Interoperability in Bangladesh:: of Digital Finance
Interoperability in Bangladesh:: of Digital Finance
Interoperability in Bangladesh:: of Digital Finance
Background Paper
INTEROPERABILITY
OF DIGITAL FINANCE
IN BANGLADESH:
Challenges and Taking-Off Options
Mustafa K Mujeri
Sifat E Azam
1
Interoperability of Digital Finance
in Bangladesh:
Challenges and Taking‐Off Options
1. Introduction
In Bangladesh, in common with many other countries of the developing
world, dramatic growth in digital financial services (DFS) have emerged
as the most promising development in financial inclusion.1 Mobile money
solutions have grown steadily in Bangladesh and mobile financial
inclusion has shown the promise of emerging as the most viable method
of accessing financial services to rapidly expand the customer base.2 Like
other innovations, DFS have the potential to efficiently reach millions of
people and present an opportunity to develop economically viable
business models targeting low‐income populations. The total number of
mobile phone subscriptions has reached 129.6 million in February 2017
implying that most households have access to mobile phone in
Bangladesh.
There are three key components of DFS:
(i) a digital transactional platform; (ii)
retail agents; and (iii) use by customers
and agents of a device – most commonly
a mobile phone – to transact via the
platform. In practice, DFS build upon the
transactional platform that allows
payment instruments (e.g. cards, mobile
phones and others) to be connected to storage accounts and allow users
to make payments using any retail agent. The mobile phone network in
remote and inaccessible locations allows mobile phones to be used by
the financial service providers as an effective distribution channel to
lower operational costs, increase financial services coverage, and extend
financial services to unserved populations.
1
DFS include MFS, branchless banking, electronic money, digital payment solutions and
other new technologies available to promote DFS as a major driver of greater financial
inclusion.
2
It must, however, be recognised that the implementation of DFS faces a number of
hurdles related to infrastructure and ecosystem, product design, trust in financial
system, and financial knowledge and capacities to make informed decisions.
2
Bangladesh has one of the most successful mobile financial services
(MFS) market globally, having 54.4 million registered clients, along with
the possibility of developing a growing ecosystem of products such as
savings, credit and microinsurance, riding on the mobile money rails.3
The market is driven by banks since Bangladesh has adopted a bank‐led
model. There are also possibilities of mobile network operator (MNO)
partnerships with financial service providers to offer more products and
services via MFS including savings, credit and microinsurance.
2. Interoperability
Overall, interoperability gives mobile
money service providers the opportunity
to increase the volume of digital
transactions, improve sustainability of
mobile money services, and contribute to
an open digital ecosystem that promotes
financial inclusion.
3
In July 2017, the number of total transactions is recorded at 152.3 million involving BDT
233.7 billion. The total number of agents is more than 772 thousand. The transactions
covered inward remittances; cash‐in/cash‐out transactions; P2P, B2P and P2B
transactions; merchant and government payments; and others. Source: Bangladesh
Bank.
3
For interoperability, there are three broad groups of players:
Financial regulators and central bank: Regulators and the central bank need to
create proportionate regulation and supervision to enable non‐banks to compete
with traditional banking players when providing financial services to the excluded
groups.
Banking and traditional financial service providers: MFS bring risks and
opportunities to traditional financial service providers. There is clearly enormous
potential from an untapped market made available by MFS channels, which allow
banks to overcome infrastructural, geographical or information constraints. In
addition, the wide acceptance for MNO payments and mobile money systems can
increase consumer confidence in markets where trust in the banking system is low.
MNOs and non‐banking players: These include MNOs, affiliates and subsidiaries
that may issue e‐money and set up customer accounts. Local regulation may require
that they establish a non‐bank subsidiary. In many locations, non‐traditional
financial service providers are vital players and can often be the only providers of
products and services to the financially excluded and under‐banked.
With respect to account‐to‐account (A2A) interoperability, GSMA highlights four key
requirements:
Direct transaction between wallet accounts at different mobile money operators
(MMOs);
Direct transaction between mobile money accounts and bank accounts;
Settlement of funds for transactions across schemes and between schemes and
banks; and
Adoption of common risk management practices that preserve the integrity of
individual mobile money schemes.4
The GSMA also identifies different models to support mobile money interoperability. In
countries where interoperability only interconnects mobile money service providers not banks,
there can be: (i) bilateral agreements between mobile money schemes and banks; (ii) neutral
processor between mobile money schemes and with banks; (iii) commercial processor between
mobile money schemes and with banks; (iv) using a bank and a national automated clearing
house (ACH) to interface with other banks; (v) direct connectivity to national ACH for all mobile
money schemes and banks; and (vi) a mix of commercial processor for bank interface, bilateral
between mobile money schemes.
4
The GSM Association (GSMA) is a trade body that represents the interests of mobile
operators worldwide. Approximately 800 mobile operators are full GSMA members and
a further 300 companies in the broader mobile ecosystem are associate members. The
GSMA represents its members via industry programmes, working groups and industry
advocacy initiatives. The GSMA is headquartered in London.
4
In countries where there is a clear dominant player, the dominant service provider may be
reluctant to support interoperability. As the leading mobile money scheme, it may not have
incentives to open its solutions to others and make services accessible to customers not
registered with it. This introduces the over‐the‐counter (OTC) money transfers which enable
customers to send and receive money by relying on agent networks.
The priority competition issues cover a number of areas, such as channel access, transparency,
interoperability, regulatory coordination, and data sharing. These are important elements for
developing diverse and open MFS ecosystems. Further, as the ecosystem becomes more
diverse through bringing in a wider range of providers and product types, the regulators will
also have to ensure a market‐wide jurisdiction to facilitate an equitable application of rules and
requirements on fair play across banks, MNOs and other providers.
Global experience indicates that, for ensuring fair ‘rules‐of‐the‐game’, several policy
developments are necessary to ensure that the maturing MFS market can establish an
ecosystem that better supports free and fair competition in the market. These include:
National payments act to clarify questions of regulatory jurisdiction across regulators
and set common standards for different types of institutions involved in offering MFS
(e.g. banks and MNOs).
Feasibility of offering mobile virtual network operator (MVNO) licenses that will allow
new entrants to challenge MNOs by establishing own telecommunications networks on
which they can offer MFS.5
5
A mobile virtual network operator (MVNO) is a wireless communications services
provider that does not own the wireless network infrastructure over which it provides
services to its customers. An MVNO enters into a business agreement with a mobile
network operator to obtain bulk access to network services at wholesale rates, and
then sets retail prices independently. An MVNO may use its own customer service,
5
Interoperability agreements to facilitate across‐provider mobile money transfers.
Possibility of allowing individual agents to serve more than one MFS provider.
Greater transparency in pricing of mobile products.
Payments interoperability enables different payment infrastructures and
financial service providers to effect payments between customers.
Through the mechanism, interoperability expands the reach of
transaction accounts and retail payment instruments, making them more
useful for end‐users. Although payments are an essential financial service
in their own right; when payments are made from a transaction account,
they also serve as an important gateway for the delivery of additional
digital financial services, such as savings, credit, microinsurance and even
investment products. Digital transactional platforms that enable
transfers, value storage and additional services — increasingly offered by
banks, non‐banks and nonfinancial entities such as retail networks and
MNOs in complex partnerships — can target the financially excluded and
the underserved. These efforts to deliver other financial services of a
digitally accessed transaction account means that the expanded reach
offered by interoperability can have greater significance for those who
are financially excluded or underserved.
Lessons from the global experience suggest four key factors in facilitating
payments system interoperability:
First, economic incentives: participants agree to voluntary interoperability for economic
gains; often determined by larger business objectives and not just related to costs and
revenues of interoperable payments transactions.
Second, effective regulatory framework: rapid voluntary interoperability can be
fostered by encouragement from regulatory bodies.
Third, government commitment on using digital payments system: government
initiatives to use the new payments system can foster interoperability.
Fourth, early dominance: Early dominance by one provider needs careful consideration
as it can slow down interoperability.
billing support systems, marketing, and sales personnel, or it could employ the services
of a mobile virtual network enabler (MVNE).
6
interoperability, network interoperability, and parallel system
interoperability; the regulators should consider all options.
The White Paper of the G20's Global Partnership for Financial Inclusion
(GPFI) in 2017 notes that, in the absence of interoperability, ‘the early
rapid growth of one system … could have a ‘tipping effect’ such that no
other system can compete,’ with negative effects on efficiency and
innovation and consequently on outreach, adoption and usage. A useful
framework to consider interoperability and related issues is to adopt a
three‐tiered approach6 :
The above framework helps the regulators (and the policy makers) to
identify the big questions on interoperability and mobile money.
For effective agent level interoperability to emerge, there is a need for
the regulatory regime to examine agent exclusivity and other issues of
business correspondent (BC)/agent banking route to ensure adequate
integration and interoperability of BC/agent banking channels. 8
Adequate platform level interoperability, on the other hand, requires
6
Also see, Kumar, K. et al. 2012, Interoperability in Branchless Banking and Mobile
Money, CGAP.
7
This is comparable to the evolution of ATM networks, which originally started as
private networks and later on emerged as 'networks of networks'.
8
For details, see Tarazi, M et al 2012, Branchless Banking Interoperability and Agent
Exclusivity, CGAP
7
products built not as silos which will offer only very limited
interoperability across payment instruments like card, mobile number,
and NID. Further, mechanisms should be in place to include ‘virtual
payment addresses’ that can be used for various electronic transactions
in an interoperable way across all banks and regulated players. There
should also exist unified layer that makes mobile applications (banking,
wallet, etc.) to seamlessly integrate with these systems using a standard
set of Application Programming Interface (API).9
Interoperability has been attracting significant attention among the policy makers in
Bangladesh. While strong evidence can be gathered to suggest that interoperability
results in long term benefits for all stakeholders, success of interoperability depends on
a number of elements, such as the level of development of the sector, state of the
market, politico‐economic landscape, regulatory maturity, and technological
innovation.10It also requires strong coordination between different regulatory agencies,
such as the financial sector regulators: Bangladesh Bank (BB), Ministry of Finance,
Microcredit Regulatory Agency (MRA), Insurance Development and Regulatory
Authority (IDRA); telecom regulators: Bangladesh Telecommunications Regulatory
Commission (BTRC) and Ministry of Posts, Telecommunications and Information
Technology; as well as consumer protection and competition regulation agencies.
In recent years, Bangladesh Bank has issued various directives on mobile banking. For
interoperability, one initial step is to launch a national unified USSD platform (NUUP)
that can bring together all banks and telecom service providers. Overall, for deriving
potential benefits of interoperability, Bangladesh needs to address several issues while
considering the interplay between interoperability and financial inclusion.
Second, ideally the regulatory approach should be to ‘follow the market’.
However, as Bangladesh is passing through the early stages of development of
9
For example, technology‐enabled payment banks can usher interoperability in the
financial services market in a significant way. However, regulatory relaxations (if any)
for payment banks needs careful consideration as these may raise competition
concerns vis‐à‐vis traditional banks and others.
10
See, Rhyne, E. 2014, The Political Economy of Financial Inclusion Policy, Centre for
Financial Inclusion Blog, 25 September.
8
digital transactional platforms, regulators should focus attention on ensuring
that interoperability is technologically feasible. In this context, regulators should
also be prepared to take action where there is evidence that a provider is
exploiting its dominant position. The regulators may also mandate
interoperability or specify a timeframe for interoperability.
Third, the regulators should develop a thorough understanding of the potential
new risks posed by interoperability of banks and nonbanks (including legal,
operational, and financial risks) and how to address such risks while maintaining
a level playing field for all players.
Fourth, in the context of lowering security standards for lower‐risk scenarios
(e.g. small‐value transactions or service providers serving specific customer
groups), lower security standards should not come at the expense of the
integrity of and interoperability with providers and markets that are required to
comply with higher security standards.
Fifth, the lessons learned from the success of interoperability in different
countries and the important insights on how and when to intervene to ensure
interoperability are important to consider for Bangladesh. Some important
lessons are:
Interoperability progresses over time; and it takes years to build the volume of
transactions of interoperable use cases that can contribute to robust policy conclusions.
Three functional elements will have to come together for effective interoperability: (i)
arrangement governance; (ii) business model, and (iii) technical integration. In practice,
much focus is placed on technical interconnections at the expense of required focus on
other two elements that are critical to creating volume and economic value.
Interoperability may either be actively considered as digital financial services grow and
mature or prior to digital financial services making a sizeable impact. There is no
conclusive evidence to suggest the best time to consider and implement
interoperability.
9
3. Landscaping of Interoperability
DFS interoperability is much more than technical tools that allow modern payment
systems to work together. The existence of a well‐designed technology connecting
payment systems alone will not ensure that interoperability will reach its full potential
unless the providers are incentivised to pass payments to each other. For the purpose,
interoperability must balance the conflicting interests of different providers; and
probably strike a middle ground between competition and coordination. Achieving the
balance is one element which makes interoperability a complex issue.
In the MFS market, banks (and other financial institutions) are both customers of, and
competitors to, MNOs. This creates a fundamental conflict as MNOs control access to
mobile network and has incentives to restrict access to competitors. Restrictions in
channel access can have a number of adverse consequences such as: (i) potential
foreclosure of the market to providers constituting a barrier to entry; (ii) consequent
limited product range in the market; (iii) limited scope for innovation with potentially
high‐value and high‐demand products and services; and (iv) high price of products for
consumers resulting from increased cost of channel access.
Technical integration: Technical infrastructure must be in place to connect participants
and transfer payments and related data.
Business agreements/incentives: Balanced models should be made operational that
can serve economic interests of interoperability participants equitably.
Governance of interoperability: Agreed decision making systems are available to
manage shared processes, rules, operations and risks.
In a recent study on interoperability in 20 country markets, CGAP
mentions that the focus in almost all countries is on technical
connections and not on the remaining two elements (business
agreements and governance) that are critical to creating volume and
value. According to the CGAP study, some form of interoperability exists
in each of the 20 countries; however, no country is found where all three
elements are working optimally. In addition, the study notes that there is
often not enough focus on governance and business agreements; and
that too heavy focus on technical aspects may actually have hindered the
scalability of interoperable transactions in many countries.
10
The CGAP 20‐country scan to assess the state of interoperability
identifies three broad types of interoperability at the technical level: (i)
bilateral (two providers connect with each other directly e.g. through
API); (ii) multilateral (e.g. any number of providers connects to a central
piece of infrastructure (switch); and (iii) third‐party solution (e.g. a non‐
provider facilitates connection by holding accounts at two or more
providers).
On the other hand, three arrangements are observed to have helped
interoperability: (a) bilateral under which two providers negotiate
directly to set rules and pricing; (b) three or more providers agree on
shared common rules (scheme); and (c) third‐party solution under which
rules and pricing are set by third party which facilitates transactions
between two or more parties and under which ability to negotiate
depends on volume of transactions.
Beyond these elements, two broad patterns in the approaches to
interoperability can be noticed from the inter‐country analysis. Some
countries have followed a market‐wide approach aimed at building a
centralised infrastructure across all use cases and providers. On the other
hand, there are countries which have followed a more focused approach,
first tackling a small number of use cases according to the needs of the
providers involved.11
Models can be difficult to get right. However, interoperable systems are
important to achieving broader financial inclusion. Network effects from
larger and more efficient systems promise expanded use of DFS by low‐
income populations. Expanded consumer use cases mean this access has
the potential to enrich lives beyond the payment uses most common
today.
11
Out of 20 countries, six countries are pursuing a ‘market‐wide’ approach, whereby
some type of central plan covers a majority of providers for a majority of use cases.
Four countries are pursuing a ‘focused’ approach, whereby a subset of nonbank
providers have joined together to make their own arrangement, which is largely
separate from mainstream banking. The remaining 10 markets do not exhibit a
dominant pattern; for these ten, a mix of these approaches may be happening
simultaneously. See, Arabehety, P G, G Chen, W Cook, C McKay 2016, Digital Finance
Interoperability and Financial Inclusion: A 20‐Country Scan, CGAP Working Paper, CGAP
Washington DC http://www.cgap.org/publications/digital‐finance‐interoperability‐
financial‐inclusion
11
3.2 Interoperability in Bangladesh: Issues and Challenges
In Bangladesh, the front‐end technology used in deployment of MFS is
the unstructured supplementary service data (USSD) technology.12 As
channel access is one of the critical issues in MFS, two important
elements are: first, price of channel access; and second, licensing
framework for provision of fair access to USSD channel. Similarly, price
transparency (e.g. P2P payment costs, C2B payments, etc.) is important
in ensuring competition in the MFS market.
One possible factor for lack of interoperability in Bangladesh's MFS
market is the concentrated market share across MFS providers. It creates
both (i) less demand for interoperability from consumers since most of
them use the same provider; and (ii) low willingness on the part of the
dominant MNO to extend interoperability to protect its share of the pie
rather than expand its size.13 While forcing interoperability in the early
stages of a mobile money market may hinder market growth by
discouraging first‐movers to invest in building out their product lines,
marketing, agent networks, platform and other up‐front costs, the
regulators should create a conducive environment for interoperability in
the long run.14
12
USSD, a communications service controlled by the MNOs, is considered a critical
piece of infrastructure to provide MFS on nearly any phone at low cost and without
requiring access to the user's SIM card. USSD enables customers to send instructions to
the MFS provider along with their personal identification number (PIN) for
authentification, while enabling MFS provider to send responses to clients and confirm
transactions. Relative to other technologies, USSD is a cost‐effective technology that
involves simple operations that can be accessed from any mobile phone and is widely
used in the provision of MFS. Unlike SMS which is 'store and forward', USSD is session
based and can provide an interactive dialogue between the user and a certain set of
applications. USSD requires no pre‐configuration on the consumer's SIM or handset and
is already built onto most GSM networks. See, Hanouch, M and G. Chen 2015,
Promoting Competition in Mobile Payments: The Role of USSD, Brief, CGAP, Washington
DC, http://www.cgap.org/sites/default/files/Brief‐The‐Role‐of‐USSD‐Feb‐2015.pdf
13
For example, due to the concentrated market share across MFS providers, there has
taken place no noticeable progress in interoperability in Kenya while less concentrated
mobile money market share in Tanzania across MFS providers makes interoperability
more appealing for both consumers and providers alike. See, Mazer, R and P Rowan
2016, Competition in Mobile Financial Services: Lessons from Kenya and Tanzania,
CGAP, Washington DC.
14
For example, the Centre for Global Development maintains that '...regulation should
focus on ensuring that firms do not take actions that increase the barriers to achieving
interoperability.' See, Bourreau, M and T Valletti 2015, Enabling Digital Financial
Inclusion through Improvements in Competition and Interoperability: What Works and
What Doesn’t? CGD Policy Paper 065, Centre for Global Development, Washington DC.
http://www.cgdev.org/sites/default/files/CGD‐Policy‐Paper‐65‐Burreau‐Vallerri‐Mobile‐
Banking.pdf
12
Several areas need
attention of the policy
makers in Bangladesh.
These are: (i) restrictions on
agent exclusivity; (ii)
interconnection rates for
MFS interoperability; and
(iii) requirements for
technological interoperability.
The removal of agent exclusivity can support interoperability by reducing
network effects (compulsion of using the same large network used by
peers as the network is closed off to incoming or outbound to other
similar networks) and thereby entry barriers to market. Agent non‐
exclusivity is an important first step in the process of interoperability as it
establishes a business case for interoperability and makes agents familiar
with a range of providers' services. However, an efficient transformation
along these lines requires proper regulatory monitoring and enforcement
of provisions for removal of agent exclusivity.
For interoperability, the issues of interconnection rates and technological
interconnectivity are relevant for the regulators as these rates can
encourage or discourage dominant providers to accept interoperability. A
high interconnection rate may discourage consumers from transacting
across networks. This may be a special concern for the smaller MNOs as
users are more likely to call off‐network to larger MNOs than users of
larger MNOs calling off‐network to smaller MNOs. Potential
technological interconnectivity and agreement on principles of
interoperability and commercial terms will allow for MFS interoperability
as technical elements are put in place.
Although regulatory actions are powerful drivers of DFS interoperability,
it is important to solicit agreements among the stakeholders prior to
formalising through rules for ensuring consistency and sustainability.
However, in a concentrated DFS market as in Bangladesh, a stronger
approach may be necessary for encouraging interoperability. Hence,
given the importance of local market contexts in moving towards NFS
interoperability, it may be useful to begin with an in‐depth analysis of the
existing environment and identifying its implications for interoperability.
The analysis should cover a number of interoperability dimensions:
13
Potential benefits to consumers and market development; and desirability of
interventionist policies for interoperability.
Implications of removal of agent exclusivity and interoperability and its linkages.
Potential changes in market behaviour in post‐operability environment, including
changes in off‐net and overall mobile money transactions, channel access and pricing,
mobile money wallet related issues, use of value‐added services, and active SIM cards
across providers.
Nature of regulatory intervention on interconnection rates in mobile money.
Interoperability issues for non‐payment MFS such as savings account tied to mobile
wallets.
Switch between banks, MNOs and all providers offering financial services via mobile
channels.
Broadly speaking, three different regulators operate in the MFS space in
Bangladesh: overall regulators (relevant ministries), financial regulator
(Bangladesh Bank), and telecommunications regulator (BTRC). These
regulators have their own mandates, areas of focus, capacities and
jurisdictions. For smooth and efficient operation of the MFS market, a
critical concern is to ensure that many providers and different types of
providers have entry into the market and are able to compete effectively
with each other. This requires an open MFS ecosystem that is provider‐
neutral.15
Since different provider types (e.g. banks, MFIs) are regulated by
different authorities and they compete in the same market, there is a
need to work very closely for the regulators. This will help avoid
regulatory arbitrage and bring coordination in enforcement and
supervision. For Bangladesh to move forward, it is important to bear in
mind that the adoption of country‐specific means to achieving
interoperability is important. It is desirable to set the stage for
interoperability as the market for innovative platforms starts developing;
understand potential new risks; and adopt measures consistent with
existing landscape of interoperability scenario in the country.
15
In Kenya, for example, the National Payment System Act 2014 adopts a functional
(rather than an institutional) approach to regulation where banks and nonbanks,
including MNOs, are permitted to provide mobile money services. In Tanzania, Payment
Systems Act 2015 provides for both banks and nonbanks to be licensed and issuers of
electronic money ensuring that the regulations do not favour one provider over others.
14
3.4 Challenges to Interoperability
While interoperability is expected to offer benefits to consumers and at
the market level, its introduction faces several challenges in Bangladesh.
One can list the following common challenges to interoperability:
Lack of a common definition resulting in confusion as different operators have
different ideas about what it is.
Benefits associated with interoperability are not always immediately clear, with the true
impact of interoperability felt over time.
Potential mistrust amongst competitors can make it difficult for operators to
collaborate even when the benefits of interoperability are realised.
Understanding and agreeing to a technical and commercial model to govern the
interoperable process.
Conflicting organisational priorities resulting in the desire to delaying of becoming
interoperable.
Imposition of unfavourable regulatory regimes for mobile money and interoperability.
Technical standards and coordination
A first type of challenge to creating interoperability consists of the
need to define and enforce a common set of rules and standards,
both in the technical and legal realm.
A common switch, with its own set of rules for participation, technical
and operational issues, improves coordination and customer
experience, and allows for a much faster implementation of
interoperability, as compared with private switches or bilateral
agreements. A set of clear rules is essential to create trust in the mobile
money network. At the same time, care should be taken to leave
the necessary flexibility so that new technological developments can
be taken into account, both at the design stage and later at the operating
stage.
Dominant firms
15
network is larger (for example, the first mover) then it has less interest in
interconnecting with others.
While the short‐run effect seems to be negative for this operator, in the
medium run agreeing to interoperability brings advantages, especially
if the overall growth potential of the market is large. It may simply
be better to be a less‐than‐dominant operator in a large market than a
dominant one in a small market.
Competition policy
Still, competition policy concerns must be balanced with property rights
(investments in platform development and agent network) and entrants’
incentives to invest. This is a difficult balance to strike, similar to
concerns in many other regulated markets. Agents need recruiting,
training and branding‐‐all of which are costly‐‐ and investments are made
to gain competitive advantage. Imposing interoperability should not
destroy incentives to invest in agent networks.
Approach to interoperability
It is important for Bangladesh to decide: which of the two principal
approaches to creating interoperability would it follow: the
collaborative approach on the one hand, and mandating
interoperability on the other. In the collaborative approach, the policy
makers act as an intermediary. More precisely, the policy makers act as
facilitators, helping providers to create the road map that they will be
primarily responsible for designing and implementing. The regulators
would only intervene if the market is sufficiently developed, with a
functioning agent network and an active customer base.
16
The different approaches for interoperability (e.g. via the platform, via
the agents, or via the SIM card) present different types of costs and
regulatory risks, which the regulators can help to clarify. The
regulators should also take care that interoperability does not stifle
emerging competition, for example, investments in agent networks if
third‐party sharing is implemented in an immature market. In both
approaches, it is considered necessary that all parties involved see the
value of participating. In particular, instead of devaluing their
investments the introduction of interoperability should be expected to
increase the value of their infrastructure through higher usage. This is
important even under mandated interoperability, since foot‐dragging
by unwilling operators can create unnecessary delays and reduce user
benefits.
The KYC collection and maintenance process can be upgraded with the
help of digitisation, which would benefit everyone. The future has the
possibility to replace the entire manual, paper based, time consuming,
expensive and inefficient process needed to maintain up to date records
of customers. Digitising the process will provide an immense opportunity
to maintain accurate information, at a low cost that is continually
updated and can make transacting on the internet a process with
genuine trust between parties.
A holistic approach is required on the part of the financial regulators and
institutions in creating room for e‐signing of agreements and OTP‐based
eKYC authentication, which are critical enablers for completely digital
and paperless financial transactions. These processes enable consumers
to digitally sign their agreements as opposed to having to visit the bank
or having the bank send them many papers to sign.
Also, eKYC can be done via OTP on the mobile phone, which again
reduces the need to manually collect and process copies of identity and
address proofs; eKYC via OTP also removes the need for purchase of
hand‐held biometric devices by banks, and the need to meet consumers
face to face for biometrics—which consumes time and money—thereby
reducing the benefits of going instant and paperless. For the purpose,
relevant acts (e.g. evidence act and information technology act) may
have to be amended and updated to allow the use of e‐signatures.
17
4. Conclusions
No doubt, establishing interoperability is a formidable task for which it is important to
find the right balance between cooperation and competition. Despite the advantages
that interoperability brings, not all market participants will necessarily embrace
interoperability initiatives, e.g. if they fear to lose their dominant position and/or
competitive advantage. Bangladesh Bank is a key driving force in interoperability, but it
cannot – and should not – act alone. Other regulators – such as financial and telecom
regulators – are also important to achieving interoperability.
The lessons learned from establishing the National Payment Switch Bangladesh (NPSB)
can be useful in spurring competition, innovation, efficiency, safety and security. The
bringing in of automated cheque processing system, electronic fund transfer network,
mobile financial services, national payment switch and real time gross settlement
system and the introduction of NPSB will facilitate interoperability of the different
payment systems. In order to move forward, a taskforce among the market participants
can be formed and the role of different stakeholders may be clarified and agreed upon
in a memorandum of understanding.
The regulators in Bangladesh may adopt two basic methods of encouraging
interoperability: setting standards for interconnectivity; and enforcing interoperability.
Enforcing interoperability can happen by either setting interconnection charges or
requiring the unbundling of platform provision from the provision of accounts. This,
however, is not easy and has an overlap between regulation of telecom services and
that of account providers.
18
Considering the dynamics of interoperability, regulators should explore the pros and
cons of both mandated interoperability and more market driven approaches and
consider one of the following three approaches:
The last option means guiding the market by establishing interoperability
as a policy objective and setting a timeline within which the market must
move to interoperability before it is enforced by regulation. For moving
along the line of encouraging interoperability, the government and the
regulators should:
Address the challenges of perceived competition that the private sector poses‐‐within
and between financial institutions and payment service providers‐‐and the role that
regulation can play in encouraging technology in existing business models.
Facilitate new market entry and encourage the growth and expansion of non‐traditional
financial service providers, in particular MNOs, in a compliant and secure way.
Encourage sector players to participate and engage in the interoperable network–
merchants, agents, MNOs and consumers alike.
Incentivise the market and encourage services providers to recognise the need for
interoperability as part of their service, for example, through tax relief.
Take the lead in encouraging consumers to transact digitally, for example by providing
government services online and discounts for individuals who pay for these services
through their wallet solutions.
Ensure that the role of IT infrastructure can be appropriately positioned to realise an
interconnected society – a society where IT infrastructure deployment reflects purpose‐
built regulations and policies, with tailored solutions designed around an agreed goal.
MFS must evolve from being solely a tool for transferring money to being the means of
empowering the poor with access to banking, credit and insurance markets.
It is recognised that in practice interoperability is ‘complex and often messy’ and
multiple arrangements of interoperability co‐exist in all markets. From the 20‐
country scan, a number of lessons can be drawn for facilitating interoperability
in Bangladesh:
Create a space for the industry to define the rules: Mandating interoperability
through regulations may lead to creating market distortions.
Ensure close collaboration between regulators, financial service providers, and
other stakeholders: This is especially critical for setting ground rules and
creating an enabling environment for multilateral interoperable scheme.
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Identify an independent facilitator: This brings in confidence among the
participants that the process will not be influenced by any vested interests.
Plan for achieving interoperability in stages: This helps all stakeholders to
prepare for availing opportunities.
Adopt a detailed and coordinated plan: The plan should outline the agreed
issues, specific timelines, deliverables and required resources.
For the regulators, the key would be to craft regulations that allow technology‐enabled
business models to emerge, while balancing access and protection for the base of the pyramid
customers.
In addition, moves to promote interoperability should be geared to harness, and not
determine, the business case for the stakeholders to make required investments. For
approaching interoperability, an important guide for the policy makers could be the following:
It is also important to review the progress on interoperability at five different levels:
(i) theoretical e.g. systems capability to connect with each other; (ii) technical e.g.
points of interconnection/interfaces that make it possible to interoperate; (iii)
functional e.g. capacity of points of interconnection to meet agreed technical
standards; (iv) business‐related e.g. business rules beyond technical standards that
make interoperability commercially viable; and (v) effective interoperability that
successfully meets financial inclusion and broader national goals.
A pragmatic approach for Bangladesh would be to let the market develop and DFS
deepen and mature so that industry actors themselves feel the compulsion of
embarking on interoperability initiatives; while simultaneously make a serious
beginning in adopting relevant interoperability rules to enable the market to move
towards implementing interoperability at the earliest possible time.16 To facilitate
16
The rule sets may cover, for example, a number of transactions e.g. wallet to wallet
(P2P), agent wallet to agent wallet (A2A), bulk payments (BP), cash in (CI) and cash out
(CO) interoperability rules.
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the above, the feasibility of introducing ‘Regulatory Sandbox’ may be explored such
that the regulators would be able to analyse the impact, safety, and robustness of
the business models and processes to devise effective DFS interoperability policies
in Bangladesh.
Further, we must recognise that interoperability is not – or should not be – an end
in itself; it is a means to a broader set of goals: to address market
fragmentation; to avoid market tipping towards monopoly; to increase
innovation irrespective of market power; and to address a perceived societal need
for interconnectedness across DFS networks.
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Prepared By
Supported By