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Today you can stay at your home in self-isolation and order your grocery delivery, without having to worry about exchanging cash. Thanks to FinTech, you can do it with your smartphone. While mobile financial services are transforming the traditional money transaction process and fostering e-wallet adoption in Bangladesh, the wide-ranging opportunities of fin-tech, however, remains untapped. With expanding middle-class society, higher smartphone penetration, greater access to the internet and an up-and-coming startup ecosystem in the country, the future for fin-tech never seemed more promising.

Starting with convenience, cost-efficiency and speed, FinTech can fulfill all the demands of the digital age. Fintech refers to the integration of finance and technology that seeks to improve and automate the use and delivery of financial services. Digital Financial Services (DFS) is also one of the platforms of FinTech which comprises a broad range of financial services that are accessed and delivered through digital channels, including payments, credit, savings, remittances and insurance. But FinTech encompasses a much larger sector; innovation in the financial sector, retail banking, investment, crowdfunding, blockchain, cryptocurrencies and the list goes on.

With fast technological advancement, the global FinTech industry has transformed drastically in a short span. However, the adoption of FinTech in Bangladesh has been limited to digital financial services while the global FinTech industry has evolved to a substantially more advanced stage. It is vital to explore the far-reaching potentials of FinTech in Bangladesh to level up the game and in turn, the economy.

FinTech Revolution: Reshaping the Global Financial System

In 2018, the global FinTech industry experienced explosive growth by drawing investments worth USD 128 billion.[1] With a 25% annual growth, the industry is expected to grow to USD 310 billion by 2022. In 2019, the trend has somewhat reversed with normalization of volumes but still projection of strong historical growth, meaning the sector is maturing.

FIGURE: FinTech Deals from 2015 to 2019 (in USD billions) / Source: CB Insights

According to Ernst and Young’s Global FinTech Adoption Index 2019, China and India are leading in the FinTech adoption index at 87%.[2] Russia and South Africa are close behind, both with 82% adoption. The development of open banking in Europe has led to increased adoption in the Netherlands, the UK and Ireland. Over five years, these six markets- Australia, Canada, Hong Kong, Singapore, the UK and the US have highlighted the maturation and globalization of the industry.

FIGURE: Comparison of FinTech adoption in six markets from 2015 to 2019 / Source: Global FinTech Adoption Index 2019

As mentioned before, FinTech is not just having a smartphone app and being able to make digital payments. FinTech has been challenging the entire traditional financial sector with a disruptive attitude.  The challenger banking is being highly facilitated in the European Union by making necessary changes in the regulatory environment.[1] To manage core business financing processes, the use of artificial intelligence and machine learning-powered platforms are becoming more prevalent.

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FIGURE: Relative Size of FinTech Segments / Source: Statista

Personalized advice platforms like UK-based Nutmeg are becoming popular providing scalable and improved user experience primarily addressing processes including loan subscription, wealth management and life insurance. Many players are developing platforms to simplify complex processes of insurance and pension, lending and crowdfunding along with security and identity.

Possessing highly disruptive potential, blockchain technology-based FinTech platforms are currently at a nascent stage, but not for too long. According to Bain Capital Ventures, FinTech has started becoming an ingredient used in other technology businesses, a “fourth platform,” joining mobile, internet and cloud in the modern technology pile.[3] As FinTech has evolved payments, it will further change traditional lending, insurance and investment by moving to an embedded model. 

FIGURE: Market projection for embedded financial services (In USD billions) / Source: Bain Capital Ventures

FinTech: Driving Financial Inclusion

Traditionally, FinTech has targeted the world’s large unbanked population as a commercial market and has been thinning the ranks of financially excluded. In many countries, especially in developing economies, the impact of FinTech on financial inclusion can be strongly observed. Among various sectors of FinTech, the digital payment sector is the most popular that has led to revolutionary changes in money transaction systems. In 2005, M-PESA, a mobile-payment system developed out of a pilot scheme by Safaricom, became the most popular way of moving money around in Kenya. Shortly, Kenya experienced a boom in financial inclusion and from 27% in 2006 it reached 75% in 2016.[4]

In China, Ant Financial (formerly known as Alipay), a smartphone-based payment system has around 1.2 billion active users and expanded its financial services like loans and wealth management. Tencent, a social media giant, developed WeChat Pay which is the only mobile-payment service competing with Ant Financial. These services have significantly contributed to increasing financial inclusion in China. Similarly, bKash, the most popular mobile financial service in Bangladesh with more than 30 million users, has also spurred growth and boosted financial inclusion.[4]

FinTech in India has been serving as a vital catalyst for financial inclusion. The sector has experienced massive growth and is increasingly becoming an indispensable part of daily transactions. The core problem faced by MSMEs, credit availability, is being solved by several new-age FinTech start-ups that offer easier and faster access to loans. SMEs in Bangladesh face similar problems where FinTech can play a crucial role.

How FinTech Is Changing Banking Landscape

Compared to FinTech’s offerings, traditional consumer banking services certainly fall short in providing customer-oriented solutions. Therefore, consumer banking is perceived to be the one FinTech is going to disrupt the most. The consumer banks are currently focusing on channel diversification such as increasing usage of mobile applications. However, by the time traditional banks catch up, FinTech will reach a far more technologically sophisticated stage with their narrowly defined and highly effective solutions. It already has, with the emergence of neobanks and challenger banks.

Neobanks and Challenger Banks: The Ultimate FinTech Disruptors

Neobanks are referred to completely digital banks that reach out to customers via web platforms and mobile apps without traditional physical branch networks. In 2010, with the development of Monzo, Starling and Atom Bank in the UK, the first wave of neobanks hit the banking world.[6] These banks aim to aid SMEs and startups by offering them business banking accounts and services like expense management, payroll, automated accounting and solutions to niche business finance problems.

FIGURE: Global neobank landscape / Source: Invyo Insights

Similarly, challenger banks are disrupting business banking by leveraging technology to streamline retail banking. Challenger banks have their banking license, which allows them to conduct all the traditional banking operations at a more flexible scale. As these highly user-friendly FinTech services make their position steady in the market, the majority of people will be doing banking online. Eventually, the shaky grounds on which traditional banks are functioning will fall to pieces. Looking at Bangladesh, such a collapse in the banking sector is yet to occur, but not too far in the future.

High FinTech Opportunities in Bangladesh

As of 2017, financial inclusion in Bangladesh had reached 21% from 3% in 2011.[5] Despite remarkable progress, Bangladesh still remains one of the economies with the most unbanked population. Most SMEs, the bloodline of the economy, are not unified under a formal financial system. Furthermore, only a few portion of the account owners receive payments for agricultural products digitally.[5] Lack of financial and technological literacy is one of the core obstacles in adopting FinTech in Bangladesh. Additionally, poor regulations in the banking industry have caused people to lose faith in financial institutions, making Bangladesh a highly potential market for FinTech with numerous opportunities, in both rural and urban demographic aspects.

FIGURE: Share of unbanked adults by country / Source: The Global Findex Database 2017

Mobile financial services have been growing steadily in the country with bKash leading the way. COVID-19 has accelerated e-wallet adoption driven by the need for contactless transactions. According to a recent MasterCard survey, around 79% of global consumers, and least 91% of consumers in Asia, now  transact digitally. The survey also revealed that 6 out of 10 consumers now prefer online transactions in a post-covid retail market. 

FIGURE: Consumer perception about online transactions / Source: MasterCard

Due to lockdown in place, urban consumers are making fast adoption of e-commerce and digital payments. The number of mobile financial services (MFS) registered accounts reached 85 million. Digitized payments of utility bills, private sector wages have increased amidst the crisis. During May 2020, MFS transactions experienced 7% increase compared to the second quarter of FY 2019-20. 

FIGURE: MFS in Bangladesh experiencing upsurging growth in May, 2020 / Source: Bangladesh Bank

However, the economy will be most benefited from FinTech when SMEs and startups will be provided with adequate financial services. By generating easier loan facilities, it will increase SMEs’ efficiency and capacity to produce high quality products. Platforms like iFarmer that provide end-to-end solutions in the agriculture value chain need to be expedited.

Integration of Digital Financial Services (DFS) with Microfinance Institutions (MFIs) is another area that needs to be explored. This can make MFIs more efficient by enabling them to access more people living in remote parts of the country. Accordingly, this will contribute to increase financial and technological literacy among the population and reduce financial exclusion. 

According to the Financial Inclusion Insights 2018, Banks drove a 7% increase in digital financial inclusion compared to 2017. This reflects on banks’ commitment to drive higher digital financial inclusion in comparison to mobile money.

FIGURE: Digital financial inclusion, by service type / Source: Financial Inclusion Insights 2018

In the banking sector of Bangladesh, competition between banks and new entrants will possibly pave the way to direct collaboration across the FinTech ecosystem. As most of the startups tend to lack capital and infrastructure, building partnerships can be profitable for both parties. On the other side, a few banks have started launching their own FinTech platforms. Dhaka Bank Limited (DBL) has specified their plans about introducing diversified FinTech based-services to ensure uninterrupted banking services.[7] Targeting the tech-savvy youths, Bank Asia has intended to form a neobank, to help spread the practice of a cashless society to every part of the country following the footprints of developed nations.[8] 

For a developing economy like Bangladesh, such initiatives are timely, praiseworthy and much needed, however, the right implementation of these attempts will set their odds of becoming successful. Moving forward, the disruptive potential of FinTech should not be feared, rather should be embraced with adaptive tools to drive financial inclusion in the country. 

Ishrat Jahan Holy, Content Writer and Rageeb Kibria, Principal Consultant, at LightCastle Partners, have prepared the write-up. For further clarifications, contact here: [email protected]

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