bank. In the preamble of the Guidelines, it is said that digital innovation is continuously modifying the landscape of the financial system all over the world. Central bank facilitates to promote an enabling regulatory environment that allows innovation to make the financial system more robust, efficient and secure. It highlights the role of digital platforms in driving greater efficiency in the delivery of financial products and services and in widening the outreach of the financial system.

The Guidelines states that it is a compilation of instructions requiring to be followed by applicants/ promoters/ sponsors/ shareholders who are willing to establish a digital bank in Bangladesh. The instructions of the Guidelines need to be followed by the proposed digital bank along with Bank Company Act, 1991, and other guidelines, circulars and circular letters issued from time to time.

This is a milestone decision taken by central bank. Simultaneously with the issuance of the Guidelines, central bank has issued a notification regarding the requirement of paid up capital for new bank. The required capital is enhanced to 5 billion Taka from 4 billion Taka for establishing a new bank. On the other hand, required capital for a digital bank is 1.25 billion Taka.

The Guidelines contains 14 paragraphs such as status, capital requirement, fit and proper test for directors, operational framework, different regulatory compliances, application formalities for obtaining licenses, etc. Of the different issues, operational framework constitutes a vital part, containing 23 items. It states that a digital bank is required to establish a registered head office in Bangladesh for serving the main point of contact for stakeholders, including central bank and other regulators.

It focuses automated artificial intelligence (AI) supported technology-based dispute resolution mechanism to be in place to resolute day to day disputes aroused from transactions, whether there is any intimation or not made by the customer. Digital bank is required of offer efficient, low-cost and innovative digital financial products and services through online end-to-end tech-based digital ecosystem using artificial intelligence, machine learning, block chain and other advance technologies of 4th industrial revolution (4IR) to serve the customer. Digital bank is allowed to use the agents of conventional banks or mobile financial services (MFS) providers, network of existing automated teller machine (ATM)/cash deposit machine (CDM)/ cash recycling machine (CRM) and MFS network instead of its own agents complying with prevailing regulations issued from time to time. It is restricted to provide any over the counter (OTC) services, and cannot establish any branch, sub-branch, window, agent, or any ATM/CDM/CRM of its own; digital bank is to issue virtual card, QR Code or any other advanced technology-based product for facilitating its customer transactions. Restrictions are also there to issue any physical instruments for transactions.

The Guidelines allows digital bank to execute cross border transactions. It said that digital bank can execute permissible transactions in foreign exchange pertaining to inward remittances, outward payments, and maintaining eligible foreign currency accounts in compliance with regulatory framework in force including retention of compatible digitized records. In this context, it needs to have authorized dealer (AD) license under the Foreign Exchange Regulation Act, 1947. Foreign exchange transactions exclude trade and guarantee services, the Guidelines said.

Digital bank needs to maintain relevant regulatory parameters including the minimum Cash Reserve Ratio (CRR) and Statutory Liquidity Ratio (SLR) prescribed by central from time to time.

Establishment of digital bank is a step to use fintech in banking system. The application of innovative fintech is found with the accommodation of MFS decade back. The concept of digital bank may be an upgraded version of MFS, containing different banking services.

It is true that presently banks use different technologies in providing banking services. But traditional banks provide services sitting in physical branches. The faceless banks can be of support to such customers without physical interaction. As a result, the banking services can go wider, including crossing borders to non-resident customers who can easily execute transactions of their accounts maintained with digital banks in Bangladesh. The accounts they maintain here can be used as a pathway to facilitate inward remittance services.

Banks today facilitate establishment of financial linkages between residents and non-residents. This results in cross border transactions to take place. In the present days, annual trade transactions comprising exports and imports of goods and services are near to 160 billion US dollar. In addition, inward remittances sent by Bangladeshis working abroad are a major part of cross border transactions. Digital bank can be a wider solution to provide trade and wage remittances services. The Guidelines allows inward remittances facilities, but restricts trade transactions as noted earlier.

In addition to traditional trade transactions - business to business (B2B), retail trade is executed through business to customers (B2C) model. There is another trade model consisting of two legs - business ships goods to business which sells them to ultimate customers. It is known as business to business to customers (B2B2C) model. It is observed that digital trade is flourishing in domestic market of Bangladesh phasing out physical shops, groceries, etc. In this situation, customers place orders through respective mobile Apps and receive delivery of goods through delivery partners. There are different payments modes to execute transactions. They are cash on delivery, and payments through bank transfer, MFS, cards, etc. Changes are observed taking place rapidly. Mentionable here that residents having international cards can place orders abroad and receive goods therefrom. This way of trade is nothing but retail imports. On the other hand, retail exporters can sell goods to non-resident customers against online orders. Alternatively, they can ship goods to global market places for sales to ultimate buyers. These are all possible to be executed in the present days. But there need banking services to execute these transactions. It is known that traditional banks are focusing on wholesales services. Though digital formalities such as declaration by customers are in place since long, retail transactions, export in particular, are not found growing fast. Attention is needed to promote retail export. In this case, digital bank is a solution.

It is reported that Bangladesh Government is working to formulate acts and guidelines to facilitate digital trade in retail form such as B2C, B2B, B2B2C, etc. It is a question whether traditional banks can facilitate these transactions in small value.

Cross border trade becomes a part and parcel of the national economy. The present regulatory framework for banks facilitates to maintain online formalities such as online information to central bank and customs system. Despite different policy framework is in place, development of cross border retail trade is not significant. These can easily be facilitated by the forthcoming digital bank. Trade is one of the best alternatives to facilitate supply of foreign currency. Hence, trade should be within the framework of digital bank.

Wage remittances are one of the major sources of inflows of the country. It is reported that most of the transactions are executed through exchange house abroad. It indicates there are many paths like agents, exchange houses, banks, MFS, etc. required for remittances services.

These are all can be phased out with the help of digital bank. In these cases, digital booths need to be established by digital bank in different financial hubs of the world in association with counterparts there. This will be alternative paths, without depending on different parties, for channeling remittances to bring home. Digital booths can also be used as primary windows to provide payments confirmation services on behalf of Bangladeshi banks for trade transactions. The proposition as expressed here may be heard as high ambition but it should be materialized for strengthening transactional supports with external world. Just expansion of scope for digital bank can bring a solution in this context, it can be expected.


Mehdi Rahman works in the
development sector.